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External Presentations and Publications:

Title
Schodde, RC, "Impact of taxes on the profitability of projects". China Mining Taxation Workshop Organised by the Australian Canadian Mining Industry Working Group (ACMIWG), Beijing, China, September 2003.

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This paper calculates the optimum tax rate for the mining industry.

This study looked at the profitability and level of taxation within the Western World mining industry. Over the 20 year period 1982-2002, the industry only generated an average return of 4.6% to shareholders.

The average tax rate paid by the industry was 39%. This includes corporate taxes and royalties, but excludes indirect taxes. An analysis of the Australian Mining industry shows that these indirect taxes can be very significant and the overall effective tax rate is 50%.

While the overall returns generated by the mining industry may be low, individual mines may be spectacularly profitable. Indeed, it is the hope of finding such a mine that drives the industry to continue to operate in the face of poor profitability from its existing assets!

Detailed modelling was carried out on the economics of 1000 largest known copper deposits in the world. The aim was to firstly determine how many of these would be built today assuming a given set of tax rules and hurdles. And secondly, if developed, how would the economic benefit be shared between the developer and the government?

Intuitively, if the tax rate is too high, no mines get built and no one benefits. If the tax rate is too low then lots of mines will be built but the Government's revenues may be low (and restricted to the indirect taxes on inputs). But on the other hand, the Government has to provide incentives to industry to find the deposits (and cover the cost of the unsuccessful exploration).

The analysis found that the optimum tax rate depends on the level of business risk. In low-risk countries like Australia the optimum rate is around 50% (which is where the effective tax rate currently is). However, in high-risk countries the optimum rate is 20 30%. A key message from this is that High-Risk countries should benchmark their tax rates against their peers rather than against low-risk countries like Australia or Canada.

The paper concludes that there are three actions a Government can do to maximise its return from mining. These are:

  1. Set the tax rate at the right level
  2. Lower the cost of exploration
  3. Lower the level of business risk

The last factor has the largest impact !

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