Tax administration in the mining industry

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The mining industry and tax administrators often find themselves at inevitable loggerheads. The two operate from opposite ends. Tax administrators have a sole responsibility of collecting taxes to maximize government revenue while the mining industry must reduce the amount of tax it pays so as to maximize profits. Keith Tucker, head of tax at mining giant Anglo Group’s American, recently shared his experiences at the 35th Commonwealth Association of Tax Administrators (CATA) technical conference which was hosted by Botswana. Tucker said that mining is limited by geography because it only occurs where minerals are found. The industry is also long term, high risk and capital intensive. “Money is a scarce resource and when it is pinned to such high risk for a long time, there is need for guaranteed returns on investment. The more the risk the more mines need an quicker pay back,” he said. He explained that the mining exploration process usually takes seven to 20 years, adding that usually one out 100 results come out commercially viable. However, he said mines spend a lot of money during exploration and sometimes still have to pay tax. “The higher the tax, the longer it takes for payback. Therefore most miners are comfortable with profit based taxation,” he said. For his part, chief executive officer of Botswana Unified Revenue Service (BURS) Ken Morris said tax administrators are often forced to learn how mines operate because of the complexity of taxes in the mining industry. Morris said the intricacy of taxation on the industry is not unique to Botswana, but is innate in other resource endowed countries. He explained that most mining houses often plead with governments to be given tax holidays for a specific number of years and sometimes indefinitely. “In the eyes of a tax administrator, extracting a non renewal resource that belongs to the people of the endowed country without deriving any revenue in the form of tax robs the people of what ought to be of benefit to them,” said Morris. The worst case scenario, he said, is when a mine reaches its expiration without having paid any taxes. In the case of Botswana, BURS has been able to derive revenue from the mining industry by taping on the experience garnered during the country’s 45 year mining history. “Most countries benchmark from Botswana as we have been modeled as one of the few countries that have collected taxes from the mining industry,” said Morris.