The impact of Royalties and Taxes from
towards governments and investors

by Ignatius Kamwanje

Regulatory frameworks and fiscal systems in the mining industry have seen tremendous reforms, replacements and ammendments over the past years possibly due to globalization, modernization, competition to attract exploration and mining investment. Of late mineral-exporting countries have reduced their general income tax rates and have exempted mining operations from other taxes and others have been zero rated.

A nation with a strong desire to attract mining investors should consider itself either forgoing a royalty tax and relying on the general tax system or recognizing investors’ strong preference to be taxed on their ability to pay. Profit based royalty schemes are more difficult to implement than other royalty schemes but governments that can effectively administer an income tax are better able to manage a profit or income-based royalty tax. 

1. Mineral Royalties and Policy Issues

 Governments that impose royalty taxes to mining companies are encouraged to do the following:

  • Implement a system that is transparent, robust and must provide a sufficient level of detail with respect to relevant regulations/laws that make it clear how the tax base is to be determined for all minerals.
  • Devise royalty methods that are suitable for efficient and effective administration within the capacity of the tax-collecting authority.
  • Avoid value-based royalty rates that will significantly affect production parameters such as cutoff grade and Life of the Mine. Be able to give waivers of royalty, provided that clearly predefined criteria are met.
  • Prioritize financial reporting for accountability and transparency purposes.

The more the government taxes the mineral sector, the greater the share of wealth created by mining that flows to the government. This means that less wealth is flowing to the companies. Therefore, rising tax rates undermine companies’ incentive to carry out exploration, to develop new mines and to remain in production at existing operations.

The mix of taxes also influences the distribution of risks between the state and mining companies. Mining is a particularly a risky activity and not for the faint hearted. This is partly because of the long period associated with the development of most new mines and the difficulty of anticipating prior to development of all the potential technical, geological, socio-economic, and political problems. In addition, most minerals markets are highly volatile over the business development cycle due to price fluctuations.  

 2.   Malawian context of Royalty and Taxes in mining.

It has been argued that the Mines and Minerals Act of 1981 had some weak regulatory frameworks. Due to modernity, there have been ammendments to some clauses and addition of new ones to be at par with the present state of affairs, hence the 2019 Mines and Minerals Act.

Of recent times,there was a newspaper article on social media about the position of Sovereign Metals on the Kasiya Rutile Prospect where it was alleged that Malawi is to get MK50 billion out of the MK 1 Trillion over the 15 year Life Of Mine. This figure is calculated from the 5% royalty as stipulated in the development agreement based on the Mines and Minerals Act in its entirety.

Consequently, the conclusion of the countrys’ standing in mining benefits based on royalties only from the article does not give a good picture. There are some areas where the country can benefit in terms of taxes, Development Agreements from mining. There are taxes like Pay As You Earn (PAYE), Value Added Tax (VAT), Corporate taxes, Resource Rent taxes, whithholding taxes etc. It is better to use a holistic approach of analyzing the benefits which the country gets from mining royalties and taxes as food for thought. The country gains in one way or the other.  There is also a percentage of (10%) free equity ownership interest in a large mining project as from the 2019 Mines and Minerals Act.

However, the country might have an oversight in the royalty 5% calculation. The government could do more by pushing the percentage to a reasonable, significant level of confidence for the country to benefit since there are always fears of secretive deals that breed corruption in mining.

However, Malawians must understand that the risk that is in mining unfortunately may significantly affect royalties and taxes in terms of cost-benefit analysis and unforeseeable circumstances. For example a mining company as an investor may run into difficult losses due to among others situations which were anticipated during the preparation of Risk Management Process during the Bankable Feasibility Studies but not exactly expected at the time of occurrence. These situations can be:

  • Closure due to political instability
  • Force majure
  • Safety, health and environmental issues.
  • Fluctuation in the market price affecting the Stock Exchange Market, Mines being put on Care and Maintenance, change in cut-off grades.
  • Natural or artificial disasters
  • Changes in mine design due to adverse geological/geotechnical factors e.g failures
  • Exhaustion/depletion of a Mineral resource due to wrong projections by a Competent Person.

In Malawi, negotiations on mining and petroleum contracts have been on going. There have been some ammendments on taxation Act so as to protect the future potential revenues from the mining sector. The government is encouraged to look beyond revising tax rates in order to address tax base erosion. A Corporate tax rate becomes irrelevant if mining companies report no taxable income.

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