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Evaluating Fiscal Attractiveness for Gold Mine Development: Africa vs South America

- By: John P Sykes
Posted in: Blog, Mineral Economics, Mineral Policy, Mining, Publications, Recommended, Technical Paper Reviews


Last year I helped contribute to some research for the International Mining for Development Centre (IM4DC) on “Evaluating the Attractiveness of Fiscal Regimes for New Gold Developments: African and South American Peer Country Comparisons” with Allan Trench (The University of Western Australia), Chris Gemell (Red Onyx Consulting), Michael Curtis (RISC) and Tony Venables (Independent Geologist). Particular credit goes to Chris Gemell for the heavy-lifting with the spreadsheet!

I have just noticed this research is free-to-view online via the IM4DC (accessed through the imbedded links in this article), so I thought I should write about it a bit in case you’re interested.

The research compares the fiscal regimes applying to gold mining for five African and five South American countries that are aiming to develop their gold mining sectors. The research involved using a standard, large gold mine and transplanting it into the fiscal (taxation) regime of each country to see which had the highest (i.e. least attractive) overall tax burden, when including all fiscal policies (i.e. royalties, corporation taxes, equity shares, and other mining related taxes) over the life of the mine.

The headline results are the rankings of Overall Effective Tax Rate (over the life-of-mine), with a lower rate seen as more encouraging of foreign investment in the gold mining sector:

  1. South Africa, Africa (36.3%)
  2. Chile, South America (44.3%)
  3. Brazil, South America (44.8%)
  4. Burkina Faso, Africa (52.2%)
  5. Colombia, South America (55.0%)
  6. Peru, South America (58.5%)
  7. Tanzania, Africa (58.8%)
  8. Mali, Africa (60.4%)
  9. Guyana, South America (63.9%)
  10. Ghana, Africa (66.5%)


As well, as providing a ranking of the 10 countries involved, a number of other interesting insights arose from the research, that require further investigation.

Firstly, although Africa had slightly less competitive fiscal regimes than South America in general, the overall average difference between the continents was small when compared to the variation of fiscal regimes within the continents. From a due diligence perspective, neither ‘Africa’ or ‘South America’ is ‘better’ for fiscal policy, and thus it is really down to investors to research individual countries.

Secondly, that different governments raise their taxes from the mining sector in different ways. All use corporate taxes and royalties in some way, but some also use equity ownership dividends and some other special mining taxes. In general, corporation tax is the most significant revenue generator (though clearly this is dependent on profitability) for governments, not royalties. The actual blend of taxes is unique to each country (especially when you consider that royalties themselves can be structured in many different ways – ad valorem, volume based, rent based etc) and as such individual study of country’s fiscal regime is required before investment.

Thirdly, and in relation to the above point, there was no correlation between individually reported tax rates and fiscal policies, and the overall fiscal burden of a country, i.e. a low royalty rate does not indicate a low taxation state – the taxes could just come via other mechanisms such as corporation taxes or equity shares.

Fourthly, that in general the overall split of economic rents from gold mining seems to work roughly on a half and half split between the government and private sector, with most overall effective tax rates between 35% and 65%. This number changes significantly when bank debt is included to fund a project, and can become as much as a third each split between government, miner and financier. Though an early-stage finding this would seem to suggest it is in government’s interests to have mine projects in their domain financed by equity (assuming that this does not stop the investment in a mine project full stop, or make it uneconomic and result in premature closure).

Fifthly, the perceived attractiveness of a country’s fiscal regime (as measured using ranking for taxation in the Fraser Institute) does not correlate with the overall fiscal burden of some countries. Most noticeably, Brazil and South Africa which have low overall tax rates for gold mining are ranked as having some of the least attractive tax regimes in the mining world. This would suggest that either perception of mining executives, are not matching the actuality of operating in these countries, i.e. there is a perception problem, or that some other taxation related factor, other than the rate, is causing a negative perception, i.e. there is an actual problem. The potential candidate in these cases could be bureaucracy and complexity, with problems arising not from the rate of taxation but the difficulty in complying with the tax code. From an economic development perspective this causes a number of problems for host regimes. Firstly, poor perceptions discourage investment in the mining sector, reducing economic activity and government benefits in these countries. Secondly, the poor perceptions potentially due to bureaucratic complexity mean that these countries have to charge a lower tax rate than they could otherwise ‘get away with’, reducing government revenues and benefits to the populace.

Sixthly, that even for a number of experienced mining professionals involved in this work, conducting the research was very complicated (and thus the results are somewhat of an oversimplification). Details on the fiscal regime are often very difficult to acquire in the first place, then difficult to translate into Excel-based financial models, and then quite difficult to interpret. This complexity is probably not good, as it increases opacity in taxation (which can lead to corruption) but also can act as a deterrent for investment. More importantly, fiscal complexity, can mean foreign investment becomes more reliant on perceptions, than the facts off the matter, as discussed above – this is economically inefficient.

Finally, in conducting our research, it seemed to us that governments often focus on the details of fiscal policy – a kind of bottom up approach – building the policy from the bottom and arriving at an overall fiscal policy in the end, more by accident, rather than by design. It perhaps may be better to set an overall fiscal aim first (i.e. an overall life-of-mine tax rate of no more than our neighbouring countries, which for example might be 55%) and then designing the system to achieve this is the most efficient and transparent way, in line with local custom and law – a top down approach. This way governments can assure their fiscal policy is competitive, efficient and equitable.