TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE

The document argues that tax incentives in the mining sector are often ineffective at attracting investment due to the location-specific nature of mineral resources and can lead to significant revenue losses. It provides a framework for reviewing incentives, identifying high-risk behavioural responses—such as 'high-grading' during tax holidays or abusive transfer pricing in export processing zones—and offers recommendations for better design, including the use of incremental sliding-scale royalties and the avoidance of 'cliff-edge' fiscal changes.

• Tax incentives are generally ineffective at attracting mining investment in developing countries because mineral resources are location-specific and non-mobile, meaning investment decisions are driven more by resource quality and policy climate than by tax concessions.
• Income tax holidays are identified as high-risk and inefficient because they encourage 'high-grading,' where companies increase extraction rates or preferentially mine high-grade ore during the tax-free period to maximize tax-free revenue.
• Withholding tax (WHT) relief on interest and management fees increases the risk of base erosion and profit shifting (BEPS), as it encourages companies to inflate intra-group charges to strip profits from the mining country.
• Export Processing Zones (EPZs) can create parallel fiscal regimes that incentivize abusive transfer pricing, specifically by under-pricing mineral products sold from a mine to a related processing facility within the EPZ.
• Cost-based incentives, such as accelerated depreciation and investment allowances, are generally preferable to tax holidays as they allow for cost recovery without completely wiping out government revenue in the near term, though they still risk 'gold plating' (inflating capital costs).
• Sliding-scale royalties with an 'aggregate' structure create 'cliff edges' that incentivize investors to underprice sales to avoid crossing into a higher royalty bracket; an 'incremental' structure is recommended to mitigate this.
• Fiscal stabilization clauses can inadvertently lock in inefficient tax incentives and prevent governments from implementing international best practices or correcting revenue losses when commodity prices rise.

APA

Readhead, A. (2018). TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE. International Institute for Sustainable Development. https://www.iisd.org/system/files/2024-07/tax-incentives-in-mining-minimising-risks-to-revenue.pdf

Chicago

Readhead, Alexandra. TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE. International Institute for Sustainable Development, 2018. https://www.iisd.org/system/files/2024-07/tax-incentives-in-mining-minimising-risks-to-revenue.pdf.

Wikipedia

{{cite report |last1=Readhead |first1=Alexandra |title=TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE |publisher=International Institute for Sustainable Development |date=2018 |url=https://www.iisd.org/system/files/2024-07/tax-incentives-in-mining-minimising-risks-to-revenue.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{readhead2018tax, author = {Readhead, Alexandra}, title = {{TAX INCENTIVES IN MINING: MINIMISING RISKS TO REVENUE}}, institution = {International Institute for Sustainable Development}, year = {2018}, url = {https://www.iisd.org/system/files/2024-07/tax-incentives-in-mining-minimising-risks-to-revenue.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }