collection relative to ordinary business taxes are then justified as mirroring what a rights holder collects when contracting with an extractor.

# D. Governments Tax Only a Small Proportion of Mining Project Rents

There is a general proposition that regular corporate taxes are insufficient to tax all resource rents. As a result, mining projects are charged with special additional taxes like royalties to soak up these untaxed rents as they manifest as surpluses during operations. Yet there is still the feeling that even these regimes leave large quantities of rents in the hands of the investors, with calls for additional special taxation instruments.

Rents cannot be measured. What one can measure is profits and the taxes on profits. There is often the claim that mining company profits are taxed at lower effective rates than companies in other sectors because they manage to shield profits from taxation through various accounting profit-shifting exercises.<sup>5</sup> This may be the genesis of the idea that rents, in turn, are not sufficiently taxed. The data shows otherwise. In 2021, 25 mining companies belonging to the International Council on Mining and Metals (ICMM) states that “current CIT and royalties charged in 2021 was 32.6% of adjusted profit before tax”<sup>6</sup> corresponding to payments of US$30.2 billion in income taxes and royalties to host countries from their operations, even after this alleged profit shifting. About 24% of that tax is derived from corporate income tax (CIT). The additional 9 percentage points is because of special royalty charges that are unique taxation instruments applied to mineral and energy extraction in an effort to tax resource rents. According to ICMM, its member companies paid about 38% in effective profits taxes from 2013 to 2021.

Data published by Damodaran on listed company effective tax rates according to companies’ financial reports supports this relatively high level of profits taxation. The different versions of effective tax rates calculated by him for the profitable mining companies as a sector varies between 25.8% for _average cash tax rate_ and 40.5% for the _aggregate effective tax rate_ .<sup>7</sup> These numbers do not include precious metal miners, where he observes higher rates than for the non-precious miners.

Because surplus is only a portion of profits, the tax on surplus and thus resource rent will be greater than these relatively high rates of profit taxation. A review of 17 mining projects in selected Latin American countries estimated that governments take on average more than 60% of mining project rents over the life of the project, leaving less than 40% to go to other claimants.<sup>8</sup> In other words, to the extent that mining projects contain resource rents, there is evidence that most of it is being taxed away under existing tax instruments.

# E. Mining Rents and Surplus Are Relatively Large

Rents are not observable in the market. What is observable is the miners’ after-tax profit margins. If resource rents were large, they should be observable on the bottom lines of mining companies’ financial

> 5 <u>https://www.imf.org/en/Blogs/Articles/2021/11/05/blog-countering-tax-avoidance-sub-saharan-africa-miningsector.</u>

> 6 _ICMM Members’ Tax Contribution_ - _Focusing on Corporate Income Tax and Royalties – 2021 Update_ . ICMM, December 2022.

> 7 ~ Retrieved in August 2023 from https://pages.stern.nyu.edu/ <u>adamodar/New_Home_Page/datafile/taxrate.htm.</u> 8 According to Davis and Smith (2020), governments in Latin America take 60% of project value at the development stage. Because value at this stage includes quasi-rents as a return to past investment, governments take more than 60% of project rents.

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