Thursday, August 15, 2013

Mining 30: Some Conceptual Considerations in Mining Tax

* This is my article today in Mining Week

There are several proposals to amend the mining tax policy as contained in RA 7942 or the Mining Act of 1995. The dominant proposal so far is to have a 10 percent tax (7 percent on gross revenue + 3 percent on windfall income) on gross profit (ie, net of operating costs) to replace the two percent excise tax and royalties. The government says it will raise an additional P10 billion a year on average.

Another proposal, raised by Prof. Winnie Monsod, is to have the Malampaya gas revenue sharing where the government and Shell/private developers get a 60-40 percent of the gross profit, respectively, be applied to mining too.

There are several considerations, theoretical and empirical, in deciding whether to raise, retain or cut taxes in metallic mining, or any other sectors in general. Here are some.

One, there is a limit to raising taxes. There is an “optimal” tax rate where government tax revenues can be larger than if government will further touch the “maximum” tax rate. As the tax goes higher, either people will reduce working and hence, gross output will decline, or people will resort to under-report actual production. And government (national and local) tax assessors and collectors will be happy to accommodate such under-reporting in exchange for a bribe. This situation is demonstrated by the Laffer Curve.

Figure 1. Optimal tax rate in the Laffer Curve

This curve is saying that government tax revenue is larger if the tax rate is only on that “revenue maximizing point” (RMP) rather than go for 50 or 80 or 100 percent. At higher tax rates, under-reporting of production, if not under-working, is likely to happen, so that the tax base declines and hence, revenue collection declines.

Two, there are “deadweight losses” to society as the tax rates go up. Deadweight loss is an economic term that means “excess burden” or “inefficiency in resource allocation” because of monopolistic pricing including government higher tax imposition, externalities and price controls. For instance, people will buy only a few units of a particular commodity even if they actually needed more, because of its high price. Or people will buy more than what they need and end up wasting or losing the excess units bought, because of government subsidy that result in artificially low price. Such non- or reduced purchase of certain essential items, or over-purchase of certain items resulting in wastes, are called excess or unnecessary burden, or simply “deadweight loss.”

In this hypothetical graph that this author has developed, let us assume that corporate income tax + excise tax + royalty tax + certain other taxes would be equivalent to about six percent of the gross revenues of large-scale mining companies, and consider it as a temporary equilibrium tax rate . Mining output at that rate is 12 million tons, composite for various types of metals.

If the government will raise it to 10 percent or higher to collect more tax revenues, it can result in an area on the left of the RMP of the Laffer curve and hence, result in higher revenues, or it could be on the right side of RMP and hence, result in lower revenues.  

Figure 2. Possible Effects of Higher Tax Rate in Mining

A decline in reported production from 12 to 8 million tons is possible if (a) existing local mining companies will reduce production even temporarily due to lower international prices of certain metals while local costs (wages, mandatory social contributions, electricity, fuel, taxes, fees, etc.) are rising. Or (b) simple under-reporting of actual production by some companies.

Currently, large scale metalling mining companies (LSMM) are already paying high taxes and fees to both national and local governments. In 2010 for instance, LSMM companies paid 43 percent of their net revenue to the government.

Figure 3. Taxes and Fees Collection from Philippine Mining, 2010

Source: Dr. Artemio Disini, COMP, presentation at the Philippine Economic Society (PES) Conference, November 27, 2012, PICC, Manila.

The numbers above would imply that there may be no need to amend RA 7942, especially on the taxation aspect. But since many sectors and legislators are driven by the politics of envy, a hike in mining tax may be inevitable.

The bigger issue in the mining industry is not raising the tax, but implementing the rule of law. That mining enterprises, large- or small-scale, local or foreign, should pay the established tax rates and regulatory fees; that environmental rehabilitation is strictly implemented after a mined out area; that mine tailings are securely impounded and isolated away from creeks, rivers, lakes and the sea; that certain community development projects are implemented to the host villages or barangays of the mining companies.

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