NPV beginning at the time the first exploration dollar is spent. Third, firms retaining profits after taxation, due to profit shifting or perhaps price windfalls, does not necessarily mean rents are going untaxed. A zero after-tax resource rent project will still exhibit periods of positive after-tax profits because those profits are serving to pay back invested capital. This profit is all quasi-rent.

The impossibility of calculating resource rent at project inception or as surplus during project operations results in profits during operations being taxed as a proxy for surplus taxation, with the hope that the level of taxation does not dramatically affect the firm’s investment and operating decisions. In the Latin American analysis previously mentioned, actual taxation practices were estimated to destroy about 7 cents of project NPV for every dollar of tax taken, indicating that distortions are occurring. The analysis also indicated that an average of more than 60% of project NPV, based on an accounting for marketed capital inputs, was being taxed by host governments. Once non-marketed capital inputs are included, an even higher percentage of project NPV is being taxed.

We end this section by briefly returning to the concept of tax competition. Tax competition is seen as the difference ) affecting investment in a project. From equation (5), increasing local taxation will lower investment (because it is distortionary) and lower project NPV, while increasing foreign taxation tt FF (ττ −ττ can decrease the opportunity cost of investing in the home country. The argument suggests that higher foreign taxes will cause firms to invest more in the home country. The absence of an empirically observable tax competition effect in mining means that the latter proposition is not empirically observed.

D. What Creates a High Resource Rent Mining Project?

Host countries often do not have access to the capital and skill necessary to develop mineral deposits into profitable mining projects. For this reason, the host country governments will lease mineral deposits to foreign mining operators, who develop the deposit and reap the after-tax benefits. There is much concern in host countries that they receive relatively few domestic benefits from such transactions, while the foreign operators extract the majority of the rents because of relatively low profits taxes. We have already shown that this latter statement is a myth. It may well be that a “fair” host government share of profits is larger still, but that then puts the mining project at risk because the resource rent remaining to the foreign operator may drop below zero. In other terms, “fair” is irrelevant if there is no investment in the first place.

Some projects will stand out as being especially profitable at the operations stage, or especially prospective at the exploration stage. From equation (3), resource rent is higher when the term on the lefthand side of the equality is more positive. Perhaps because of terms like Hotelling rent (Hotelling, 1931) and Ricardian rent associated with mining projects, and more generally the term scarcity rent associated with the notion of a finite stock of mineral resources, one would expect rents to be higher in mining projects than in other projects. The Hotelling Valuation Principle suggests that a mining project will have positive value, and positive resource rent, because average cost is less than price due to Hotelling rent.

These models and considerations are highly abstract. The Hotelling Valuation Principle, for instance, assumes no fixed costs of operations, no investment prior to production, and no reclamation costs. Ricardian rent comes as a gift of nature, freely available, with no need for exploration to find these quality deposits.

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