This article first appeared in Forum, The Edge Malaysia Weekly on September 25, 2023 - October 1, 2023

The commodity boom early this century was mainly driven by mineral prices. Yet, mining’s contribution to developing countries’ revenue has been modest, largely due to massive tax evasion and avoidance.

Decades of well-supervised mineral extraction prove resource extraction by accountable and effective states can accumulate more “resource rents” to enhance sustainable development and social welfare.

Well-regulated, progressive resource rent taxation can greatly enhance such extractive industries’ fiscal contribution to public well-being and national development.

But mining royalty rates fell significantly at the end of the 20th century to a range of up to 30%. Mineral revenue rates must be increased if resource-rich developing countries are to progress. Those responsible have justified lowering resource rents for host governments and economies. The World Bank’s Extractive Industries Transparency Initiative supposedly seeks to cut corruption associated with mining and attract more mining foreign direct investment.

From the late 20th century, Tanzania rapidly became the third largest gold producer in Africa — after South Africa and Ghana, which was once known as the Gold Coast.

But with negligible royalties and tax revenue, Tanzania — a least developed country — subsidises the government-provided infrastructure built to attract primarily foreign gold mining investors.

The Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) and the African Tax Administration Forum (ATAF) have proposed how developing countries can benefit more from their mineral resources.

Their book — The Future of Resource Taxation: 10 Policy Ideas to Mobilize Mining Revenues — considers policy options available to governments, and offers lessons from how several have successfully implemented the proposed approaches.

(i) Minimum profit share for government

Many governments receive mineral resource rents via royalties and corporate income tax. A few insist on minimum government revenue even when prices fall below thresholds. The book assesses whether such “profit sharing” — in Tanzania, the Philippines and Ecuador — improved on the status quo ante.

(ii) Production sharing contracts

Many governments get oil and gas revenues via production sharing contracts. Some have been considering whether such arrangements would work well for other minerals. A chapter considers issues arising from executing such contracts.

(iii) State equity participation

State equity participation enables governments to receive dividends and other benefits from their investments. The volume offers practical guidance in this regard.

(iv) Commercial state-owned enterprises

Nationalist desires for mineral resource ownership may involve fully state-owned mining enterprises to maximise economic benefits to the nation. One chapter recommends how such companies should be established, expanded and reformed to succeed.

(v) Variable royalties

Variable royalty rates are easier to enforce than profit- or cash-flow based taxes. The book offers pragmatic guidance from reviewing variable royalties in 15 countries.

(vi) Related-party sales

Resource-rich Latin American countries have been using commodity prices from a relevant exchange — such as the London Metals Exchange — to reduce tax dodging involving mineral transactions. Such reference prices are less vulnerable to related-party mineral sales’ tax dodging.

(vii) Carbon pricing and border adjustment mechanisms

The carbon border adjustment mechanism (CBAM) taxes imports from outside the European Union for presumed greenhouse gas emissions at rates equal to what EU-made products are charged by its Emissions Trading Scheme. The report considers CBAM’s likely impact on mineral-exporting developing countries, and whether they should emulate it.

(viii) Community revenue from a development turnover tax

Some mining tax instruments cater for specific demands from resource-rich countries. One chapter discusses a “development turnover tax” requiring private mining companies to invest in shared public infrastructure. Alternatively, the national revenue authority can collect a development turnover tax for a government-run mining development fund to do likewise.

(ix) Competitive bidding for mining rights

Under the correct conditions, competitive bidding can efficiently assign mineral resource extraction licences to private companies. The report describes how countries can increase revenue from allocating mining licences via competitive bidding.

(x) Better monitoring of quarrying

In most resource-rich countries, regulatory oversight and mining revenue mobilisation tend to focus on precious minerals, ignoring quarried industrial minerals. Remote monitoring can help tax authorities better assess quarried output volumes and sales.

When mining companies use their power, money and influence to get mining rights, land, water and other resources, they invariably provoke resistance, often local. But better international, national and local 

regulation can reduce such adverse impacts and related conflicts.

Some proposals in the volume involve incremental changes, while others are more radical. But they all need careful government consideration to ascertain appropriateness. Of course, the likelihood of success also depends on various circumstances.

Governments require human and financial resources to implement the proposed reforms. They should avoid inefficient and ineffective tax incentives as well as enforcement powers undermining government policies and the law.

Effective implementation often needs support from resource-rich developing countries — from international organisations, bilateral and other development partners — to improve mineral resource rent collection.

Generally, mining revenue has fallen short of expectations — largely due to inappropriate laws, poor investment agreements, overly generous tax incentives, tax evasion and avoidance. Some countries also lack the needed expertise, information and means to effectively implement mining taxation, free of corruption.

Intensified competition for mineral resources is worsening rivalries. As demand grows, new alliances and rivalries are emerging, even as circumstances change.

With such uncertainties in a fast-changing international situation, developing countries can better advance their national interests by cooperating and staying non-aligned, rather than competing with other mineral producing nations.

Jomo Kwame Sundaram, a former economics professor, was United Nations assistant secretary-general for economic development. He is the recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

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