No need to raise taxes from mining

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Chamber of Mines suggests options to increase government take from mining projects

Government data indicate that nearly half of the country’s gold output is produced by small-scale mining operations, most of which operate illegally.

Small-scale miners’ excise and income tax payments are negligible and in fact, non-existent for illegal miners, yet the value of the gold, nickel, and iron ore they extract – minerals owned by the Filipino people–run in the billions every year.

“If government wants a bigger take from mining, there are many other options it can explore before increasing the tax on mining,” says the Chamber of Mines of the Philippines in a statement sent to Opinyon.

It can encourage local investment and development linkages to supply and interconnect with mining projects. It can revive idle or abandoned mines to generate new employment and revenues.

Case study: The Tampakan Project in South Cotabato
In a 2011 study of the Tampakan Project, Dr David Pearce of the Center for International Economics (CIE), found that the project will generate, not just direct benefits for the Philippine economy, but substantial indirect benefits as well:
* Around US$800 million (Php35 billion) directly spent on Philippine goods and services during the construction phase, and an additional US$892 (Php40 billion) on Philippine goods and services over the mine’s 20-year operation.
* The project will make an estimated total contribution of US$5.1 billion (Php220 trillion) in taxes and duties over the life of the project.

Infra Benefits
* The total contribution of the project to household income could be up to Php600 million annually in the four host provinces, and the impacted and outlying municipalities.
* Around USD477 million in total, or USD19 million each year, will be allocated to the host barangays.
* Approximately USD344 million in total, or USD14 million, will be allocated to provincial and other local government units in the four host provinces through investment in roads, health care, schools and other essential government infrastructure and services.
* Host communities will receive royalty payments of USD338.5 million over the life of the project. On a per capita basis, these payments are significant and will make a major contribution to sustainable economic welfare of these communities.
“Simply increasing the tax on mining projects will have an enormously negative effect. With very few projects far down the pipeline, an increased tax on new projects will not immediately result in a bigger take for government.

In Limbo
Since the issuance of Executive Order No. 79 in July 2012, a moratorium on new mining projects has been put in place by the Department of Environment and Natural Resources (DENR), while the Mining industry Coordinating Council (MICC) looks into how it can increase government’s share in mining projects.
Nearly two years later, the mining industry is still in limbo. With mining investments down 40 percent from projections for 2012, the MICC insists it is just out to ensure government gets its fair share from mining.
The challenge has been how government determines what is “fair”–and how to get there. Thus despite the issuance of EO 79 over a year and a half ago, the MICC still has no revenue sharing bill ready for Congress.
However, the MICC seems set to impose a 10-percent tax on gross revenues or a 50-percent share of the adjusted net mining revenues (ANMR)—figures which industry players and analysts find to be too high and which will make the country unattractive as an investment destination.
In a letter to President Aquino last March 2014, the Joint Foreign Chambers (JFC) expressed concern over the proposed revenue scheme and said that “such a fiscal regime will have an extremely negative impact on future investment in the minerals sector.”

The JFC said that “mining investments generate jobs, and multiply those jobs into other jobs. They build infrastructure. They inject money into communities. In short, they create inclusive growth – which is so much needed in these economic times of the country’s development.”

Increased linkages will yield more revenues for government. Given the chilling effect increased taxes will have on investments, the Chamber of Mines suggests that the key to increasing the mining industry’s contribution to the economy lies in increased mining investments and in enhancing the local backward and forward linkages in the sector—essentially maximizing mining’s multiplier effect,
especially in the areas where mines operate.

With proper linkages programs created by the government coupled with transparency in tax collections and disbursements, the Philippine mining industry can go a long way in helping deal with poverty and be an example of inclusive growth,” said Jesse Ang of the International Finance Corp. (IFC), adding that mining “can be a strong catalyst” for the country if managed properly.

“With a proper linkages program, with proper transparency–you know here the (tax) payments are going–to make sure that money goes to the communities,” Ang said.

The IFC official also said mining as an industry can help government drive infrastructure projects to greater levels so the Philippines could move up to the next stage of economic growth beyond that driven by consumption.

By encouraging local source and supply linkages, the mining industry’s most valuable contribution to the country’s growth could come from its ability to generate further benefits to the domestic economy through productive linkages with other sectors.

Spillover Effects
If interconnected with the mining project, local suppliers of goods and services needed by the mine
and its employees will grow as the mine operation progresses–encouraging inclusive growth and yielding even more tax revenue for government.

For backward and forward linkages to have the desired impact, it is not enough that government impose local content and value-addition conditions on mining contractors, and provide incentives for investors to structure projects.

Government needs to come up with complementary strategies to create the business environment and public sector institutions that encourage growth and deepen the integration of mineral projects into national and regional economies.

Government must also make mineral processing a viable investment, developing upstream capital goods and service industries. It must create and improve needed infrastructure, particularly power and transport.
Policymakers need to maximize the beneficial spillover effects of infrastructure triggered by mining by planning around resource corridors.

Policies should also encourage the collateral or integral use of the minerals produced by other economic sectors.

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