Baunsgaard - A Primer on Mineral Taxation

Baunsgaard, T., A Primer on Mineral Taxation, IMF Working Paper, September 2001

This paper discusses options available to tax extractive minerals especially in developing countries. The author observes that a desirable tax regime can be designed through different tax and non tax instruments but notes the challenge of designing a fiscal regime that gives the government a fair share of the economic rent while remaining attractive to investors.

The authors upon considering the types of tax and non‐tax instruments including corporate income tax, resource rent tax, royalties, bonus payments and production sharing argue that there are no intrinsic reasons to prefer one tax type to another because a country’s choice should reflect the administrative preferences most suitable to the peculiar needs of that country. With this arrangement, the author notes that inherent project risks and rewards can be shared between the government and the investor; and the high risk premium sought by investors for taking up huge project risks can be minimized.

The author also considers the issues of tax administration and the macro‐economic impact of taxes. He suggests that the ease of administering a tax is an important factor to be considered when designing the tax.
The author concludes the paper by observing that there is no super fiscal regime that can be applied to all countries but that certain general features which may be considered in designing a fiscal regime is to combine some up‐front revenue with sufficient progressivity to provide the government with adequate share of the economic rent. This he says can be achieved by combining royalty and corporate income tax with a rate of return‐based resource rent tax. Alternatively, production sharing arrangement could be used even though it may prove more difficult to administer.

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