The best way to tax natural resources
- A 'good' natural resource tax regime is one that does not undermine - or strangle - the development of the ordinary tax system, says CMI researcher Odd-Helge Fjeldstad. Different segments of the tax system 'interfere' with each other. If the most resourceful companies and individuals do not contribute with tax revenue due to tax avoidance and exemptions, this will affect the taxpaying behaviour of others.
Tax systems must be treated in a holistic manner where the natural resource tax regime is one component of the overall tax system. The way extractive sectors are taxed, including tax exemptions, tax holidays, etc. influence people’s taxpayers' behavior.
Zambia is one of the African countries struggling to find the best way to transform its vast mineral resources into welfare. Fjeldstad was recently invited to speak at an open meeting organised by the Economics Association of Zambia in Lusaka.
- There are some general characteristics and principles behind a 'good' natural resource tax system, but the implementation of these principles must be tailored to the specific context. What has worked in Norway or Australia or Chile, may not work in Zambia, says Fjeldstad.
Zambia needs to:
- Establish clear, unambiguous tax rules with few exemptions and equal treatment of companies. The original Mining Developing Agreements (MDAs) between the Government and the mining companies in Zambia were damaging in this respect, by establishing different tax regimes between individual mining companies.
- Build broad consensus on taxation. Unfortunately, the so-called 'consultations' between the Zambian Government and key stakeholders on new mining tax legislation during the last 6-7 years have lacked substance and contributed to undermine trust between the industry and the Government.
- Ensure stability and predictability for investors. Stability does not imply that no changes in the mining tax regime should take place, but these should be well prepared and based on consultations with key stakeholders. The erratic and frequent changes in the mining tax regime, especially since 2009, have damaged the credibility of the mining tax regime in Zambia, and have had negative impacts on trust relations between the Government and the industry.
- Strive for openness and transparency.Openness with respect to mining contracts is essential to avoid speculation of dubious deals.
While ensuring appropriate tax revenue from the mining sector is important, there are also balancing considerations, such as enabling other aspects of the country's tax systems to function. There is a trade-off between tax revenue goals and to ensuring that the tax system does not provide an unwarranted deterrent to investors. According to Fjeldstad, this trade-off it is still a fundamental tax policy problem in Zambia.
Natural resource taxation is undoubtedly very important in Zambia. Yet, during the discussions Fjeldstad stressed the need for developing the 'ordinary' tax system alongside taxation of natural resources. Revenues from extractive resources are volatile, and dependency on one resource makes the country vulnerable to international market forces. Developing a broad-based tax system is also essential for state-building and accountable state-citizen relations.
- The current Zambian tax system is relatively narrow and dependent on the mining sector – directly and indirectly. It is important to diversify the government's revenue base and broaden the tax base, he says.
- However, building a robust mining tax regime - and a robust holistic tax regime in Zambia - is not only about building administrative capacity. It is largely about politics and to get tax policy right. To achieve this, will require strong and sustained citizen engagement around taxation, says Fjeldstad.