TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE

This supplementary guidance note provides a framework and a financial modelling tool to help governments estimate the total cost of mining tax incentives, specifically focusing on the 'hidden' costs arising from investor behavioural responses. It details how to calculate direct costs, model behavioural changes such as high-grading and excessive interest deductions, and test these estimates through sensitivity analysis and scenario modelling.

• The document proposes a four-step framework to estimate the total cost of tax incentives: first, estimating revenue under a benchmark fiscal regime; second, calculating the direct cost by comparing benchmark revenue to incentive revenue; third, estimating the behavioural cost by incorporating investor responses; and fourth, summing direct and behavioural costs to find the total revenue foregone.
• The Intergovernmental Forum on Mining (IGF) has released a beta-stage financial model, licensed under CC BY-SA 4.0 and following the FAST Standard, pre-configured for a representative medium-sized surface gold mine in sub-Saharan Africa. The model allows users to input tax incentives and behavioural responses via a dashboard to see real-time impacts on government revenue and project returns.
• Direct costs of tax incentives can be offset by impacts on other tax bases. For example, an import duty exemption reduces operating costs, which can increase taxable income and subsequently increase income tax revenue and withholding tax on dividends.
• Combining multiple tax incentives can lead to a total cost greater than the sum of individual costs due to interactions that erode the tax base. Specifically, combining income tax holidays with exemptions on withholding taxes for dividends is identified as a risky combination that can facilitate significant profit shifting.
• High-grading is a behavioural response to income tax holidays where investors increase the cut-off grade to speed up production and maximize returns during the tax-free period, which shortens the mine's life and reduces overall output. In the IGF model's example, high-grading almost doubled the real-term cost of a 10-year income tax holiday, increasing it from $23.4 million to $46.9 million.
• Investors may respond to withholding tax exemptions on interest by increasing debt financing, interest rates, or repayment periods to shift profits to offshore affiliates. The document notes that maintaining a withholding tax on interest can protect revenue by imposing a financial cost on such excessive interest deductions.
• Sliding-scale royalties with an aggregate structure can create 'dead zones'—price ranges just above a rate threshold where both buyer and seller are incentivized to underprice minerals to remain in a lower royalty bracket. Monte Carlo simulations in the document suggest that while the average behavioural cost of price manipulation is 1.1% of benchmark revenue, the highest observed cost reached 26.4%.
• The document distinguishes between well-targeted and poorly-targeted incentives based on their response to mine performance. Well-targeted incentives (e.g., cost-based incentives) cost more when performance is worse, supporting marginal investments. Poorly-targeted incentives (e.g., profit-linked income tax holidays) cost more when performance is better, meaning they are most expensive when least needed for viability.

APA

Steel, I. (2018). TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE. International Institute for Sustainable Development. https://www.iisd.org/sites/default/files/publications/tax-incentives-in-mining-minimising-risks-to-revenue-guidance.pdf

Chicago

Steel, Iain. TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE. International Institute for Sustainable Development, 2018. https://www.iisd.org/sites/default/files/publications/tax-incentives-in-mining-minimising-risks-to-revenue-guidance.pdf.

Wikipedia

{{cite report |last1=Steel |first1=Iain |title=TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE |publisher=International Institute for Sustainable Development |date=2018 |url=https://www.iisd.org/sites/default/files/publications/tax-incentives-in-mining-minimising-risks-to-revenue-guidance.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{steel2018tax, author = {Steel, Iain}, title = {{TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE}}, institution = {International Institute for Sustainable Development}, year = {2018}, url = {https://www.iisd.org/sites/default/files/publications/tax-incentives-in-mining-minimising-risks-to-revenue-guidance.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }