Ring-Fencing Mining Income

The document defines ring-fencing as a limitation on the consolidation of income and deductions across different projects or activities for tax purposes. It argues that while ring-fencing can discourage investment in marginal ore bodies and increase compliance costs, it is essential for capturing economic rents, preventing permanent revenue loss from unsuccessful exploration, and mitigating BEPS practices. The guide recommends ring-fencing by mining licence area and suggests that profit-based taxes like Resource Rent Tax (RRT) and Additional Profit Tax (APT) must be ring-fenced to be effective. It also provides technical recommendations on apportioning indirect and general expenditures, suggesting that capital expenditure (CapEx) is a more effective allocation key than production volumes to avoid tax deferral.

• Ring-fencing accelerates the delivery of government revenues by preventing mining companies from offsetting exploration and development costs of new projects against the profits of existing producing mines.
• Without ring-fencing, governments face the risk of permanent revenue loss when investors offset costs from unsuccessful exploration projects against the profits of producing mines.
• Ring-fencing can mitigate BEPS practices, such as the use of structured financial derivatives to intentionally generate losses in a mining entity while booking gains in a related overseas company.
• The most administratively simple method of ring-fencing is by mining licence area, as it aligns tax treatment with geographical locations defined in the licence and regulatory reporting.
• Profit-based taxes, specifically Resource Rent Tax (RRT) and Additional Profit Tax (APT), require ring-fencing to be effective; otherwise, consolidation of results across projects can delay the point at which the required internal rate of return (IRR) threshold is met.
• Using production volumes as an allocation key for indirect and general expenditures can be counterproductive, as it allocates 100% of costs to producing mines, thereby deferring taxes and undermining the purpose of ring-fencing.
• The guide recommends using capital expenditure (CapEx) as an allocation key for indirect and general expenditures because it preserves the policy intent of ring-fencing by allocating costs to projects regardless of whether they are currently producing.
• To prevent profit shifting between ring-fenced activities within a single legal entity, countries should apply transfer pricing rules to internal 'dealings' based on the arm's-length principle.
• Ring-fencing can create a more equitable environment for new entrants by removing the tax advantage incumbent operators have when offsetting new exploration costs against existing income.
• Some jurisdictions, including Papua New Guinea, Kenya, and the Cook Islands, use exceptions to allow the limited recovery of unsuccessful exploration expenditures to balance revenue needs with the goal of attracting exploration investment.

APA

International Institute for Sustainable Development (2025). Ring-Fencing Mining Income. https://www.iisd.org/system/files/2025-07/ring-fencing-mining-income-toolkit-en.pdf

Chicago

International Institute for Sustainable Development. Ring-Fencing Mining Income. 2025. https://www.iisd.org/system/files/2025-07/ring-fencing-mining-income-toolkit-en.pdf.

Wikipedia

{{cite report |author=International Institute for Sustainable Development |title=Ring-Fencing Mining Income |date=2025 |url=https://www.iisd.org/system/files/2025-07/ring-fencing-mining-income-toolkit-en.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{internationalinstituteforsustainabledevelopment2025ringfencing, author = {{International Institute for Sustainable Development}}, title = {{Ring-Fencing Mining Income}}, institution = {International Institute for Sustainable Development}, year = {2025}, url = {https://www.iisd.org/system/files/2025-07/ring-fencing-mining-income-toolkit-en.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }