The mining sector is, unequivocally, one of the most vital organs of the Guyanese economy. But there are some underlying issues which must be addressed if there is to be any improvement and doubling in the reserves. In agreement with this perspective is the International Monetary Fund (IMF), one of the world’s leading financial institutions. During one of its most recent assessments here, the IMF noted that the gold mining sector in Guyana is split between smaller artisanal mining and larger industrial mines, typically owned by foreign investors. In fact, artisanal mining continues to represent 70 percent of Guyana’s 700,000 ounces of annual production, though larger scale mines are proving profitable. One of these larger mines wound up production in 2005, two others recently began production, and it is reasonable to expect that other similar-sized mines, producing in the range of 200,000 ounces per year, could be developed in the future. In some cases, larger scale mines are being developed at sites on which artisanal miners have already produced as much as one million ounces of gold. But let’s turn our attention to the fiscal regime for mining, which is a tax-royalty system. Artisanal mines pay a flat five percent royalty on the gross value of gold production; while per ounce, the royalty for large scale mines varies with the world price of gold, which is five percent under US$1,000 and eight percent above. Corporate income is taxed at a 27.5 percent rate, with
royalties being a deductible expense and capital expenditures depreciated on a straight-line basis over five years. Mining agreements with foreign investors typically include a stability clause that confirms the applicable royalty and corporate income tax rates, plus a range of exemptions from taxation, including: wide zero-rating of VAT; exemptions from import duties and other indirect taxes; and exemptions from dividend and withholding taxes.
The IMF notes that, in practice, these exemptions have been a challenge to administer, creating delays at the port of entry and a significant compliance burden for the private sector. The stability clause is also applied asymmetrically: mining companies benefited from the general reduction in the
corporate income tax rate, from 30 percent to 27.5 percent as part of the 2017 budget. The Fund said that it is common, in a mining fiscal regime, to have a tax targeting natural resource rents. In this regard, the IMF said, “A mining rent tax can allow a business to earn the rate of return required to undertake investment and then tax the residual supernormal profits at a relatively high rate, without distorting the decision to invest. Simple royalties, based on the volume or value of production, such as that levied by Guyana on the value of gold production, are relatively easy to administer and comply with and yield a steady stream of predictable revenue from the start of production.” It continued, “However, simple royalties are insensitive to the profitability of the individual mine and can thereby have a negative impact on business investment. In general, the combination of a royalty – such as five percent on the value of gold production – with a mining rent tax presents the best combination of the stable, predictable revenues provided by a royalty with the high government share of supernormal profits and optimal level of business investment available from
a mining rent tax.”
Furthermore, the IMF pointed out that those negotiating exemptions into mining agreements creates competitive imbalances and administrative complexities. In this regard, it explained that mining businesses that obtain tariff and VAT exemptions on imports favour foreign over domestic
suppliers. This problem is exacerbated when input tax credit refunds on domestic purchases of goods and services are challenging to get processed. Revenue administrators, in turn, dedicate significant resources to interpreting individual mine agreements and then assessing imports to determine whether they qualify for exemptions that may differ from one mining agreement to the next.
Additionally, mining companies are required to file an annual Investment Development Agreement to import equipment under their contractually granted exemption. It can take up to six months for it to be reviewed and approved by the Guyana Revenue Authority. This Investment Development Agreement is then the basis for applying tariff and VAT exemptions specified in the mining agreement at the port of entry. Additional assessment at the port of entry
concerning whether the goods are necessary for use within the mine, introduces additional delays, complications and uncertainties.
That said, the IMF stressed that it is important that these administrative challenges are addressed now for all businesses; in particular, so that petroleum development proceeds as quickly as possible.
The Fund said that a comprehensive review of the mining tax regime would provide a good basis for introducing a generally applicable fiscal regime for future investment for mining.
It said that the key features should include the following, subject to a further, more detailed review:
• Artisanal gold miners should be subject to an escalating royalty plus service and permit fees. Given the prominence of artisanal gold miners in Guyana and the simplicity of the current royalty structure, a mining rent tax should only be considered for larger and more sophisticated mines. That said, at higher gold prices, the Government should take a greater share of the profits from all gold producers.
• For larger gold mines, retain the five percent royalty while replacing the escalating royalty with a mining rent tax. This could allow more revenue to be earned from larger mines with a smaller negative impact on investment. It would be difficult to make such a large change in the current structure of mining taxation without creating disputes with foreign mining companies in possession of a mining agreement that includes a stability clause. As a result, the legislation could be amended to clearly specify the tax and royalty treatment of all future mines. Existing mines with a mining agreement that includes a stability clause could be given a one-time irreversible opportunity to opt-in to the new regime.
• Tariffs should be eliminated on capital goods and other business inputs for all businesses, not just those foreign-owned businesses with the ability to negotiate preferential provisions in a mining agreement. Such a change would greatly simplify the current administrative approach of exemptions and annual Investment Development Agreements, while improving the competitive position of domestic businesses and increasing productivity and economic growth rates more generally.
• In the case of VAT, in lieu of exemptions for foreign-owned businesses, the Guyana Revenue Authority should commit to processing and paying all input tax credit refunds in a timely manner. Such a change would allow business to quickly clear their importations through the port of entry by paying the VAT up-front, with the confidence that refunds would be expedited. It is worth exploring the scope to design the VAT policy in ways that reduce the cash-flow pressures from mining and petroleum operations (perhaps by applying a reverse charge mechanism or a deeming rule); since their exported supplies are zero-rated, there is no revenue at stake (other than ensuring that there is no leakage stemming from abusing VAT exemptions).
The Fund said that VAT registration should be made available to all mining or petroleum companies with an exploration or production license. Regardless of whether the business is currently making taxable supplies or whether all future outputs are likely to be zero-rated exports, the core benefits of VAT include the non-taxation of business inputs during the exploration and development phase.
In the interim, the IMF has called for the Government to undertake a review of the mining fiscal regime, ensure that VAT registration is available to all mining and petroleum companies with an exploration or production license and strengthen the administration of exemptions from tariffs and VAT under mining and petroleum agreements.
This call was made since November 2017. The nation and the IMF continue to await any movement by the Government in this regard.