Insights on Incentives:

Tax competition in mining

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Introduction
This paper highlights key findings from an analysis of the IGF Mining Tax Incentives Database, a
collection of files comparing the fiscal regimes of 104 mining projects across 21 countries. The
database is the first large-scale, systematic attempt to compile tax incentives used by developing
country governments to attract mining investment. It is also the first public effort to bring together
incentives granted in mining contracts. This is made possible through greater contract transparency—
in particular, the availability of resource contracts compiled by the Natural Resource Governance
Institute (NRGI), Colombia Centre for Sustainable Investment (CCSI), the World Bank and Open Oil.

The findings below are by no means exhaustive. It is hoped that further analysis of the database by
policy-makers, researchers, international organizations and civil society, will yield additional lessons
for the design and use of mining tax incentives. To ensure that the contents remain relevant, and
in light of the Extractive Industry Transparency Initiative (EITI) requirement to publish all resource
contracts by 2021, IGF is committed to periodically updating the database, and welcomes support
from researchers and partner organizations in this task.

The database is part of a series of materials on mining tax incentives. Readers should refer to the
IGF-OECD practice note Tax Incentives in Mining: Mining Risks to Revenue, as well as the open-
source IGF financial model for estimating the cost of tax incentives.

Data Description and Method

1. Selection of Countries
The database surveys mining tax incentives in 21 countries. These countries were selected based
on the public availability of mining contracts on NRGI’s webpage resourcecontracts.org. For most
countries, all available mining contracts were coded provided they were available in English, Spanish,
French or Portuguese. However, for the Philippines, Guinea, the Democratic Republic of Congo, and
Peru only a limited selection of contracts was coded due to the large number of available contracts. A
sample was chosen to reflect the different types of minerals mined in each country. Figure 1 outlines
the number of contracts coded per country.

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 Seven Insights from the IGF Mining Tax Incentives Database

Figure 1. Coverage of Database (number of contracts per country)

2 Tunisia
Mali 12 1 Mongolia

1 Niger
3 Afghanistan
Senegal 5
3 Cameroon
7 Philippines
Guinea 8
6 DR Congo
Colombia 5
Sierra Leone 8
1 Burundi
Ecuador 1
Liberia 16
Peru 5 2 Malawi

Burkina Faso 7

Zambia 6 1 Madagascar

4 Mozambique

2. Selection of Mining Tax Incentives

The database adopts the same definition of “tax incentives” as the IGF-OECD practice note—that is,
any special tax provision granted to mining investors that provides a favourable deviation from the
general tax treatment that applies to all corporate entities. It also captures the same tax incentives
defined in Table 1. As in the practice note, the incentives captured in the database are not exhaustive,
but include the more typical mining tax incentives.

Table 1. Typical mining tax incentives

Mining fiscal instruments Corresponding tax incentives

Taxes on income • Income tax holiday

(e.g., corporate income tax, resource rent taxes, • Accelerated depreciation
withholding taxes) • Investment allowance/tax credit
• Longer loss carry forward
• Withholding tax relief on interest expense dividends,
services (e.g., management fees)

Taxes on production • Reduced royalties

(e.g., mineral royalties) • Royalty holidays
• Sliding-scale royalties

Tariffs on imports and exports • Import duty relief

(e.g., tariffs on import of capital inputs)

Others • Stabilization of fiscal terms

• Property tax
• VAT

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 Seven Insights from the IGF Mining Tax Incentives Database

3. Method for Classifying Fiscal Terms as Tax Incentives

Whether a fiscal term is a tax incentive depends on the country’s legal framework, in particular the
law that applies to all taxpayers by default (the “benchmark fiscal regime”). If the term in question
provides a favourable deviation from the benchmark fiscal regime for mining investors it will be
deemed an incentive. Thus, in order to identify tax incentives for the purpose of the database, it
was necessary to review the general tax code, the mining code, and project-specific contracts, in
that order. In some countries, mostly in Anglophone Africa, the mining tax law is included as part
of the general tax code rather than as part of the mining code. In these cases, the mining tax
law is treated as part of the general tax code. Having identified the relevant fiscal terms, these
were copied into a spreadsheet; the terms were translated into English, summarized and analyzed
according to the steps below.

Figure 2. Steps in the analysis

STEP 1: STEP 2: STEP 3:

General tax code Mining code Mining contracts
Terms more favourable to Terms more favourable Terms more
mining relative to other than incentives in the favourable than
economic sectors were tax code were marked incentives in the tax
marked as incentives. as incentives. and/or mining codes
were marked as
incentives.

(i) Using the Primary Law Presently in Force

It was not practical to identify the primary law in force at the time each contract was signed.
As such, the tax codes and mining codes included in the database are the most recent
versions, which may be different to the primary law when the contract was signed. This is
one of the limitations of the database, and government and investors may object to certain
terms being deemed incentives that were not incentives according to the benchmark at the
time. Notwithstanding, these terms are favourable relative to the most recent tax code and/
or mining code and it is reasonable to count them as incentives.
(ii) Counting Incentives Across Multiple Sources of Law
It is possible for a country to have an incentive in the law and in the contract, if the contract
provides something more generous than the legislation. For example, all mining investors
may be subject to a lower corporate tax rate by law; however, one mining company receives

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 Seven Insights from the IGF Mining Tax Incentives Database

an even lower tax rate in its contract. While it could be argued that the incentive in the law
is cancelled out by the more generous incentive in the contract, both are counted in the
database. This is because the incentive in the law would still apply to any other investor
entering the market as well as to existing investors with less generous contracts. Table 2
provides a stylized example of how incentives were assessed in such cases. On the other
hand, if the incentive in the contract is less generous than the incentive in the law, the
“incentive” in the contract as not counted as an incentive.

Table 2. Example: When is something defined as an incentive?

Tax code 30% tax rate 30% tax rate 30% tax rate 30% tax rate

Mining code 30% tax rate 25% tax rate 30% tax rate 25% tax rate

Contract According to law According to law 25% tax rate 10% tax rate

No incentive Incentive in law Incentive in Incentive in law

contract and contract

(iii) Not all Incentives Are Made Equal

Of course, not all incentives are the same—some are more generous than others. A tax
holiday, for example, eliminates all corporate income tax for that period, whereas if the
benchmark rate of tax is 30 per cent, and the incentive rate is 25 per cent, government
foregoes some tax, but not all. Despite these important differences, the database counts
each incentive as one. Thus, a tax holiday and a lower rate of tax are each counted as one
incentive although the impact on government revenue may be different. Users should refer
to Tax Incentives in Mining: Mining Risks to Revenue for a detailed discussion of the different
risks to revenue of each incentive.

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 Seven Insights from the IGF Mining Tax Incentives Database

7 Key Findings
1 It is more common for countries to grant incentives in the
primary law than in contracts.

Across the three regions, the average number of incentives granted through law is higher than the
number of incentives granted by contract. Without considering the type of incentives, it is positive
that a greater proportion are granted in the law, which is public, and subject to legislative review,
rather than by contract, which are often discretionary, secret and vulnerable to corruption.

→ See page 18 of the IGF-OECD practice note for a checklist for good governance and tax incentives.

However, there are significant regional differences. In particular, African countries grant more
contract-based incentives than their peers in Asia and Latin America. It should be considered that
the database coverage of Asia and Latin America is less than Africa, which may impact regional
comparisons. Notwithstanding, the finding is still valid given that the results are weighted for
number of contracts and number of countries. The average number of incentives in law per region is
determined by the combined number of incentives in law divided by the number of countries in that
region. Incentives per contract per region are the number of contract-based incentives divided by the
number of contracts analyzed. Thus, the comparison is valid, although the results may look different
if more Asian and Latin American countries were included in the database (the limitation was the
availability of contracts).

Tax incentives by region

Figure 3. Tax incentives by region

9.00

8.00 7.7
7.0
7.00
Number of incentives

6.00
5.0
5.00
3.9
4.00

3.00

2.00
1.2
1.00 0.7

0.00
Africa Asia Latin America

Average number of incentives in legislation Average number of incentives in legislation

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 Seven Insights from the IGF Mining Tax Incentives Database

Reading the chart: The “number of incentives in law” is the sum of incentives by
type for the primary law; this may include incentives in the general tax code, the
mining code, and, in some cases, investment codes. It is not necessary to provide an
average here as the chart is per country.

Figure 4. Tax incentives by country

Tax incentives by country
12.00
Number of incentives

10.00

8.00

6.00

4.00

2.00

0.00
Ecuador

Madagascar

Niger
Afghanistan

Burkina Faso

Burundi

Cameroon

Colombia

DRC

Guinea

Liberia

Malawi

Mali

Mongolia

Mozambique

Peru

Philippines

Senegal

Sierra Leone

Tunisia

Zambia
Average number of incentives in contract Number of incentives in law

2 Tax stabilization and corporate income tax incentives are the

most common incentives. Withholding tax incentives are also
common, which is relevant in terms of risk to revenue.

Tax stabilization and corporate income tax incentives are the most common form of incentives
across both primary law and mining contracts. They are also two of the most high-risk incentives
according to the IGF-OECD practice note. Partial or complete income tax holidays may cause the
investor to increase their income during the tax-free period by speeding up the rate of production
and shifting the profits offshore. Combining incentives with excessive use of broad and long-
term fiscal stability provisions will magnify the adverse impact of tax incentives, including the
unintended consequences, by potentially cutting off government’s ability to correct mistakes and
unexpectedly large revenue losses.

→ See pages 42 to 44 of the IGF-OECD practice note.

Incentives relating to withholding tax raise particular tax base erosion and profit shifting (BEPS)
issues. Withholding tax requires the taxpayer to withhold some income tax on outbound payments.
For example, a taxpayer in Country A borrows USD 1,000 from a lender in Country B; the lender
requires 10 per cent interest on the loan, which is USD 100. The withholding tax rate in Country A is 5

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 Seven Insights from the IGF Mining Tax Incentives Database

per cent, meaning the borrower must withhold USD 5 income tax on the USD 100 interest it pays to
the lender. However, if countries reduce or exempt withholding tax on interest expense, management
fees or royalties, there is an added incentive for investors to increase these payments in order to strip
profits out of the mine, transferring them to a foreign affiliate, usually based in a low-tax country.

→ See pages 25 to 27 of the IGF-OECD practice note.

3 Cost-based incentives, in particular investment allowances

and tax credits, are uncommon, despite being better suited
to mining investments than profit-based incentives.

Only Colombia, Mongolia and the Philippines offer an investment allowance or tax credit in the
law. This is surprising given that cost-based incentives are generally better targeted to mining
investments. An investment allowance, or tax credit, allows taxpayers to recoup their investment, as
well as defer taxes to later stages in a project’s life and hence not eat into cash flows in the early
years when capital is most needed. They are also easier to monitor, as the benefit is based on the
amount of investment. However, there are some importance differences: Mongolia gives a 10 per cent
tax credit, whereas Colombia offers an allowance for investments made in the environment, including
the rehabilitation of mine sites. A tax credit will reduce the tax payable, whereas the investment
allowance will reduce the taxable income. The effect is different; the tax credit being significantly
more generous than the investment allowance.

→ See pages 28 to 30 in the IGF-OECD practice note.

Figure 5. Number of countries with incentives in law

Number of countries with incentive in law
18

16

14

12

10

0
Loss carry

Royalty

Tax stability

Other
Accelerated
depreciation

CIT

Deduction
on CAPEX

Property tax
or licence fee

Tariffs and
excise taxes

Tax credits
and allowances

VAT

WHT
forward

rates

agreement

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 Seven Insights from the IGF Mining Tax Incentives Database

Figure 6. Average proportion of contracts with incentives

Average proportion of contracts with incentive
70%

60%

50%

40%

30%

20%

10%

0%
Loss carry

Royalty

Tax stability

Other
Accelerated
depreciation

CIT

Deduction
on CAPEX

Property tax
or licence fee

Tariffs and
excise taxes

Tax credits
and allowances

VAT

WHT
forward

rates

agreement
4 Royalty-based incentives feature heavily in contracts but
not in the primary law.

Very few countries grant royalty-based incentives in the primary law. Thus, it is particularly striking
that many more offer such incentives in contracts. Royalty-based incentives may take the form of
reduced or deferred royalties, or variable rate royalties where the benchmark is a flat rate. The extent
of royalty-based incentives is concerning for two reasons. First, royalties are intended as payment for
the right to extract a publicly owned resource. If government reduces or waives royalties, it foregoes a
regular and relatively predictable source of revenue. Secondly, a royalty holiday provides an incentive
to shift revenues into the tax-free period, like the response to an income tax holiday. While there may
be circumstances in which it is necessary to waive or exempt royalty payments, when cash flows are
negative, for example, there should be clear and objective criteria and procedures.

→ See pages 39 to 41 of the IGF-OECD practice note.

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 Seven Insights from the IGF Mining Tax Incentives Database

Figure 7. Number of countries with incentives

Number of countries with incentives
18

16

14
Number of incentives

12

10

2
Loss carry

Royalty

Tax stability

Other
Accelerated
depreciation

CIT

Deduction
on CAPEX

Property tax
or licence fee

Tariffs and
excise taxes

Tax credits
and
allowances

VAT

WHT
forward

rates

agreement
Number of countries with incentive in law Number of countries with incentive in at least one contract

5 Taxes are stabilized for 20 years on average.

Nearly all countries include a tax stability clause either in the primary law or mining contracts. A
predictable investment environment is important to ensure the bankability of projects. However,
where the period extends well past the financing stages, for example, 30–34 years on average in
Guinea, Burkina Faso, Burundi, Madagascar and Mali, stabilization clauses become more akin to
rent-seeking tools than necessary financial assurances. Where governments choose to offer fiscal
stabilization, they should ensure that the time period and scope are limited, and that there are
opportunities for review.

→ See page 43 of the IGF-OECD practice note for recommendations on drafting fiscal
stabilization clauses.

Reading the chart: The “average years of stability” are calculated using the number
of years offered for each contract. If the contract does not specify a number of years,
the number of years specified in legislation is entered. If the offered tax stability is for
the entire duration of the project or indefinite, 30 is entered as a benchmark.

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 Seven Insights from the IGF Mining Tax Incentives Database

Tax stability agreements

Figure 8. Tax stability agreements

Afghanistan
Burkina Faso
Burundi
Cameroon
Colombia
DRC
Ecuador
Guinea
Liberia
Madagascar
Malawi
Mali
Mongolia
Mozambique
Niger
Peru
Philippines
Senegal
Sierra Leone
Tunisia
Zambia

0 5 10 15 20 25 30 35 40

Years of stability offered (average)

6 Tax holidays are nine years long on average.

More than half of the countries surveyed offer a corporate income tax holiday either in the law, or in
one or more mining contracts. Statutory tax holidays are provided for in Ecuador, Madagascar, Niger
and the Philippines.

Tax holidays are problematic for two reasons: First, income tax holidays are a relatively inefficient and
ineffective incentive for mining. They are ineffective because mining is location-specific, making it
difficult for investors to move where they are offered better fiscal terms. They are inefficient because
profitable projects benefit more from tax holidays than marginal ones whose viability may actually
depend on favourable fiscal terms. The second problem is the risk of abuse. Investors are incentivized
to increase their income during the tax-free period by speeding up production and shifting the profits
offshore, leaving less income to tax after the holiday has ended. In some cases, the tax holidays are
more than the average life of the mine, in which case government may never collect income tax.

→ See pages 20 to 24 of IGF-OECD practice note for a detailed discussion of tax holidays.

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 Reading the table: Tax holiday is defined as a corporate income tax exemption
during the operating phase and is counted as “yes” if either legislation or at least
one contract is granted such for at least one year. Tax holiday length is the simple
average of the projects with a tax holiday, regardless of whether this comes from law
or contract. In one case in the Democratic Republic of Congo, the tax holiday is not
time-limited: for this a period of 30 years is used to calculate the average. In Guinea,
one contract has a tax holiday "Until full repayment of initial investments." For this
case we do not assign a number of years.

Table 3. Mining tax holidays

Country Average Tax Average Country Average Tax Average

CIT rate holiday length CIT rate holiday length
for mining of tax for mining of tax
projects holiday projects holiday
(years) (years)

Afghanistan 20.0 No Mali 31.3 Yes 4.4

Burkina Faso 18.9 No Mongolia 25.0 No

Burundi 30.0 No Mozambique 29.3 No

Cameroon 28.3 Yes 5 Niger 40.5 Yes 4

Colombia 33.0 No Peru 27.6 No

DRC 25.0 Yes 22.5 Philippines 35.0 Yes 8

Ecuador 25.0 Yes 15 Senegal 30.0 Yes 13.6

Guinea 31.3 Yes 10 Sierra Leone 26.2 Yes 8

Liberia 29.5 Yes 5 Tunisia 25.0 Yes 7.5

Madagascar 12.5 Yes 5 Zambia 27.5 No

Malawi 30.0 No

7 The use of mining tax incentives rose sharply in the late

1990s, and during the commodity price crash of 2014–2016.

The use of mining tax incentives peaked during the late 1990s, with an average of 4.7 incentives per
contract. This coincides with many African countries seeking to attract private investment to develop
their mineral resources. Some of the Zambian contracts signed during that period offered 0.6 per cent

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 Seven Insights from the IGF Mining Tax Incentives Database

royalty rates, for example. The experience was mixed during most of the 2000s. However, there was a
sharp decline in incentives from 2010 to 2013, which coincides with high commodity prices. This was
followed by a steep increase from 2014 onwards, mirroring the commodity price crash, in which case
countries would have been under pressure to offer generous fiscal terms to attract investment. With
the exception of these events, countries’ motivations for granting incentives seem relatively random,
and are more likely determined by particular policy choices, or private sector investors, than global
economic conditions.

Incentives
Figure 9. Incentives in contracts in contracts over time
over time

14 8.0

Number of incentives per contract

12 7.0

6.0
Number of contracts

10

5.0
8
4.0
6
3.0

4
2.0

2 1.0

0 0.0
1977

1987

1997

2007

2017
1978
1979
1980
1981
1982
1983
1984
1985
1986

1988
1989
1990
1991
1992
1993
1994
1995
1996

1998
1999
2000
2001
2002
2003
2004
2005
2006

2008
2009
2010
2011
2012
2013
2014
2015
2016
Contracts without incentives Contracts with incentives Average number of incentives per contract

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 Seven Insights from the IGF Mining Tax Incentives Database

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