09 Apr James Otto, lawyer and expert on mineral economics “The key to good a tax policy is finding an approach that accommodates price cycles without the need to constantly revise the mining or tax law”
The tax expert will participate on April 15 in the seminar “Institutionality of Chilean mining in the international context” during Cesco Week Santiago 2021, where he will analyze the main trends in the world regarding this area, as well as where is Chile located compared to other mining countries.
Those who have dedicated themselves to studying the institutionality regulating different mining jurisdictions know perfectly who he is. Considered one of the world’s leading experts on the subject, James Otto is a guide when it comes to putting these issues on the table.
The discussion that is already on the public agenda of the country regarding the debate on the royalty project that has been approved in the Lower House and that will continue its discussion in the Senate. Added to this is the process of drafting a new Constitution, a debate in which we will enter soon, and where the greatest amount of good quality information will be needed to be able to make decisions.
To contribute to this dialogue, the Center for Copper and Mining Studies will hold the seminar “Institutionality of Chilean mining in the international context” on April 15, which will count on the presentation of the lawyer and expert in mineral economics and a panel of national and foreign experts who will offer their points of view on the matter.
“Mining taxation policy tends to track mineral prices”, says James Otto in this interview with Cesco. “During the last super-cycle, many governments rushed to introduce higher or new types of taxes on the sector. In some cases, governments imposed higher royalties while in others new types of ‘excess profits’ taxes were devised. When that cycle ended, the reverse was true and many countries withdrew the earlier changes”.
The evolution of Mining legislation
Otto has more than 100 publications and the book from 2006 “Mining Royalties: a global study of their impact on investors, the government and civil society” is the most known. To this day it is one of the most complete books on the subject, and it is considered a classic and a key study to understand the theory and practice of royalties in mining.
-What has been the evolution during the last decade of mining legislation in the main mining districts of the world? Do you see a greater convergence between states that want to obtain larger benefits from mining while still maintaining the attractiveness for private mining companies?
There has been a slow but steady evolution of mining sector regulatory approaches over the past two decades. Under older mining laws, there was often a problem with companies holding ground for speculative or future purposes. Many countries now have implemented various means to impose “use it or lose it” principles so that concessions are actively explored or mined. There has also been a huge movement to think about how to achieve sustainable development and avoid the boom-bust cycle that comes with exploiting a non-renewable resource. For example, many countries now require or encourage community development contracts or similar mechanisms that aim to reduce the impact that mine closure will have on local communities. There has also been an explosion in the use of sovereign wealth funds where revenues earned today are invested to provide benefits to future generations. There are over 75 such funds now in existence or that are in the planning stages.
One of the biggest developments is to make application processes more efficient through the use of computerized cadastre systems. Using such a system, an investor can quickly and remotely determine what areas are under concession and learn the details about the concession holder, determine what areas are open or closed to application, and in some cases apply for area online. Often, the cadastre system also includes links to geological data on a spatial basis.
There has also been a move to strengthen reclamation and closure requirements. Whether required in the mining or environmental law, closure planning usually now commences at the mine feasibility stage, a rehabilitation and closure plan is required and must be periodically updated, a financial assurance must be provided so that if the miner does not implement the plan the government has access to adequate funding to do rehabilitation, the public is involved with rehabilitation planning, and the government must approve the initial plan and revised plans.
Another big improvement is related to transparency. Over 50 nations now participate in the Extractive Industries Transparency Initiative (EITI) whereby many facets of a nation’s mining sector are made available to the public, ranging from information about taxes paid, licensing, regulation, and so forth. The process involves government, civil society, and mining companies. While the level of regulatory requirements has increased remarkably over the past two decades, investment has continued to pour into the sector. Often, increased regulation can reduce risks for a mining company as when for example, the system provides a clear pathway to approach “social license to operate” issues.
– Concerning the above, what has been the trend of the taxation of private mining companies? Are royalties the preferred way to capture mining rents? Which regimes have been more successful in balancing countries’ need for larger revenues with robust growth of the industry?
Mine taxation policy tends to track mineral prices. During the last super-cycle, many governments rushed to introduce higher or new types of taxes on the sector. In some cases, governments imposed higher royalties while in others new types of ‘excess profits’ taxes were devised. When that cycle ended, the reverse was true and many countries withdrew the earlier changes.
The key to good a tax policy is finding an approach that accommodates price cycles without the need to constantly revise the mining or tax law. One need only look to copper producers such as Chile, Peru, Mongolia, the Democratic Republic of Congo, Zaire, Australia – who all introduced new taxes or raised taxes on mines during the last super-cycle to find examples of what approaches are better-suited for commodities subject to price cycles. Most simple types of royalties are not designed to capture what economists call ‘rent’, but some types are. The specific tax on mining introduced by Chile is one of the better approaches to capture ‘rent’ that have emerged in recent years, but like all pioneering taxes, there are certainly ways it can be improved.