TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE

The document introduces a four-step framework for estimating the total cost of mining tax incentives by combining direct revenue losses with behavioural costs. It presents the IGF Mining Tax Incentives Financial Model, a tool pre-configured for a medium-sized surface gold mine in sub-Saharan Africa, which allows users to simulate how investors might change operations or financing to maximise incentives. The guide details specific behavioural risks, such as high-grading in response to tax holidays and excessive interest deductions following withholding tax exemptions, and provides methodologies for testing these estimates through scenario modelling and sensitivity analysis.

• The total cost of tax incentives is composed of two elements: the direct cost (the difference between benchmark revenue and revenue under the incentive regime) and the behavioural cost (unintended revenue losses resulting from investors changing their behaviour to maximise financial benefits).
• Combining multiple tax incentives can lead to a total cost greater than the sum of individual incentives because they can interact to erode the tax base. For example, combining import duty exemptions with income tax holidays and withholding tax exemptions on dividends can allow profits to increase while remaining entirely untaxed.
• Income tax holidays create a risk of 'high-grading', where investors increase the cut-off grade to speed up production during the tax-free period, which can significantly increase the total cost of the incentive by shortening the mine's life.
• Exemptions from withholding tax (WHT) on interest can incentivise 'excessive interest deductions', where investors increase borrowing or interest rates to shift income to offshore affiliates, thereby reducing corporate income tax revenue.
• Sliding-scale royalties with an aggregate structure can lead to mineral price manipulation, creating 'dead zones' where buyers and sellers are incentivized to transact at the threshold limit to avoid higher royalty brackets.
• Tax incentives are considered poorly targeted if their cost increases when mine performance improves (e.g., higher commodity prices), as the value is greatest when the incentive is least needed for viability. Conversely, cost-based incentives are better targeted as they provide more support when performance is worse.

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} }