A review of the mining fiscal regime which would see the introduction of a mining rent has been recommended by a team from the IMF in a report submitted last month on petroleum taxation and revenue management.
The team from the Fiscal Affairs Department (FAD) of the International Monetary Fund (IMF) visited in July this year and in the report seen by Stabroek News it adverted to what it termed the generous deal that ExxonMobil has gotten in its Production Sharing Agreement (PSA) for the offshore Stabroek block.
While mainly focused on petroleum matters, the team also addressed the mining regime and made recommendations. The government has thus far not commented on the report.
The team said that one objective of assessing the gold mining sector was to identify lessons to be learnt which could have implications for the petroleum sector development.
It noted that artisanal mining continues to represent 70 percent of Guyana’s roughly 700,000 ounces of annual production. It pointed out also that larger scale mines are proving profitable and it is reasonable to expect that other similar-sized mines producing in the range of 200,000 ounces per year could be developed in the future.
The FAD report pointed out that artisanal miners pay a flat 5 percent royalty on the gross value of gold production, while per ounce the royalty for large scale mines is tied to the world price of gold: 5 percent under US$1000 per ounce and 8 percent above. Corporate income is taxed at 27.5 percent with royalties being a deductible expense and capital expenditures depreciated on a straight-line basis over five years. Mining agreements with foreign investors, the report said, traditionally include a stability clause that affixes the applicable royalty and corporate income tax rates plus a range of exemptions from taxation, including: wide zero-rating of VAT; exemptions from import duties and other indirect taxes; and exemptions from dividend and withholding taxes.
Administer
The report said that in practice, these exemptions have been a challenge to administer, creating backups at the port of entry and a significant compliance burden for the private sector. The FAD report said that the stability clause is also applied asymmetrically. It noted that mining companies benefited from the general reduction in the corporate income tax rate from 30 percent to 27.5 percent as part of the 2017 budget.
The FAD report said it is common in a mining fiscal regime to have a tax targeting natural resource rents.
“A mining rent tax can allow a business to earn the rate of return required to undertake investment and then (for the government to) tax the residual supernormal profits at a relatively high rate, without distorting the decision to invest. Simple royalties based on the volume or value of production, such as that levied by Guyana on the value of gold production, are relatively easy to administer and comply with and yield a steady stream of predictable revenue from the start of production. However, simple royalties are insensitive to the profitability of the individual mine and can thereby have a negative impact on business investment. In general, the combination of a royalty – such as 5 percent on the value of gold production – with a mining rent tax presents the best combination of the stable, predictable revenues provided by a royalty with the high government share of supernormal profits and optimal level of business investment available from a mining rent tax”, the FAD report asserted.
Imbalances
It cautioned that negotiating exemptions into mining pacts creates competitive imbalances and admi-nistrative complexities.
“Mining businesses that obtain tariff and VAT exemptions on imports favour foreign over domestic suppliers; this problem is exacerbated when input tax credit refunds on domestic purchases of goods and services are challenging to get process-ed. Revenue administrators, in turn, dedicate significant resources to interpreting individual mine agreements and then assessing imports to determine whether they qualify for exemptions that may differ from one mining agreement to the next”, the FAD report stated.
It added that companies are required to file an annual Investment Deve-lopment Agreement to import equipment under their contractually granted exemption. The report said that it can take up to six months for it to be reviewed and approved by the Guyana Revenue Authority. This agreement is then the basis for applying tariff and VAT exemptions specified in the mining agreement at the port of entry. Additional examination at the port of entry in relation to whether the goods are necessary for use within the mine, introduces additional delays, complications and uncertainties.
“It is important that these administrative challenges are addressed now for all businesses; in particular, so that petroleum development proceeds as quickly as possible”, the report declared.
It argued that a comprehensive review of the mining tax regime would present a good basis for introducing a generally applicable fiscal regime for future investment for mining. The report said that the key features could include the following, subject to a further more detailed review:
Artisanal gold miners should be subject to an escalating royalty plus service and permit fees. Given the prominence of artisanal gold miners here and the simplicity of the current royalty structure, a mining rent tax should only be contemplated for larger more sophisticated mines. The report said that at higher gold prices the government should take a greater share of the profits from all gold producers.
For larger gold mines, the report recommends that the government retain the 5 percent royalty while replacing the escalating royalty with a mining rent tax. It said that this could allow more revenue to be earned from larger mines with a smaller negative impact on investment. It noted that it would be difficult to make such a large change in the current structure of mining taxation without creating disputes with foreign mining companies which hold a mining agreement that includes a stability clause. As a result, the legislation could be revamped to clearly specify the tax and royalty treatment of all future mines. Existing mines with a mining agreement that includes a stability clause could be given a one-time irreversible opportunity to opt-in to the new regime, the report recommended.
The reports said that tariffs should be eliminated on capital goods and other business inputs for all businesses, not just those foreign-owned businesses with the ability to negotiate preferential provisions in a mining agreement. Such a change, it said, would greatly simplify the current administrative approach of exemptions and annual Investment Development Agreements, while improving the competitive position of domestic businesses.
In relation to VAT, in lieu of exemptions for foreign-owned businesses, the Guyana Revenue Authority should commit to processing and paying all input tax credit refunds in a timely manner. This would allow businesses to quickly clear their importations through the port of entry by paying the VAT up-front, with the assurance that refunds would be expedited. The report added that it is worth exploring the scope to design the VAT policy in ways that reduce the cash flow pressures from mining and petroleum operations. Since their exported supplies are zero-rated there is no revenue at stake other than ensuring there is no leakage stemming from abusing VAT exemptions, the report added.
The report also recommended that VAT registration should be made available to all mining or petroleum companies with an exploration or production license. Regardless of whether the business is currently making taxable supplies or whether all future outputs are likely to be zero-rated exports, the FAD report said that the core benefits of VAT include the non-taxation of business inputs during the exploration and development phase.
