mining taxation system: competitive position -...

Romanian Mining Taxation System: Competitive Position 2009

Prepared by James Otto

Third Edition Revised May 2009

Romanian Mining Taxation System: Competitive Position (3rd Edition) James Otto

Table of Contents

1. Executive Summary ………………………………………………………… 1 2. Factors Affecting Investment Decision Making By International

Mining Companies ……………………………………………………………. 11 3. The Taxation Dilemma Faced by All Governments:

Fiscal diversity or uniformity? ……………………………………………….. 21 4. Description of the Existing Romanian Fiscal System ……………………..... 23 5. Description of the Standard Gold Mine Model …………………………..….. 30 6. Comparison of Romania’s Tax System to Minerals Tax Systems

in Selected Countries ………………………………………………………… 34 7. Tax System Sensitivity to Prices and Costs ………………………………… 38 8. Comparisons of Approaches and Rates in a Cross-Section of

Countries for a Selection of Different Tax Types …………………………. 39 9. Summary and Final Observations …………………………………….. 71 Annex A. Outline of Services ……………………………………………………........ 78 Annex B. References ………………………………………………………………….. 81 Annex C. Fraser Institute Tabular Data ………………………………………………. 82 Fraser Institute Survey Rankings of Selected Nations by Policy Potential Index Annex D. Behre Dolbear Tabular Data ………………………………………………. 84 2009 Behre Dolbear Overall Ranking of Countries for Mining Investment 2009 Behre Dolbear Ranking of Countries for Mining Investment: Ranked by Tax Regime Annex E. About the Author ……………………………………………………………. 86

Abbreviations CSM Colorado School of Mines DETR Effective Tax Rate (discounted at 12%) ETR Effective Tax Rate (undiscounted) GST Goods and Services Tax IRR Internal Rate of Return NAFTA North America Free Trade Agreement NPV net present value UNCTAD United Nations Conference on Trade and Development USD United States Dollars VAT Value Added Tax List of Figures Figure 1. Model Gold Mine: Comparative Effective Tax Rates Figure 2. Government Revenue by Year and Type Figure 3. Policy Potential Index (Fraser Institute) Figure 4. Perception of Taxation Regimes (Fraser Institute) Figure 5. Overall Ranking of Countries for Mining Investment – Behre Dolbear Figure 6. Ranking of Countries for Mining Investment by Tax Regime Behre Dolbear Figure 7. The Optimal Effective Tax Rate Figure 8. Distribution of Mine Revenues (from sales) Figure 9. Breakdown of Total Taxes Paid Over Life of Model Gold Mine Figure 10. Summary of Taxes, Fees and Government Equity Distribution Figure 11. Model Mine Spreadsheet

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List of Tables: Table 1. A Subjective Appraisal of Romania’s Approach to Mine Taxation Table 2. Competitive Position of Romania’s Fiscal System on a Model Gold Mine Table 3. Ranking of Investment Criteria at the Exploration and Mining Investment Stage Table 4. World Bank Ranking System Table 5. World Bank Survey Financial and Taxation Investment Criteria Score Table 6. Taxes Sometimes Applied to Mines in Other Countries and Whether, in

Practice, they are Applied by Romania Table 7. Description of Romania’s Mining Fiscal System Table 8. Romania: Identification of items that may be deducted for calculating net

income subject to income tax Table 9. Summary of Romania’s Mining Fiscal System as Reproduced in the

Computer Analysis Gold Mine Model (base case assumptions) Table 10. Comparative Economic Measures for a Model Gold Mine in Selected

Jurisdictions Table 11. Model Mine Profitability at Different Discount Rates Table 12. Gold Model: Tax System Sensitivity to Price and Cost Changes Table 13. Availability of Tax Stabilization in Selected Jurisdictions Table 14. Income Tax Rates Applied to Mining Projects in Selected Jurisdictions Table 15. Tax System Sensitivity to Income Tax Table 16. Depreciation Applied to Typical Mining Equipment in Selected Jurisdictions Table 17. Loss Carry Forward/Back Policy in Selected Jurisdictions Table 18. Deductibility of Pre-production Exploration Costs Table 19. Ring Fencing Policy in Selected Jurisdictions Table 20. Presence of Mineral Royalty Tax Systems in Selected Jurisdictions Table 21. Tax System Sensitivity to a Royalty Tax Table 22. Typical Import Duties on Mine Equipment Table 23. Typical Export Duties on Minerals Table 24. VAT on Imported Goods and Services in Selected Jurisdictions Table 25. Tax System Sensitivity to Withholding Tax Table 26. Dividend Withholding and Similar Taxes in Selected Jurisdictions Table 27. Loan Interest Withholding Tax in Selected Jurisdictions Table 28. Tax System Sensitivity to Deforestation Taxes & Reforestation Charges Table 29. Sensitivity of Net Present Value to Tax for Forestry Land and Wood Values &

Reforestation Charges Table 30. Tax System Sensitivity to Property Tax on Land Value Table 31. Tax System Sensitivity to Free Government Equity Table 32. Equity Requirements in Selected Jurisdictions Table 33. Tax System Sensitivity to Debt to Equity Funding Table 34. Effect of Fiscal Reform on Competitiveness (Model Gold Mine)

Acknowledgements The Author would like to acknowledge the valued assistance of Gabriel Resources Ltd and their accountants Price Waterhouse Coopers who provided information on the Romanian fiscal system. This study would not have been possible without the many clarifications and data provided by Gabriel’s Director of Finance and Treasurer, Derrick Weyrauch.


Romanian Mining Taxation System: Competitive Position 2009

1. Executive Summary

This report investigates Romania’s mining fiscal regime taking into account major government taxes, fees, duties and equity participation. It compares each major type of direct and indirect tax levied on the mining industry with similar types of taxes in other selected countries. In addition, it uses a model gold mine to compare the overall effect of taxes and state equity participation in Romania as compared to the overall fiscal regimes in other nations. The purpose of this report is to provide a neutral-party examination of the Romanian mining fiscal system. The report specifically looks at whether the existing Romanian fiscal system imposes a higher or lower overall tax-take on new mining investment than is imposed generally on mines in other nations to conclude whether the system is internationally competitive. Observations are offered on specific fiscal matters. The observations are those of the Author and do not necessarily reflect the views of any other party. This report is a third second edition and includes revisions and additions (the first edition was produced in December 2007 and second in November 2008). Specifically this edition takes into account revisions to fees paid in regard to forested land used for industrial purposes. Tables and figures have been updated. The Author is a recognized expert on mining fiscal systems, and he has been an advisor to many governments on fiscal reform initiatives and mining agreement negotiations. His books on mining taxation have been published and/or distributed by the United Nations and the World Bank (see Annex E). The Author’s contractual terms of reference are set out in Annex A. The report contains the following:--

description of how tax fits in with mining company investment decision-making. description of the proprietary gold mine tax assessment model used in the

comparative analysis. table showing the relative position of the Romanian fiscal system applied to the

model mine as compared to taxation systems in selected other countries. summary of whether the Romanian fiscal regime imposes a higher or lower overall

state take than is imposed generally on gold mines elsewhere. sensitivity analysis of the fiscal system to price and cost changes. summaries indicating the relative position of Romanian tax types versus their

counterparts in other selected nations. sensitivity analysis of selected fiscal system features.

The effective tax rate comparative analysis utilizes a proprietary gold mine model developed by the Author. The model is described in detail in a March 2000 comparison of mining taxes worldwide. The study, Global Mining Taxation Comparative Study 2nd Edition, has been distributed worldwide by the United Nations, World Bank and the Colorado School of Mines. At the present time, the model is widely used in the comparative analysis of mining fiscal systems, and the aforementioned study is a standard reference found on the shelves of most ministers of mines (Romania received two copies of the study in 2000 from UNCTAD).

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The key findings of this report are as follows:

• Taxation is an important criterion that foreign investors analyze when deciding where to invest, but it is not the only criteria.

• The most important observation in this report is that several features of the

Romanian fiscal system make it unlikely that a typical medium-sized gold mine could operate profitably in the country in times of average gold prices and costs. This is mainly the cumulative result of fees, taxes and charges related to deforestation, reforestation, property value and aggregates. The imposition of a free government equity share makes investment additionally unattractive. It should be noted that the numerical analysis base case reported in this study assumes a free government equity share of 19.3% based on recent historical precedent, but this may not be an indication that the government will require any free equity share in future projects. Given the overall impact of its taxes, the Romanian fiscal system is clearly not competitive with the fiscal systems in many other nations.

• This study has analyzed the competitive position of the Romanian mineral sector

statutory tax system to determine if it is internationally competitive. The tax systems of over twenty nations, including Romania’s, were assessed using a proprietary gold mine model. Based on well accepted measures of comparison, internal rate of return (IRR1) and overall effective tax rate (ETR2), it was determined that the current Romania statutory mineral sector tax system is, given the fiscal assumptions thought to be obtainable under statutory law, not internationally competitive.

• Nations that have enjoyed high levels of mineral sector investment and that are

generally acknowledged as obtaining a “fair share” of fiscally derived revenues usually, for gold mines, have a total undiscounted effective tax rate (ETR) of between 40 and 70%. The estimated ETR for a medium sized gold mine in Romania is above this range at over 72% (Figure 1). This ETR is based on price and cost assumptions set below the near record levels in 2009 (to allow comparisons with previous nations assessed). If higher prices and costs are assumed, the Romanian ETR falls within the 40 to 70% band (Table 12); however, Romania would still remain a relatively high tax jurisdiction when compared to other nations that it must compete with for scarce investment capital.

• Surprisingly, large charges are associated with deforestation of the mine area and

reforestation of other lands. Figure 2 indicates their magnitude relative to other tax types. Because the deforestation taxes apply during the early years of the project, they have a very large impact on measures of profitability such as Net Present Value and Internal Rate of Return. If a project’s measures of profitability are too low, it is unlikely that the project will proceed and there will thus be no government fiscal revenue.

• Without modifications to the fiscal system, it is doubtful that a significant gold mining

industry can be developed in Romania unless current near record high prices are maintained over the long-trem. Foreign direct investment in the sector is likely to be low, and its contribution to national deficit reduction constrained.

1 A technical definition of internal rate of return (IRR) is provided in the report. 2 A technical definition of total Effective Tax Rate (ETR)is provided in the report.. ETR is a measure of the level of taxation that takes into account all taxes, tax incentives, fees, duties, and other distributions to government.

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• The fiscal needs and administrative capabilities of individual nations vary and tax systems thus evolve differently in different nations. However, as the world moves forward into the new century it is clear that mining fiscal systems are becoming increasingly similar. Nations whose mining fiscal systems impose a non-transparent taxation system (such as a negotiated system) or a system that investors perceive as inappropriate (such as one where taxes not tied to profitability dominate) can expect to see lower levels of investor interest than nations with transparent systems that approach the “global” norm.

• Most international exploration/mining companies will find the level of taxation

in Romania unacceptable and will avoid investing. Mining companies have many alternative nations to invest in, and nations with favorable geology, a reasonable legal framework, and a competitive and transparent fiscal system have an advantage over other nations in attracting foreign investment.

Explanations for specific observations are provided in the main body of this report regarding each major tax type. The specific observations include the following: Observation on Tax Stabilization

Companies and their lenders find tax system stabilization very attractive, and some developing nations allow mine fiscal systems to be stabilized for a limited time period. However, many countries, including Romania, do not provide fiscal stabilization. Nations that frequently change their fiscal systems or that do not honor stabilization arrangements are considered high risk by many companies.

Observations on Income Tax

The rate of income tax in Romania is low as compared to most mining nations, and because of the many other taxes and fees being paid and which are deductible, the income tax basis is relatively smaller than in many other nations.

Observations on Depreciation

The concept of depreciation is that a taxpayer should be able to over the life of a piece of physical plant (equipment or building) deduct the full cost of that plant. Governments in almost all major mining countries provide an acceleration of depreciation deductions for mine equipment and plant. Romania allows a taxpayer to elect to either take depreciation calculated using the normal straight-line schedule of depreciation rates or to take depreciation based on an accelerated method.

Observation on Pre-production Exploration and Other Expenses

Most mining tax systems allow certain pre-production costs to be accumulated and then either expensed in the first year of production or amortized over a number of years. In many nations, the amortization period is accelerated. In Romania, preproduction costs of establishment (pre-production exploration, site development, feasibility and similar costs) may be recovered through amortization over the life of the mine (no acceleration).

Observations on Loss Carry Forward Time Limit

Some nations have moved to eliminate any maximum time limit on the carry forward of losses for income tax purposes. The time limit in nations that set a time limit is typically in

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the 5 to 10 year range. The loss carry forward time Romania is currently 5 years. Observations on Deductibility of Investment in Communities and Public Infrastructure

Companies are often willing to invest in local community infrastructure, services and sustainable development initiatives, and many nations encourage such investment by allowing such expenditures to be tax deductible. Romania allows expenditure on infrastructure such as roads and building to be expensed as incurred, and carried forward for five years, but only if the infrastructure also serves the needs of the mine. Romania does not allow expenditure on community services to be deducted. The fiscal system does not provide a significant incentive for mines to invest in communities and sustainable development.

Observations on Ring-Fencing

Most nations do not ring fence mining projects. In other words if a single legal entity runs and operates multiple exploration and mining projects, it can combine the revenues and costs from all of them for taxation purposes. This is also the practice in Romania. However, if such operations are run by separate legal entities, each of those entities is separately taxed for its respective operations.

Observations on Royalties

Romania imposes a 4% net smelter return royalty on gold. This rate is similar to that imposed in many other nations. It has been reported that the royalty basis has changed from time to time and may in the near future be changed again.

Observations on Import Duty Observation on Import Duty

Import duty is mainly paid during the period in which a mine is being constructed during which there is no sales revenues. Thus, companies view such an input tax very negatively. Most mining nations have exempted mines from import duty during construction or zero-rated most mine type equipment categories. In Romania, mines may be exempt from paying import duty subject to certain European Union directives.

Observations on Export Duty

Almost all nations have exempted minerals from export duties or zero-rated mineral export categories. It is probable that many mining companies avoid investing in nations with appreciable export duties. Like most nations today, Romania does not impose export duties on minerals.

Observations on VAT

Value added tax is becoming widespread and largely has replaced general sales tax in most nations. Typically, mining nations handle VAT in two ways. Where the mineral produced is sold for consumption within the country the normal VAT system is applied. However, where the output is exported, the sales transaction is free of VAT (zero-rated or exempt) and there is a way for VAT to be negated on inputs (exemption, zero-rated, refund or credit scheme). The approach in Romania follows the typical approach with VAT applying in the normal way if the mineral is sold for local consumption, but if the

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product is exported, the sale is exempt from VAT and input VAT is refundable. Observation on Dividend Withholding and Loan Interest Withholding

Most nations impose withholding tax on remitted dividends, loan interest and on payments for foreign sourced services. Romania does so also at a rate of 16%. For remitted dividends and loan interest to E.U. recipients the rate is often zero. The rate can be less than 16% in countries that have tax treaties with Romania.

Observation on Land Area Fees

The annual area related fees set out in the Romanian mining law for prospecting, exploration and mining area are similar to the fees imposed in other nations. However, in addition to these fees Romania assesses an annual “property tax” based on a set fee per unit area. Such a “land value” based tax is rare in most developing economies. Unlike many other economic activities, mines occupy substantial area in order to accommodate tailings, water reservoirs, the mine, and mining and processing facilities.

Observations on Tax for Forestry Land and Wood Values (Deforestation)

In most nations, the holder of a mining licence is granted the right to use timber found on the licence area for the purposes of mining free of charge. More rarely, the state conducts an auction for the clearing of the timber prior to the commencement of mining. Still more rare is where the miner must pay for cutting down of the timber. In Romania, substantial taxes must be paid for forestry land and wood values, and additionally there is a requirement to reforest a new area three times the size and five times the value of area deforested. The intent of the legislation requiring payment/replanting was probably to curtail and discourage conversion of forested area to other uses and to recover the market value of the current timber and potential future timber. In practice, the State may require very substantial payments even when the timber has little or no commercial value or when land classified as forest has no trees. It is doubtful that any small or medium sized gold mine would be economic to develop if a substantial portion of the mining licence area is forested. For a medium sized gold mine, deforestation taxes will play a significant role in decision making because the charges are payable during the early years of the project and thus they will have a major and negative impact on measures of profitability (see Figure 2).

Observations on “Construction Minerals” Royalty

In most nations, the holder of a mining licence is granted the right to use sand, gravel and stone found within the licence area for the purposes of mining free of royalty. The quantities of such materials required to build a mine is large, and Romania’s atypical imposition of royalty on these “non-revenue producing” minerals puts its mines at a competitive disadvantage.

Observation on Equity Participation

Most nations today do not participate as an equity partner in mining projects. The few that require a free equity interest do so in the range of around 10% percent. The very few nations that require or retain an equity option for more than 10% acquire their equity on a paid basis. The situation in Romania is not clear, with the State taking a free equity share of up to 19.3% in at least one project.

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Observation on Excess Profits Taxes

Very few nations impose excess profits on mines. Such taxes, regardless of their form, are viewed very negatively by investors. When profits are high, companies already pay more income tax and dividend withholding tax. Many mines lose money when commodity prices are low and may require funds saved from higher price periods to remain in business. It is usually in the interest of both the investor and the government to keep a mine open so that future revenue flows will occur. Unlike a petroleum producing field, mines are not easily opened, closed and reopened. Romania, like most nations, does not impose an excess profits tax.

Observation on Bonus Payments and Mining Licence Fees

Bonus payments are common in the petroleum industry but very few nations impose bonus payments on the mining industry. Like most nations, Romania does not apply bonus payment requirements on the mining industry. Almost all nations impose a one-time mining licence fee at the time that the mining authorization is issued. The fee is usually nominal, just a few hundreds or thousands of dollars.

The above observations are summarized in Table 1 where Romania’s approach to various fiscal issues is subjectively appraised by the Author as “typical,” “low” (as in being more generous to taxpayers), and “high” as being less generous to taxpayers). Table 2 indicates the relative ranking of its fiscal system to that in selected other nations. Detailed comparisons and analysis are provided later in this report. Table 2 reports Effective Tax Rate and Discounted Effective Tax Rate. These terms are defined later in this report, and unless otherwise specifically noted any reference in this report made to Effective Tax Rate or ETR refers to undiscounted effective tax rate.

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Table 1. A Subjective Appraisal of Romania’s Approach to Mine Taxation ______________________________________________________________________ Tax Type / Incentive Comparability* Comment on Current System ___________________ __________ _____________________________

Deforestation charges very high - if a mine is located in a forested area, deforestation/reforestation charges would be large

Government free equity very high - very few governments have a free equity share of profit distribution

Property tax (on land) high - many nations do not assess a land tax on mines in addition the land area fee already imposed under the mining law, unless they are located inside a municipality

Royalty on aggregates high - in most nations, when aggregates are mined within the licence area for use in the mining project, such as for a dam and road building, no royalty is due

Surface rentals • Exploration typical • Mining typical

Royalties typical - 4% Import duties typical - mines are exempt Export duties typical - none Tax stabilization typical - stabilization not available (note, some

developing countries provide stabilization for a defined time period)

Dividend W/H tax typical - 16% (for non E.U. recipient, treaty rates may differ)

Loan Interest W/H tax typical - 16% (for non E.U. recipient, treaty rates may differ)

Foreign services W/H tax typical - 16% (treaty rates may differ) Income tax rate low - 16% (many nations are at 25 to 35%)

Tax treatment of:

depreciation typical - accelerated depreciation allowed exploration costs high - recoverable over the life of the mine (no

accelerated recovery) development costs high - “intangible costs” are recoverable over the

life of the mine (no accelerated recovery) feasibility costs high - recoverable over the life of the mine (no

accelerated recovery) community costs typical - trend: increasingly, many nations allow

qualified investments in impacted communities that do not directly relate to the mining project to be expensed or amortized

loss carry forward typical - 5 years tax holidays typical - none ring-fencing typical - multiple projects of one legal entity are not

ring fenced _______________________________________________________________________ * “low” means that the approach would result in lower fiscal revenues than in many other mining nations; “typical” means the approach is similar to that in other mining nations; “high” means that the method would result in higher fiscal revenues being paid than in many other mining countries

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Table 2. Competitive Position of Romania’s Fiscal System on a Model Gold Mine

Country

Foreign Investor’s Internal Rate of Return

(%)

Effective Tax Rate - ETR (un-discounted)

(%)

Effective Tax Rate - DETR (discounted at 12%)

(%) Lowest taxing quartile

Sweden 19.2 29.1 47.2 South Africa 18.8 32.6 50.6 Chile 18.3 36.8 56.2 Argentina 16.6 42.5 67.6 W. Australia 15.2 43.1 76.3 Peru (2005) 15.0 45.2 NA Egypt (2007) 13.7 45.2 NA

Second lowest taxing quartile Zimbabwe 15.7 45.9 73.9 USA (Nevada) 15.1 49.3 78.7 Papua New Guinea (2002) 13.3 52.6 NA Bolivia 12.2 52.4 98.7 Kazakhstan 13.5 54.4 89.6 Greenland 14.7 54.9 82.9 Tanzania 12.7 57.9 95.1

Second highest taxing quartile Mozambique (2002) 12.6 59.9 NA Ghana (2009) 11.4 59.0 104.7 Indonesia (7th gen COW 2002) 11.2 61.2 NA Uzbekistan 11.2 62.0 105.4 Mexico 10.4 62.9 111.5 Philippines (2007) 8.3 67.8 NA Ontario Canada 10.7 68.3 106.8

Highest taxing quartile Dominican Republic (2001) 8.2 68.6 NA Ivory Coast 9.1 69.1 120.0 Indonesia (non-COW 2007) 7.9 72.8 NA Romania (2009) 7.4 72.8 134.9 China 7.1 73.9 136.5 Vietnam (2007) 6.2 77.5 NA Poland 3.0 90.2 160.7 Burkina Faso -1.6 106.0 204.6

NA – not available. Source: values in the table for all jurisdictions except Dominican Republic, Egypt, Ghana, Indonesia, Mozambique, Papua New Guinea, Peru, Philippines, Romania and Vietnam are extracted from: J. Otto, J. Cordes and M. Betarseh, Global Mining Taxation Comparative Study, second edition, IGRPM Colorado School of Mines, March 2000.


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Figure 1. Model Gold Mine

0 10 20 30 40 50 60 70 80 90 100 110

Burkina FasoPoland

VietnamChina

RomaniaIndonesia

Ivory CoastDominican

Ontario (CA)Philppines

Ghana (div)CentralMexico

UzbekistanMozambique

Ghana (noTanzania

GreenlandKazakhstan

BoliviaPapua NG

NevadaAlaska

ZimbabweEgypt

PeruW Australia

ArgentinaChile

South AfricaSweden

Effective Tax Rate - ETR

Romania: ETR ~ 73%

Gold mine ideal range?ETR = 40 to 70%

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Figure 2. Government Revenue by Year and Type

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

1 3 5 7 9 11

Year

USD

- Mining Licence Area Rental Fee

- Construction Permit Fees

- Property Tax (on land)

- Property Tax (buildings)

- Withholding Tax (dividends)

- Withholding Tax (Interest remitted)

- Withholding (foreign services)

- Stamp Tax on Property Transfers

- Royalty (on aggregates)

- Distribution to government free equityshare

- Income tax

- Royalty (on metals sold)

- Forest related charges

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2. Factors Affecting Investment Decision Making By International Mining Companies 2.1 Private Sector Investment Decision Making Companies have many countries to choose from when deciding where to expend their exploration and development budgets. Those nations with prospective geology, reasonable tax terms, acceptable legislation and political stability have brighter prospects for long term mineral sector development than where one or more of these attributes are absent. In analysing investment conditions a company will apply key criteria, including tax criteria, and see how well these are met; the types of decision criteria and the weight placed on each varies from company to company. There have been several studies published by multi-lateral institutions to assist nations and companies to better understand foreign direct exploration and mining investment decision-making. At least three of these studies include comprehensive surveys investigating the investment patterns, objectives and decision criteria of major mining companies. The first, by Johnson at the East West Center, Honolulu (Johnson, 1990) revealed a short list of key decision criteria that later surveys have confirmed. When asked to list the investment factors which they considered critical, over 50 percent of the Johnson survey respondents indicated that in addition to geology, security of tenure, the right to repatriate profits, management control, equity control, and fixed tax terms were a precondition for a positive investment decision. Subsequent to the Johnson survey, the Author implemented a major United Nations mineral sector foreign investment study3. In addition to the development of a standardised methodology by which governments could undertake a self-assessment of their mineral sector investment competitiveness4, the study also produced a comprehensive global survey of international mining companies to establish better information on what factors are taken into account in their investment decision-making process (Otto, 1992b). From out of a list of over 60 investment decision criteria evaluated in the survey, the criteria in Table 3 were ranked as "very important" by over half the survey respondents. Among the 10 top priority factors, all but one, geological potential, are in some way related to or affected by the regulatory system. Of the top 20 factors, 4 are related to taxation: measure of profitability, ability to predetermine tax liability, stability of fiscal regime, and method and level of tax levies. Governments have become increasingly aware of investors' requirements and this growing awareness is often reflected in investment-oriented policy and legislation.

3Economic Restructuring and International Trade in the Mineral Commodities Project, RAS/89/027, ESCAP/UNDP.

4A comprehensive methodology for assessing a nation's mineral sector investment climate was devised (Otto, 1992a) and then used to evaluate the investment climate in 10 Asia-Pacific nations. The standard methodology and model studies are now available as a framework which can be used by governments and companies in undertaking evaluations of the mineral sector investment environment including the regulatory system.

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Table 3. Ranking of Investment Criteria at the Exploration and Mining Investment Stage (out of a choice of 60 possible criteria)

Ranking by Importance Exploration

Stage Mining Stage

Decision Criteria Based On:

1

NA 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

NA 3 1 2 9 7 11 6 4 5 8 10 12 16 17 NA 13 15 18 21 20 14 19

geological potential for target mineral measure of profitability security of tenure ability to repatriate profits consistency and constancy of mineral policies company has management control mineral ownership realistic foreign exchange regulations stability of exploration/mining terms ability to predetermine tax liability ability to predetermine environmental obligations stability of fiscal regime ability to raise external financing long-term national stability established mineral titles system ability to apply geological assessment techniques method and level of tax levies import-export policies majority equity ownership held by company right to transfer ownership internal (armed) conflicts permitted external accounts modern mineral legislation

NA - not applicable Source: (Otto, 1992b) It can be seen in the table that with regard to mining phase investment, the factor "measure of profitability" is ranked third by companies and ability to predetermine tax liabilities is ranked fifth. In this report, the Author has in the mine tax system assessment model calculated a measure of profitability often used by companies, internal rate of return (IRR), to aid in understanding the fiscal system from an investor's point of view. Governments are of course interested in their "take" and in addition to IRR, the effective tax rate (ETR). The other three key investor criteria--ability to predetermine tax liability, stability of fiscal regime, and method and level of tax levies--are also addressed in this report. More recent but less comprehensive surveys by the World Bank (Naito and Remy, 2001a; Naito, Remy and Williams, 2001b) also provides insight. The 2001 World Bank survey work was intended to determine how important certain factors are for the mineral sector. Respondents included 35 governments and 43 mining companies or individuals. A scoring tabulation system was used based on the degree to which respondents indicated the importance of each factor. The two following tables indicate the importance levels and their determination for each factor.

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Table 4. World Bank Ranking System: Importance to Mining Sector Reform Importance to mining sector reform Extremely important Very important Partially important Somewhat important Restrictive Very restrictive

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Table 5. World Bank Survey Financial and Taxation Investment Criteria Scores Criteria Importance Financial regimes : Use of offshore accounts A1: yes A2: no

Very important Very restrictive

Guaranteed right to repatriate profits A1: yes, in foreign currency or no restriction (open market availability) A2: yes, in foreign currency subject to availability through Central Bank A3: no guaranteed right to repatriate profits

Extremely important Partially important Very restrictive

Exchange control A1: minor administrative controls but market based exchange rates A2: significant controls and non-market based exchange rate

Extremely important Very restrictive

Predictability and stability of mining taxation regime A1: mining legislation or contracts guarantee stability of taxes for certain periods A2: some changes to taxation arrangements but country track record is acceptable A3: frequent changes to taxation arrangements

Extremely important Partially important Very restrictive

Tax burden for mines : Tax structure A1: predominantly profit based taxes only with no or moderate ad valorem royalty A2: predominantly output or input based taxes (royalties, customs duties, VAT, employment taxes)


Royalty A1: none or less than 2% ad valorem A2:2 – 4% ad valorem A3: 4% or more ad valorem

Extremely important Somewhat important Very restrictive

Corporate income tax A1: less than 30% A2: 30 – 40% A3: 40% or more

Partially important Somewhat important Very restrictive

Dividend withholding tax A1: less than 10% A2: 10 – 18% A3: 18% or more

Partially important Somewhat important Very restrictive

Value added tax A1: none, exempt, or recoverable from clients or upon export of product A2: applied and not recoverable from clients or upon export of product

Partially important Very restrictive

Import taxes and duties (excluding VAT) A1: none or exemption granted for mining industries A2: applied less than 10% A3: applied 11 – 20% A4: applied, greater than 21%

Very important Somewhat important Restrictive Very restrictive

Taxes/fees/other duties on exports (in addition to royalties) A1: none A2: yes, but less than 1% A3: yes, 1 – 3% A4: yes, greater than 3%

Extremely important Somewhat important Restrictive Very restrictive

Accelerated depreciation A1: allowed for calculation of income tax A2: not allowed for calculation of income tax


Source: Derived from Appendix B, Naito and Remy, 2001a. The surveys by Otto and Naito/Remy help to explain which fiscal factors are considered important for a successful mining sector but do not determine how attractive the fiscal system is in individual nations.

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Publicly available sources that rank countries by their tax systems are available annually from the Fraser Institute (McMahon and Cervantes, 2009) and Behre Dolbear (2009). The first source ranks 71 jurisdictions (nations, states or provinces) and second ranks 25 jurisdictions. Unfortunately, neither of these publications report on Romania. This is attributable to the low level of interest in Romania by the international mining community. Although Romania does not appear in the rankings, the rankings have been included in this study so that readers will have an appreciation of how investor perceptions and analytical assessments can identify impediments to mineral sector investment. Information is provided from both studies on the overall mineral policy environment and on fiscal systems. Information is provided in both graphical and tabular forms. Two figures reproduced from the Fraser institute report appear below as Figure 3 and Figure 4. The first ranks the overall mineral sector policy environment and the second just the taxation system for 71 jurisdictions. Tables in Annex C provide numeric data on the Fraser Institute policy potential and fiscal system rankings for a four year period.

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Figure 3. Policy Potential Index (Fraser Institute)

Source: Figure 1, Fraser Institute Annual Survey of Mining Companies 2008/2009 (McMahon and Cervantes, 2009 p.12).

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Figure 4. Perception of Taxation Regimes (Fraser Institute)

Source: Figure 8, Fraser Institute Annual Survey of Mining Companies 2008/2009 (McMahon and Cervantes, 2009, p.33).

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Unlike the Fraser Institute’s ranking, the ranking by the Behre Dolbear company, a mining consultancy company, is not based on a survey of mining companies but instead is derived by their analysts applying a standardized assessment system. Unfortunately, Romania is the not among the study countries that they assess. Figure 5 shows the overall ranking results of the assessment for 25 jurisdictions based on seven criteria (macroeconomic system, political system, social system, permitting delays, corruption, currency stability, and tax regime). Figure 6 shows the country ranking by fiscal regime only. Tables in Annex D provide additional numeric data on the Behre Dolbear investment ranking of 25 countries.

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Figure 5. Overall Ranking of Countries for Mining Investment - Behre Dolbear (2009)

0 10 20 30 40 50 60 70

Australia

Canada

Chile

United States

Mexico

Brazil

Ghana

Colombia

Botswana

China

Namibia

Argentina

Mongolia

Tanzania

Peru

India

Philippines

Zambia

Kazakhstan

South Africa

South Africa

Papua New Guinea

Russia

Bolivia

D.R. Congo

Score Based on 7 Factors(high score is more attractive than low score)

Source: derived from date reported in Behre Dolbear (2009).

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Figure 6. Ranking of Countries for Mining Investment by Tax Regime Behre Dolbear (2009)

0 1 2 3 4 5 6 7 8 9

Mexico

Australia

Canada

Brazil

Ghana

Botswana

Namibia

Russia

United States

China

Tanzania

Peru

Papua N. Guinea

Chile

Colombia

Argentina

India

Phillipines

Zambia

Kazakhstan

D.R Congo

Indonesia

Bolivia

South Africa

Mongolia

Score Based on Tax Regime(high score is more attractive than low score)

Source: derived from data reported in Behre Dolbear (2009).

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3. The Taxation Dilemma Faced by All Governments: Fiscal diversity or uniformity? The task of devising a mineral sector fiscal system is not easy. There are many types of minerals and a system that is optimal for one mineral such as gold may be less ideal for another mineral, such as common sand. However, the most difficult policy issues are not what tax mechanisms, rates and incentives to implement, but rather, to what extent should mining be treated differently than other income generating activities, such as oil & gas, agriculture, and light and heavy manufacturing. Each type of income generating activity can claim some element of uniqueness laying the groundwork for some sort of special tax treatment. If policy-makers chose the path of accommodation of special sector needs, tax legislation will grow more complicated and the burden on government regulatory taxation departments will increase. It is argued by some proponents that by providing “incentives” to one sector, other sectors, or the public as a whole, will suffer. It is often said that preferential tax treatment causes distortions between sectors and harms the overall economy. Others argue that because each sector is unique, each sector should be taxed in a manner that takes that uniqueness into account. Thus, governments are faced with a dilemma--a uniform tax system applicable to all sectors, or a more complicated system that accounts for uniqueness in each economic sector. 3.1 Unique Nature of the Mining Industry and the Tax Policy Response

Most countries tax mineral enterprises somewhat differently than other industries, and tax policy makers often consider two concepts that will, in part, determine the extent to which mine taxation differs from taxes levied on other types of private enterprises. These two concepts are “uniqueness” and “ownership.” It is argued that the mining industry is fundamentally different from most other types of business and because of its unique nature it should be accorded special, preferential treatment. Nations accord preferential treatment in many ways but most approaches derive from government recognition of the following mining industry attributes:

• A lengthy and costly exploration program will proceed the start-up of a mine. Exploration

expenses are incurred before taxable income is available and thus governments provide special provision for how pre-production (pre-income) exploration expenses are handled for future income tax purposes.

• Mine development is exceptionally capital intensive and an operation will initially need to import large quantities of diverse equipment from specialized suppliers. Many governments recognize the capital intensity of the industry and provide various means to accelerate recovery of capital costs once production commences.

• With regard to equipment import dependency, governments often provide a mechanism where equipment imported during mine construction is effectively free of duty (zero-rated or exempt). Likewise, most countries provide some or complete relief from value added tax on equipment and technical service purchases, particularly if the mine product is destined for export.

• Mine products are often destined for highly competitive export markets. Most governments effectively impose no export duties on minerals and provide a means whereby VAT or GST on export sales is either not applied or applied in a way that allows for a refund or tax credit.

• Mines produce raw materials that are prone to substantial price changes on a periodic, business cycle related basis. Provision is often provided to allow a project to carry forward losses from unprofitable years to reduce taxes in profitable years.

• After mining ceases and there is no income, a mine will incur significant costs relating to closure and reclamation of the site. There is a trend for governments to require a set-

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aside of funds for closure and reclamation in advance of closure and to provide some sort of deduction for this set-aside against current income tax liability.

• Many mining projects will have a long life span, and companies will attempt to minimize their tax risk exposure by stabilizing some or all of the relevant taxes for at least part of that lifespan. Governments provide tax stability through a number of different legislated and negotiated approaches.

• Where the level of investment is particularly large, a government may enter into a standard or negotiated agreement, including tax provisions, with the mine that has the effect of supplementing or supplanting general laws, including laws that address tax matters.

• In instances where negotiated or stabilized agreements are in force, income from an operation governed by an agreement may be “ring fenced” even though the general tax law does not impose ring-fencing restrictions.

Recent trends to harmonize fiscal systems across economic sectors have been the subject of debate in many countries, but almost all nations with a substantial mining sector still provide some sort of preferential tax treatment to the mining sector. While this preferential treatment tends to lower some sorts of taxes in comparison with other sectors, this is balanced by the imposition of special taxes arising from another aspect of the mineral endowment--national ownership. In most nations, minerals belong to the state or to the people of the state as a common good. When a company extracts or sells the mineral, ownership of that mineral will transfer from the state, or its people, to the extracting company or purchaser. In most nations, a transfer of minerals from the public to the private sector is politically sensitive. Tax policy makers generally provide that a payment must be made for the transfer regardless of whether or not any profit is generated. The most common form of a tax that seeks to compensate for the loss of national ownership is a form of unit- or value-based royalty. The concept of a royalty type tax, a “public to private sector property transfer tax” not based on income or profit, is, generally speaking, unique to the natural resources sectors. While many nations impose a royalty “type” tax on mineral producers, the trend has been to move toward lower royalty taxes and to rely increasingly on income-based type taxes. 3.2 Discrimination Within the Sector Within the mining sector, pressures may be brought to bear on tax authorities to provide special treatment of certain classifications of mines. For example, some would argue that mines producing industrial building minerals should receive preferential treatment over export-oriented mines because they contribute more directly to national development. Others would argue that because large mines employ more than a certain number of workers, they should receive special treatment because their positive impact on the local economy is large. Still others would argue that small mines should receive special treatment because it encourages a higher level of entrepreneurial exploration. Still other would argue that artisanal miners should be exempt from all forms of taxation because their earnings are too low to make collection and compliance a worthwhile endeavor.

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4. Description of the Existing Romanian Mining Fiscal System Today, the world is becoming ever more economically linked and a nation that desires to attract foreign investment must increasingly take into account both the needs of the nation and the needs of investors in order to compete in the international marketplace. In such an environment it is useful to understand whether the current Romanian fiscal system is meeting the needs of the nation and whether the system is viewed as competitive by private sector investors. In this section, the existing Romanian fiscal tax system that is applied to mining is described based on a comprehensive questionnaire provided by the Author to Gabriel Resources Ltd who completed the questionnaire after consultation with their accountants, legal council and relevant taxation authorities. The questionnaire is the same one that the Author has used in mineral fiscal analysis work for many governments (see section titled “About the Author”). It should be noted that some elements of fiscal laws are vague or can be interpreted in different ways, and the information reported here is thought to be a reasonable but not necessarily exact approximation of the fiscal system that may be applied to a typical medium sized gold mine. Table 6 contains a list of tax types that are sometimes used by governments to tax the mineral sector and indicates whether each tax type is imposed by statutory law in Romania. As can be seen in the table, many of the major tax types are imposed. Detailed comparisons of tax rates are provided in subsequent tables.

In this study "tax" is defined as any tax, fee, impost or other payment that is paid by a taxpayer to the government or to another party because the taxpayer is required to do so by government. This includes distributions to government from a free equity share.

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Table 6. Taxes Sometimes Applied to Mines in Other Countries and Whether, in

Practice, they are Applied by Romania Tax

levied? Government Level Levying the Tax

Tax Type Yes No Central Government

Local Government

Comment

Income tax X X Excess profits tax X Royalty X X Withholding tax on remitted dividends

X X

Withholding tax on remitted loan interest

X X

Withholding tax on foreign services

X X

Import duties on equipment

X X exempt

Export duties on minerals

X

General sales tax on purchased equipment

X

Value added tax on services

X X

Value added tax on equipment

X X

Value added tax on mineral sales

X X If sold in-country, VAT applies but exports are exempt

Property tax/fee X X Education tax/fee X Local development tax/fee

X

Fees based on Land Area

X X

Stamp tax X X On transfers of land and buildings

Payroll tax X X Other misc taxes X The current Romanian mining fiscal system is described generally in Table 7 and details regarding various deductions for computing taxable income are given in Table 8.

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Table 7. Description of Romania’s Mining Fiscal System ___________________________________________________________________ • Income tax

• 16% on company profit • deductions for computing taxable income: • feasibility studies: amortized over the life of the mine • pre-production exploration costs: amortized over the life of the mine • mine-site development costs: “intangible costs” amortized over the life of the mine • equipment costs: the taxpayer may elect to depreciate: 1) according to published

schedules of straight-line lives for different categories of equipment and plant with depreciation lives typically in the 3 to 12 year range; or 2) take 50% of the cost in the first year of production, and the remainder at a straight-line rate based on the depreciation life of the respective equipment/plant • costs qualifying for depreciation or amortization may not be adjusted for inflation

• costs associated with local community infrastructure: expensed and available for 5 years carry forward, but only if directly related to mining operations

• the following types of costs may be deducted for calculating net taxable income: pre-production exploration costs; mine-site development costs; feasibility study cost; annual operating costs; depreciated capital cost of equipment and plant; loan interest (subject to thin capitalization rule of 3/1), royalty, fees based on land area (exploration tax levy, exploitation tax levy), property taxes, payroll taxes, community related infrastructure directly related to mining operations, deforestation taxes/fees. • depletion allowance: none

• royalty: • on gold - 4% net smelter return; royalty is deductible • on silver - 4%; royalty is deductible • on aggregates – 10%; whether or not consumed on the mine site or sold; deductible It has been reported that the royalty basis has changed from time to time and may in the near future be changed again

• License fee: nominal • excess profits tax: none • withholding tax on interest: 16%, deductible • withholding tax on dividends and distributions remitted abroad: 16%, deductible • withholding tax on salaries and fees paid to foreign (non E.U.) consultants: 16%,

deductible • import duty on foreign equipment: mines are exempt • export duties on minerals: none. • general sales tax on equipment and services: none. • VAT on goods and services: 19%, 3 to 5 months for claims; if minerals are exported,

input VAT is refundable. If equipment is sourced from within the E.U., the sales transaction is exempt from VAT.

• Property tax: paid annually • on value of buildings: 2.5%; based on book value, prudent accounting practice may

result in book value being reset to market value every three years • on value of land: locally set rate is applied and is based on a set fee per unit area

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• Area based fees:

• prospecting tax levy: 250RON/km2 , annual, deductible • exploration tax levy: this value escalates over time; initially 1,000RON/km2; it is

doubled after 2 years, and becomes 5 times higher after 4 years. • exploitation tax levy: 25,000 RON (US$10,200) per square kilometer

• Construction permit fees: typically three are paid at rates of 1%, 0.7% and 0.7%; the basis is capital construction costs not related to mobile and processing equipment

• Taxes/fees/charges related to forested areas: a number of forested area related charges can apply and these can be significant (for example: Tax for permanent declassification of the land; Equivalent value of the land to be declassified; Equivalent value of the growth loss; Equivalent value of the dismantled objectives; Expenses for afforesting and maintaining the vegetation until the full-grown state is reached. Calculation of the various charges is, in some cases, based on standard statutory formulas; reportedly a set of such charges might be on the order of $35,000 or more per hectare of forested land. Additionaly, when a project takes forested land it may be required to reforest other land not subject to the mining concession (i.e., with “new” land plots at least 5 times more valuable and at least 3 times larger). Estimates of the costs associated with this requirement indicate about $55,000 or more per hectare of the concession area that is forested. The combined impact of all forestry related charges will vary depending on the circumstances of the forested area being impacted, but a reasonable estimate is $90,000 per hectare. Applicable legislation includes: the Forestry Code adopted through Law no. 46/2008, as further amended and supplemented; Order no. 58/2003; Draft Order approving the Methodology for establishing the equivalence in value of lands and for computing the financial obligations for permanent or temporary use change of lands in the forestry fund; Order no. 715/2008 on approving the average price of a cubic meter of standing timber, …).

• Road tax: minor tax on some vehicles • Environment tax: minor tax on some vehicle usage • Excise tax on diesel: 37%, charged to the petrol company • payroll taxes paid by employer: 19.5% of salary for social security; 6% health tax; 2%

unemployment; 0.75% labour cards; 2.379% risk tax; 0.85% health assurance; 0.25% guarantees fund

• Payroll taxes paid by employee: the following taxes are paid on a salary basis adjusted to first deduct payroll taxes paid by employer: 9.5% social security, 1.0% unemployment, 6.5% health tax; 16% income tax

• worker profit participation: none • Stamp taxes: range form 0.5 to 1% based on transaction value of certain transactions

such as sales of real property • tax incentives

• loss carry-forward: 5 years (from year of loss) • loss carry-back: none • tax holidays: none. • tax credits: for donations made to non-governmental organizations; foreign tax

credits on certain payments paid abroad • special deductions: none for most mines. Note: for mines established prior to 2004,

qualifying investments in a disadvantaged zone were able to, in some instances, deduct 50% of the investment made against income

• tax stabilization: none • local equity requirement: there is no mandatory requirement that an equity share be held

by Romanians • government equity requirement: there is no mandatory requirement that an equity share

be held by the government, but for some legacy deposits and mines sometimes a joint

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venture profit sharing arrangement is used; for example 19.3% free equity for a known gold deposit

• local community development: expenses incurred in regard to investment in community infrastructure may be expensed as incurred and carried forward for up to 5 years if related to mining operations; expense incurred for recurrent community related expenses such as for teacher salaries, health clinicians and so forth are not tax deductible. There is no local development tax.

• mandatory preference to be given to procuring local goods and services: none • ring-fencing: no ring-fencing for most operations • revenues from mineral sales can be held abroad: yes • foreign exchange restriction: minimal _________________________________________________________________________

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Table 8. Romania: Identification of items that may be deducted for calculating net

income subject to income tax Deductible Not Deductible Pre-production exploration expenses X Mine site development costs X Feasibility study cost X Annual operating costs X Capital cost of equipment and plant X Loan interest X* Royalty X Withholding tax on interest X Grossed up portion Withholding tax on dividends X Grossed up portion Withholding tax on foreign services X Grossed up portion Import duties on equipment X Value added tax on equipment and services X*** Property tax X Fee based on land area (such as rent) X Stamp taxes X Payroll taxes X Investment in local community infrastructure X** Investment in local community infrastructure X Typical minor fees & taxes X

* subject to thin capitalization rules ** roads and buildings if directly related to the mine project *** refundable The mine model used in the comparative analysis was developed at a level of detail similar to the level used for pre-feasibility studies. Thus, some simplifications have been employed to allow estimations to be calculated where detailed information is lacking. The simplified tax assumptions for the mine modeled in this analysis are summarized in Table 9. Minor taxes and fees, generally those that would annually be less than $20,000 per year, are not included in the analytical model (in order to maintain comparability with the gold mine model reported by the Colorado School of Mines).

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Table 9. Summary of Romania’s Mining Fiscal System as Reproduced in the Computer Analysis Gold Mine Model (base case assumptions)

___________________________________________________________________ Modeled tax features in the "base case" include: • Income tax

• 16% on taxable income • deductions for computing taxable income: • feasibility studies: amortized over life of the mine • pre-production exploration costs: amortized over the life of the mine • mine-site development costs: amortized over the life of the mine • equipment and plant depreciation: 50% in the first year of first use, then straight line

over the remaining life of the equipment (assumed to be 8 years) • the following types of costs are deducted for calculating net taxable income: amortized

pre-production exploration costs, mine-site development costs, feasibility study costs; annual operating costs; depreciated capital cost of equipment and plant; loan interest (subject to thin capitalization rule of 3/1); royalty; fees based on land area (exploitation levy); all other taxes and fees except income tax

• royalties on gold: 4%, sales value basis, deductible • royalties on aggregate used on the mine site: 10% (value of aggregate is

USD4,000,000), deductible • withholding on foreign loan interest: 16%, deductible • withholding on foreign dividends (but not on dividends paid to state entity): 16%,

deductible • withholding on payments for foreign services: 16%, deductible • import duty on foreign equipment: mines are exempt • exploitation tax levy: 25,000RON (US$10,200) per square kilometer (assumes 10 km2) • value added tax: assumes that VAT is fully refundable because mineral product is

exported • property tax on buildings and land: paid annually

• on value of buildings: 2.5% of market vale (market value assumes that 10% of equipment and plant cost is comprised of buildings subject to property tax, and that the market value of such buildings decreases by 10% of their initial cost each year)

• on value of land: 1511 RON per hectare, (assumes 1000 hectares) • stamp tax: 1% on the value of private real property purchased by the mine (these

purchases are assumed to be 5% of development costs) • 3 construction permit fees:

• 1.0% of development and capital equipment & plant costs in the year incurred • 0.7% of development and capital equipment & plant costs in the year incurred • 0.7% of development and capital equipment & plant costs in the year incurred (excluding mobile and processing equipment)

• Forestry related charges: USD90,000 (about 66,187 Euros) per hectare including direct forestry charges $35,000/ha plus the cost of reforestation of $55,000/ha; assumes that 10% of licence area is forested; paid once in the first year of development

• state free equity profit share: 19.3%, government right to 19.3% of after tax profit commences after borrowed costs, principal and interest have been recovered (borrowed costs include development, pre-production exploration, feasibility and capital equipment)

• tax incentives: loss carry-forward: 5 years

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5. Description of the Standard Gold Mine Model In order to assess the Romanian tax system as compared to fiscal regimes in a cross-section of countries, a proprietary mine model was used. The model is based on the standard gold mine model developed by the Author in 2000, and was used for mining tax studies at the Institute for Global Resources Policy and Management at the Colorado School of Mines, and for fiscal reform projects in some nations since then. The model has been reported widely and has been used in the preparation of the well known Global Mining Taxation Comparative Study referenced in this report’s annex. 5.1 Methodology and Limitations Inherent in the Standard Mine Model There are a number of ways to assess a mineral sector taxation system. The method used in this study is to create a financial model of a typical mine and then to calculate a number of quantifiable economic measures based on that model. These measures include an investor's measure of profit (the investor’s Internal Rate of Return), the total effective tax rate (ETR), and the distribution of sales revenues to each party. When building a mine model that incorporates various tax and impost features it is necessary to determine the depth to which the model will attempt to mirror the fiscal system. In theory, a very detailed model could accurately account for every “tax” type. However, many types of taxes are calculated based on a level of information available only where a detailed feasibility study is available. The level of detail in the mine model is similar to that found in many mine pre-feasibility studies. Some of the simplifying assumptions and limitations that may impact the tax analysis are described below. Depreciation. In many countries, the costs of acquiring equipment and plant may be used to reduce the income or profits tax liability through the means of depreciation or amortization deductions. In many countries, different classes of assets are depreciated using different calculation methods or different rates or different economic “lives”. To accurately model a mine one would therefore need to identify every building and piece of equipment (and its price) qualifying as being depreciable. The model simplifies the depreciation calculation by assuming only one representative class of depreciable capital and one method of calculation. Payroll taxes. The group of taxes commonly referred to as “payroll taxes” are not directly included in the model. The payroll taxes paid by the mining company can include a wide variety of government levies tied to the activity and salary level of each employee. Examples include government mandated company contributions to social security, pension or national retirement schemes, and to national or other health care programs. The base annual operating costs are assumed to include these types of taxes. Excise taxes. Except as otherwise noted, these are assumed to be included in operating costs. Tax minimization methods. One of the limitations of any tax study is the degree to which the study should incorporate legal tax minimization methods. The most “transparent” system was used as the basis of the model. 5.2 Standard Mine Model - Basic Attributes Many factors can be taken into consideration when selecting the parameters and values to define a mine model, and the selection of key project attributes can influence taxation system analysis. For example, some tax systems may be more favorable to shorter-lived mines than

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longer-lived mines. The approach chosen by the Author when creating the year 2000 standard mine model was not to determine the optimal configuration of a mining project given the tax system, but instead to define a set mine model, and determine the taxes it would pay in any selected country. To insure the reasonableness of the gold mine model, feedback, comment and guidance was sought from a number of major private sector gold producers (headquartered in the U.S.A., U.K, and Australia) prior to settling on the final project parameters. The gold model used in this report was constructed in 2000. Key parameters and values are shown in the box below. Since the model was first developed in 2000, costs and prices have changed, and this impact is analyzed in this study by sensitivity analysis (a range of prices and costs are used to assess the impact on IRR and ETR of values higher and lower than those used in the base case assumption set). This approach has been used in order that the results from the model can be used to compare Romania’s fiscal system results to the results reported for over twenty nations in Global Mining Taxation Comparative Study Second Edition (and in some other nations since 2000). That study is scheduled for probable updating next in 2010. Gold Metal Mine Model Assumptions Total reserve base: 2,350,000tr.oz au Average annual metal sold: 261,000tr.oz.au Development period: 2 years Production period: 9 years Debt to equity 60:40% Loan life: 5yrs Loan interest rate: 8% Mine cost: US$182,000,000 Pre-production exploration US$ 5,000,000 Feasibility US$ 10,000,000 Development US$ 40,000,000 Equipment/plant US$127,000,000 Working capital US$ 12,000,000 Reclamation US$ 10,000,000 Base annual operating costs: US$210tr.oz au Sales price US$361tr.oz au Type of analysis: escalated (nominal) Escalation of costs: 3% per year Escalation of metal price: 2.5% per year Deposit size, capacity and mine life. The size of a deposit will lend some guidance to defining the size (annual capacity) and life of a project. However, given the same deposit, different companies would view the optimal extraction rate and mine life differently. Should the firm build a large capacity project and mine a deposit quickly, or a small capacity plant and mine it over many years? Taxation policies can influence such decisions. In the development of the model, a reasonable medium capacity mine was assumed. Financing. The extent to which a mine is financed through debt rather than equity capital can have a measurable impact on the amount of taxes it pays. This is largely attributable to the fact that in many jurisdictions, some or all interest payments on loans may be used as a deduction when calculating the amount of income subject to a profits or income tax. Most large scale mines use a combination of debt and equity capital financing. Debt financing can reach up to 100% and for many mines a 60 to 40% debt to equity balance is common. A ratio based on

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60% debt to 40% equity has been assumed. The amount to be borrowed is based on 60% of the capital costs incurred during the two-year mine development period and the first year of production. It is assumed that the borrowed amount is in the form of three separate loans, each made one year apart, commencing in the first year of project development. It is assumed that subsequent mine expenditures are paid from funds generated by sales revenues. An annual percentage rate of 8% compound interest has been assumed for all three loans and the repayment period for each loan is 5 years. Loan repayment is calculated assuming simple compound interest with annual equal end of year payments. Costs. The costs associated with a mine will have an effect on that mine’s tax liability. In most tax jurisdictions, some taxes (such as those based on profits or income) will be directly affected by certain costs, i.e., costs may be allowable as expensible or deductible for computing the amount of taxable income. Costs for any one activity will vary considerably from country to country. For example, mine capital equipment costs are lower in Canada than in Zambia but labor costs in Zambia are lower than in Canada. To provide comparability with the CSM global mining tax study, the base capital cost and operating cost are the same as used in the CSM model. The CSM base case costs were established using input from several multinational mining companies who were asked to submit their best estimates of what it would cost to establish and run a “typical international” medium scale operation and from annual surveys of costs reported in Mining Journal. Labor costs are assumed to 10% of operating costs. All remaining tax benefits from any write-offs at the end of the project have been neglected. Costs have escalated rapidly over the past three years and this impact is reflected in the Romanian tax model price and cost sensitivity table. Prices. Most mineral commodities are subject to substantial price variations over even a short time horizon. The base-case 2000 model uses a long-term price assumption for gold, i.e., the 10 year average London PM fix reported by Gold Fields Mineral Services price from 1989-1998--$361.00 per ounce (note: the London PM fix for the period of 1997 to 2006 was $367). Sensitivity of the tax system to price changes is provided. Escalation adjustment. Costs and prices in every country are subject to escalation/de-escalation factors, such as inflation/deflation and technological progress, and costs and prices relating to the mineral sector are no exception. In the mine models, capital costs, operating costs (recurring costs) and working capital are escalated at 3 percent per year and prices at 2.5 percent per year. Since no adjustments have been provided for costs and operating efficiencies in the various countries, the model mine before-tax rate of return is identical in each country. The before-tax rate of return is 24.4%. For a 12.0% discount rate the project before-tax net present value is $50million. All cash flows represent escalated (nominal) dollars. 5.3 Economic Measures and Profiles Based on the estimated cash-flows resulting from the model base metal mine, a number of economic measures and profiles were calculated. Internal Rate of Return. The investor’s discounted internal rate of return (IRR) is a commonly used measure of profitability. Given a model mine, a fiscal system yielding a higher IRR is preferred by an investor over a fiscal system yielding a lower IRR. IRR is defined as that interest rate which equates the sum of the present value5 of cash inflows with the sum of the 5 The term “present value” is used in its classical accounting meaning to indicate that the calculation has taken into account the time value of money. The time value of money is simply recognition that given a set amount of money, one would prefer to have that sum earlier rather than later. The

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present value of cash out-flows for a project.6 An alternative, but numerically identical definition, is that the IRR is the interest rate at which the net present value of a project is equal to zero. A company can compare a project’s IRR to the company’s hurdle rate (the minimum IRR) that every project must meet. If a project’s IRR is equal to or exceeds the hurdle rate, the project meets the company’s minimum profitability requirements. While IRR is useful to determine the effect of a fiscal system on profitability, it does not directly measure taxation levels, nor does it provide governments with a measure of their fiscal take. However, by looking at both the before-tax and after-tax IRRs, an investor can compare how the various methods of taxation can impact this economic measure of profitability. Effective tax rate. The effective tax rate (ETR) is a measure, expressed as a percentage of the effective net cash flow, of all amounts payable by the company to the government. ETR is calculated by summing the value of all taxes and other payments to the government paid in each year, then dividing that sum of the total effective annual cash flow. value of all amounts paid to government Effective Tax Rate = --------------------------------------------------------------------- value of project before-tax cash flow Some analysts are also interested in Discounted Effective Tax Rate - DETR. This is calculated in the same way as ETR but the values used to determine both the numerator and the denominator in the above equation are discounted at a chosen discount rate. Many taxation studies that report ETR do so based on an undiscounted basis. Because there is no one uniform “set” discount rate, the rate used in any one study may differ from the rate chosen in another study precluding cross-comparison. Additionally, some argue that the discount rate for the numerator should be set at a public discount rate and the denominator at a private company discount rate. Usually, public discount rates are lower than private discount rates reflecting different objectives with regard to the time value of money. This study reports ETR throughout except in several comparative tables where both ETR and DETR are reported. Discounting of all values has been done at uniform rate of 12% where DETR is reported. Net Present Value (NPV). An investor and the government may be interested in knowing how much money they will receive over the life of the project. For the government, this will be the sum of all taxes and free equity distributions. For the investor, this will be the sum of the project’s cash flow after all costs, taxes and free equity distributions have been paid. In order to take into the account the time value of money, i.e. the preference to receive money sooner rather than later, when calculating this sum, a discount factors are applied to the cash flow in each year to adjust the amounts to a base year equivalent. The discount factor rate that is applied in the calculation will vary depending on the investor and government. For some companies, this may be their cost of capital or a risk adjusted cost of capital. Often, discount rates applied by governments are lower than those applied by companies. In this study, NPV has been calculated at three discount rates: 0%, 5%, and 12%.

standard way in which to account for the time value of money is to adjust future earnings and costs to a base year by discounting those amounts to the base year at a given discount rate. 6 Donald Gentry and Thomas O’Neil, Mine Investment Analysis, American Institute of Mining, Metallurgical and Petroleum Engineers, New York 1984, p.267.

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6. Comparison of Romania’s Tax System to Mineral Tax Systems in Selected

Countries A comparison of mine taxation in different taxing jurisdictions is not straightforward. A comparison of any one type of taxing mechanism (such as a royalty tax or income tax rate) may lead to certain insights, but taken alone may not provide a useful indication of how mine taxation in one jurisdiction compares to that in another. To gain a broader understanding of how the overall system works and compares, it is necessary to analyze the fiscal system as a whole. To facilitate such an analysis, it is a common practice to define a hypothetical model mine and then apply different taxation systems to that mine. In this study, as was described in the preceding section, a model mine was defined and various measures of taxation and profitability calculated to allow comparison (see descriptions provided above) with results reported by the Colorado School of Mines and the Author for other nations. Table 10 summarizes measures of profitability (IRR) and overall effective tax rate (ETR) for the gold mine model applying the fiscal systems in over twenty jurisdictions. Discounted effective tax rate (DETR) is also shown, where available, for comparative purposes. The results show that compared to other nations, the overall current mining tax system in Romania imposes a uncompetitive tax burden. This is largely the result of three taxes that many nations do not assess and which are not related to profitability--property tax on land, deforestation /reforestation taxes and charges, and royalty on aggregates used to build the mine -- plus a profit distribution to government derived from a free equity shareholding.

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Table 10. Comparative Economic Measures for a Model Gold Mine in Selected Jurisdictions – Ranked by ETR

Country


(%)

Effective Tax Rate - ETR (un-discounted)

(%)

Effective Tax Rate - DETR (discounted at 12%)

(%) Lowest taxing quartile

Sweden 19.2 29.1 47.2 South Africa 18.8 32.6 50.6 Chile 18.3 36.8 56.2 Argentina 16.6 42.5 67.6 W. Australia 15.2 43.1 76.3 Peru (2005) 15.0 45.2 NA Egypt (2007) 13.7 45.2 NA

Second lowest taxing quartile Zimbabwe 15.7 45.9 73.9 USA (Nevada) 15.1 49.3 78.7 Papua New Guinea (2002) 13.3 52.6 NA Bolivia 12.2 52.4 98.7 Kazakhstan 13.5 54.4 89.6 Greenland 14.7 54.9 82.9 Tanzania 12.7 57.9 95.1

Second highest taxing quartile Mozambique (2002) 12.6 59.9 NA Ghana (2009) 11.4 59.0 104.7 Indonesia (7th gen COW 2002) 11.2 61.2 NA Uzbekistan 11.2 62.0 105.4 Mexico 10.4 62.9 111.5 Philippines (2007) 8.3 67.8 NA Ontario Canada 10.7 68.3 106.8

Highest taxing quartile Dominican Republic (2001) 8.2 68.6 NA Ivory Coast 9.1 69.1 120.0 Indonesia (non-COW 2007) 7.9 72.8 NA Romania 7.4 72.8 134.9 China 7.1 73.9 136.5 Vietnam (2007) 6.2 77.5 NA Poland 3.0 90.2 160.7 Burkina Faso -1.6 106.0 204.6

NA – not available. Source: values in the table for all jurisdictions except Dominican Republic, Egypt, Ghana, Indonesia, Mozambique, Papua New Guinea, Peru, Philippines, Romania and Vietnam are extracted from: J. Otto, J. Cordes and M. Betarseh, Global Mining Taxation Comparative Study, second edition, IGRPM Colorado School of Mines, March 2000.

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An important part of mineral sector fiscal policy is to decide whether the primary tax objective is to maximize the fiscal take in the short term, or in the long term. If the goal is short-term maximization, the system needs to impose a high effective tax rate (ETR) – the combined rate that takes into account the value of all the tax and fee types paid by the mine. If the ETR is too high, individual mines will pay more, but in the long run there will be fewer mines, thus fewer taxpayers, a smaller tax base, and a smaller contribution to the treasury. If the effective tax rate is too low, the government will needlessly forgo fiscal revenues. If the ETR is too high, the tax base will not grow over time and revenues will be foregone (companies will not come, explore, and discover more mines). Good tax policy will strive to set the effective tax rate at T*, where an optimal balance is found (see Figure 7). For most nations, the optimal mining ETR is between 40 and 60 percent for base metal mines and 40 to 70 percent for gold mines.

Figure 7. The Optimal Effective Tax Rate

NPV – net present value (the amount of all taxes and fees paid by mines to the government as adjusted for the time value of money) Source: J. Otto et al., Mining Royalties: A Global Study of their Impact on Investors, Government and Civil Society, World Bank Press, 2006.

It is of course not possible to accurately know what the ideal effective tax rate is for Romania. What is clear from this study is that a typical medium sized gold mine would not be economic to develop in Romania given the current fiscal system structure. Thus, the current situation would find the “T” for Romania on the right tail of the curve implying that the because the current system imposes too high an effective tax rate, that overall tax take is less than had the effective tax rate been lower. This concept, as applied to taxpayers in general, was probably one reason that Romania lowered its income tax rate some years ago to just 16%. The primary component of the Romanian mining fiscal system is not the income tax, it is the many taxes and fees that do not relate to profitability (and in particular deforestation and property taxes on land). Nations that have enjoyed high levels of mineral sector investment and that are generally acknowledged as obtaining a “fair share” of fiscally derived revenues usually have a total effective tax rate (ETR) of between 40 and 60 percent for base metal mines and between 40 and 70 percent for gold mines. As can be seen in Table 10, Romania’s ETR is outside this range for a typical medium sized gold mine. In effect, companies would view the tax system as unreasonable and not fairly balanced. If the ETR is greater than 70 percent, investment may be low or nil because when companies calculate their project internal rate of return, the impact of a high ETR will lower that return making projects uneconomic. The result is that only the very largest mines and the very high grade mines will be developed leaving dormant projects that in most nations

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would be profitable to develop. A graphical presentation is provided in Figure 1 in the Executive Summary. While governments often focus fiscal system design based on effective tax rate concepts, Investors most often base their decision about whether to invest in a mine using various measures of profitability. Two common measures are Net Present Value (NPV) and Internal Rate of Return (IRR) which have been defined in an earlier part of this study. If the investor’s projected NPV cash flow is positive, when calculated at the investor’s discount rate, the project meet’s the profitability test criterion. Likewise, if the IRR of the investor’s net cash flow meets or exceeds its minimum rate of return criterion (its “hurdle rate”) the project satisfies the profitability test. If a project does not meet an investor’s profitability test, it most likely will not be built. Table 11 shows the NPV of the model gold mine at three different discount rates, as well as the IRR. Table 11. Model Mine Profitability at Different Discount Rates

Net Present Value 0% 5% 12%

IRR (%)

Investor 47,386,061 12,404,750 -17,530,507 7.4 Government 127,114,087* 95,332,280* 67,779,693* Not applicable Project 174,500,148* 107,737,030* 50,249,186* 7.4 * if a company uses a discount factor of 5% or 12%, or a minimum rate of return of greater than 7.4%, the investor’ profit criteria are not met, and company, government and project revenues will be zero. Almost all investors use a discount factor in excess of 10% and many will apply a much higher rate depending on factors such as their cost of capital and risks associated with the project. Table 10 shows that if the model mine were subject to the fiscal systems in many countries, it would meet investor profit criteria (many investors would find an IRR of 12% or more satisfactory). The impact of the Romanian fiscal system is such that for this typical gold mine, most investors would not invest. Time value of money based profitability measures are very sensitive to the timing of tax events. Thus, taxes that are applied in the early years of a project have a greater impact than those of a similar value applied later in a project’s life (see Figure 2). The Romanian system applies one major charge at the start of the project—the charges associated with deforesting the project area. Because this is a very large charge and because it occurs early in the project, this charge is a major reason why the model mine would not meet the profitability criteria of most companies. This type of deforestation fee is not typical and is absent or is much smaller in most mining nations. Section 8.7 examines the impact of the deforestation charges in more detail. Observation on Overall Fiscal System

The most important observation in this report is that given the high level of deforestation tax, property tax on land value, and royalty on aggregate minerals consumed on-site, it is doubtful that Romania will be able to witness the development of small and medium sized mines. If Romania were to eliminate these taxes, or reduce them to levels common in other mining nations, it would have a mineral sector fiscal system not too dissimilar to that in many other nations.

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7. Tax System Sensitivity to Prices and Costs The impact of a tax system on a mine can vary according to its profitability. If the overall effective tax rate (ETR) goes up as profitability goes up, the system is said to be progressive. If the ETR decreases as profitability goes up, it is said to be regressive. In a progressive tax system, mines that are marginally economic are subject to a lower overall effective tax rate than are mines that are highly profitable. In other words, progressive tax systems tax more profitable mines at a higher effective rate than lower profit mines. Most economists agree that neutral or slightly progressive tax systems are better than regressive systems. Using the mine model that incorporates the Romanian fiscal system the effective tax rate (ETR) was assessed in three ways to determine if the system is progressive, neutral or regressive. Base case parameters were held constant except for the parameter being tested, i.e., only one parameter was varied at a time. Table 12 indicates the results. Romania’s mining tax system is regressive mainly because of the number and magnitude of taxes and fees that are not related to profitability. Taxation of longer lived mines would be somewhat less regressive because most such taxes, with the exception of property tax on land, are paid in the early years of a mining project. Table 12. Gold Model: Tax System Sensitivity to Price and Cost Changes Effective Tax Rate (%) System Effect

Price Sensitivity: US$300/oz 605 US$350 81 US$361/oz (base case) 73 US$400/oz 60 US$500/oz 50 US$600/oz 47 US$700/oz 45 US$800/oz 44 US$900/oz 43 US$1,000/oz 43

Regressive at lower prices,

neutral at higher prices

Operating Cost Sensitivity: US$175/oz 60

US$200 68 US$210/oz (base case) 73 US$250/oz 134 US$300/oz NA* US$350/oz NA*

Regressive

Capital Cost Sensitivity: US$100,000,000 65 US$127,000,000 (base case) 73 US$150,000,000 81 US$200,000,000 111 US$300,000,000 *NA

Regressive

Effect of a Combination of Increases: Gold Price: US$700/oz Operating cost: US$317/oz Capital costs: US250,000,000

52

*Note: If cumulative cash-flow is negative, effective tax rate cannot be calculated.

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8. Comparisons of Approaches and Rates in a Cross-Section of Countries for a Selection of Different Tax Types With the exception of Romania, and such as other nations as are specially noted at the bottom of each table, the tax information reported in the following tables was gathered via a questionnaire distributed by the Author in 1999/2000 and reported in the aforementioned Global Mining Taxation Comparative Study Second Edition (Otto et al, 2000). The information on the fiscal system in Romania was obtained from a detailed tax system questionnaire completed in December 2007. Forest related fees are as of May 2009. 8.1 Tax Stabilization In an earlier part of this report 20 key investor decision criteria were listed in priority order. In a global survey of mining companies over 50% of the respondents listed tax stability as a "very important" factor in investment decision making. Out of a list of 60 investor criteria, tax system stability ranked 10th in importance. Many mines are long-lived and companies are reassured by systems that reduce their fiscal vulnerability, particularly during the loan and project payback periods. However, while stabilization is attractive to companies many governments are hesitant to use it. There is a basic tenet of state sovereignty that one generation of lawmakers should not be able to bind the hands of future lawmakers. Additionally, tax stabilization is sought by all sectors as it reduces fiscal uncertainty. If stabilization is offered to one sector, other sectors will also seek it. Table 13 shows for selected countries whether they allow mineral sector tax stabilization or not. If taxes are stabilized for various mines, then an administrative challenge can arise over time. As the underlying tax laws change, each stabilized mine will have a tax regime dating to the time the stabilization arrangement was entered into. This means that over time there will be many tax regimes, and the government agency charged with tax administration will increasingly face a more complicated situation monitoring and enforcing each. This incurs costs. The government has a dilemma. On the one hand, stabilization agreements enhance the potential for mineral sector investment, and on the other, they complicate the tax system and raise administrative challenges. Stability is important to investors and to their lenders, and nations that have been successful in maintaining substantial mining sector foreign investment, such as Argentina, Chile, Indonesia, Papua New Guinea, Peru, and Zambia offer stabilization options. In Romania, fiscal system stabilization is not available. Observation on Tax Stabilization

Companies and their lenders find tax system stabilization very attractive, and some developing nations allow mine fiscal systems to be stabilized for a limited time period. However, most countries, including Romania, do not provide fiscal stabilization. Nations that frequently change their fiscal systems or that do not honor stabilization arrangements are considered high risk by many companies.

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Table 13. Availability of Tax Stabilization in Selected Jurisdictions

Country Stabilization available? Comments

Argentina Yes 30 yrs, provincial and municipal taxes, import duties, exchange rules

Bolivia No Burkino Faso Yes For term of the contract except for mining tax & fees Canada (Ontario) No - Chile Yes 10 yrs, if mine elects a higher tax of 42% China No

Egypt No/Yes Normal tax law – no; negotiated agreements - yes, for the life of the agreement

Ghana No/Yes Parliament may approve a 15 yr stabilization agreement Greenland No

Guinea Yes 10 yrs for operating permits and 25 years for concessions

Indonesia No/Yes If a general mining licence, no stabilization. If a Contract of Work or Coal Cooperation Contract, fiscal stabilization applies to at least some fiscal matters

Ivory Coast No Kazakhstan Yes Taxes stabilized for life of mining agreement

Laos PDR Yes

There are two possible ways: 1) a negotiated agreement may provide for stabilization, and 2) if the mine qualifies under the Law on Promotion of Foreign Investment as a promoted activity or is in a designated zone customs duties and income rates are stabilized for the periods granted for that investment under that law.

Madagascar Yes 15 to 30 years Mexico No Mongolia Yes Company may negotiate a stability agreement Mozambique Yes Papua New Guinea Yes Twenty years from the authorization to mine or for the

period of finance, whichever is shorter

Peru Yes Either mining contracts system is 10-15 yrs; or Legal Stability Agreements systems is 10 yrs

Philippines No - Poland No - Romania No - South Africa No - Sweden No - Tanzania No - USA No -

Uzbekistan Yes Major taxes may be frozen for 10 yrs from date of establishment; may be difficult to implement

Vietnam No W. Australia No - Yemen Yes Life of an Exploitation Contract Zambia Yes Negotiable, 10 to 15 years Zimbabwe No -

Source: James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study (2nd ed. 2000) except for Bolivia, Egypt, Ghana, Guinea, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Romania, Yemen and Zambia. Information conveyed in this table may become out of date and should be viewed with caution. Check local statutes for the current treatment.

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8.2 Income Tax At the beginning of the 20th century, the main way governments taxed mines was by imposing some type of royalty tax on production and various other taxes such as import/export duty. Today, however, almost all nations rely primarily on profit (income) based taxes although most retain a low-rate royalty. When designing an income tax system there are two key elements—the income tax rate, and the tax base that the rate is applied to. In this section, income tax level is first examined followed by an examination of the tax basis. Over the past two decades there has been a general lowering of income tax rates, and it is now uncommon to see a corporate income tax rate higher than 35%. There has been a trend to lower income tax rates, particularly in nations where tax avoidance is high. Many nations have a rate between 20 and 35%. Table 14 lists corporate tax rates for a cross-section of nations surveyed in 2000 (or more recently as noted). In Romania the income tax rate is 16%. Table 15 shows the impact of a variety of income tax rates. It is important to note that although Romania has a low income tax this may not be of great significance to a mining investor because of other features in the Romanian tax system. Romania imposes many types of taxes and fees, many of which are not related to profitability and which are deductible for computing income subject to income tax. Thus, whether the income tax rate is low or high has less impact than might be supposed. This is illustrated in Table 15 below where even a large change in tax rate has little overall impact on the economic measures.

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Table 14. Income Tax Rates* Applied to Mining Projects in Selected Jurisdictions

Country Corporate Income Tax Rate (%) Comment

Argentina 35% Bolivia 25% A 25% surtax may also apply in some years Burkino Faso 35% Canada 28% 29.12% including 4% surtax (provincial income

tax also applies) Chile 15% two elective regimes are available China 33% 30% to central government, 3% to provincial

govt. Egypt 20% Ghana 22/25% 22% if listed on Ghana exchange otherwise 25% Greenland 35% Guinea 35% Indonesia Graduated up to 30% 10% for the first fifty million rupiah; 15% for the

next fifty million rupiah; 30% for over one hundred million rupiah.

Ivory Coast 35% Kazakhstan 30% Excess profits tax may also apply Lao PDR 20 to 35% Rate determined by negotiation Madagascar 25%; If IRR >20%,

35%; if IRR >25%, 40% These rates are for large scale mines qualifying for LGIM status

Mexico 34% Mongolia 30% Mozambique 32% Papua New Guinea

30% 32% if option to stabilize taxes is selected

Peru 27% 29% if operating under a tax stabilization agreement Philippines 30% Currently 35%, 2009 = 30% Poland 22% Romania 16% South Africa 30% Special rates apply to gold mines Sweden 28% Tanzania 30% USA Progressive to 35% Uzbekistan 33% Vietnam 28 to 50% Most mines at 28%, at the Prime Minister’s

discretion W. Australia 30% Yemen 35% Zambia 25% For copper mines with agreements Zimbabwe 35% * - rate before any exemption or incentive reduction applied; IRR – Internal Rate of Return Source: James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study (2nd ed. 2000, p.49) except for more recent tax rates for Bolivia, Egypt, Ghana, Guinea, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Romania, Vietnam, Yemen and Zambia. Information conveyed in this table may become out of date and should be viewed with caution. Check local statutes for the current treatment.

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Table 15. Tax System Sensitivity to Income Tax

Income Tax Effective Tax Rate

(%)

Investor IRR (%)

Government Revenue: All Taxes & Fees

(million USD) 16% (base case) 73 7.4 127

25% 77 6.4 135 30% 80 5.8 139 35% 82 5.2 143

Observations on Income Tax

The rate of income tax in Romania is low as compared to most mining nations, and because of the many other taxes and fees being paid and which are deductible, the tax basis is relatively smaller than in many other nations.

8.2.1 Depreciation In most of the surveyed nations, tax policy is mainly implemented through manipulation of the tax base rather than through a variable or negotiated income tax rate. The tax rate is commonly uniform for all tax-payers, or for all tax payers at a given level of profit. The most common form of tax-base incentive for mining is accelerated depreciation. Most nations provide the mining industry with some sort of accelerated depreciation (see Table 16). In Romania, the taxpayer may elect to depreciate tangible equipment and plant as follows: 1) according to published schedules of straight-line lives for different categories of equipment and plant with depreciation lives typically in the 3 to 12 year range; or 2) take 50% of the cost in the first year of production, and the remainder at a straight-line rate based on the deprecation life of the equipment/plant. Costs qualifying for depreciation or amortization may not be adjusted for inflation. Import duties, if any, are added to the cost basis of equipment and plant and recovered through depreciation. Observation on Depreciation

The concept of depreciation is that a taxpayer should be able to over the life of a piece of physical plant (equipment or building) deduct the full cost of that plant. Governments in almost all major mining countries provide an acceleration of depreciation deductions for mine equipment and plant. Romania allows a taxpayer to elect to either take depreciation calculated using the normal straight-line schedule of depreciation rates or to take depreciation based on an accelerated method.

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Table 16. Depreciation Applied to Typical Mining Equipment in Selected Jurisdictions

Country Accelerated depreciation? Depreciation method for typical large equipment

Argentina Yes 3 yr straight-line Bolivia Yes 8 yr straight-line Burkino Faso No Useful life minus one year Canada (Ontario)

Yes Up to 100% in yr incurred for new mine or 25% declining pool balance

Chile Yes 3 yr straight-line China Yes 10 years Egypt Yes 25%+30% 1st year, then 25% declining balance Ghana Yes 80% in year of acquisition, then 50% declining balance Greenland Yes the company may decide the rate and period Guinea Yes Declining balance at a factor of 2.5 Indonesia Limited 12.5 % declining balance or 6.25% straight-line Ivory Coast Yes Method of acceleration depends on life of equipment Kazakhstan Yes 25% declining balance method Lao PDR Yes 5 years straight-line Madagascar Yes Straight-line at 10% rate or if eligible, at 2.5 times normal rate Mexico No - Mongolia Yes 5 year straight-line (20%) Mozambique Yes Depends on the type of development; under FBC, special

accelerated depreciation at double the normal straight-line rate; mine life, or 25% straight-line

Papua New Guinea

Yes Depreciated straight line over 10 years. Mobile plant may be depreciated using a 25% declining balance pool

Peru Yes Can select the rate of straight line dep. up to the allowed max; most mining, processing and power equipment has a max of 20% pa; roads and buildings have a max of 3% unless a stabilization agreement (15 yrs) is in effect in which case a 5% max applies; costs for govt. approved infrastructure such as a school, hospital or recreational facility can be expensed as incurred.

Philippines Yes If expected life is greater than 10 years, twice the normal straight-line rate; if life is less than 10 years, the normal rate; for most long-lived mining equipment a 5 year period is typical.

Poland Yes 5 yrs straight-line (20%) Romania Yes Election: 1) according to published schedules of straight-line lives

for different categories of equipment and plant with lives typically in the 3 to 12 year range; or 2) take 50% of the cost in the first year of production, and the remainder at a straight-line rate based on the depreciation life of the equipment/plant

South Africa Yes Expensed in 1st year of production Sweden Yes 5 yrs straight-line (20%) Tanzania Yes 12.5% straight-line USA No - Uzbekistan Limited 8% straight-line Vietnam Yes 5 to 8 years straight-line, at taxpayers discretion W. Australia Yes Prime cost or diminishing value methods, (usually less than

effective life) Yemen No According to schedule, typically 10% Zambia Yes Expensed as incurred Zimbabwe Yes Expensed in year incurred or 1st year of product

Source: James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study (2nd ed. 2000, p.51) except for Bolivia, Egypt, Ghana, Guinea, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Romania, Vietnam, Yemen and Zambia.

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Information conveyed in this table may become out of date and should be viewed with caution. 8.2.2 Loss Carry Forward One of the most common tax incentives offered by governments is to allow taxpayers the ability to carry forward losses from one year to offset taxable income in future years. For capital-intensive industries, like mining, and for industries exceptionally prone to large commodity price fluctuation, like mining, loss carry forward is an important issue. Romania allows losses to be carried forward for five years from the year of loss, but loss carry-back is not allowed. One of the main purposes of a long loss carry forward period is to allow marginally economic mines to survive time periods when prices are low. Money saved by the mining company through loss carry forward can be accumulated during high price periods and used to survive low price periods. Table 17. Loss Carry Forward/Back Policy in Selected Jurisdictions

Loss Carry Forward Loss Carry Back Country

Available? Time limit (years) Available? Time limit

(years) Argentina Yes 5 No - Bolivia Yes None No - Burkino Faso Yes 5 No - Canada(Ontario) Yes 7 Yes 3 Chile Yes None No - China Yes 5 No - Egypt Yes 5 No - Ghana Yes 5 No - Greenland Yes None Yes 5 Guinea Yes 3 No - Indonesia Yes 5 No - Ivory Coast Yes 5 No - Kazakhstan Yes 7 No - Lao PDR Yes 3 No - Mexico Yes 10 Yes None Madagascar Yes 5 No - Mongolia Yes 2 No - Mozambique Yes 10 No - Papua New Guinea Yes None No - Peru Yes 4 No - Philippines Yes 5 No - Poland Yes 5 No - Romania Yes 5 No - South Africa Yes None No - Sweden Yes None No - Tanzania Yes None No - USA Yes 15 Yes 3 Uzbekistan No - No - Vietnam Yes 5 No - W. Australia Yes None No - Yemen Yes 3 No - Zambia Yes 10 No - Zimbabwe Yes None No -

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Source: Derived from James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study (2nd ed. 2000, p.60) except for Bolivia, Egypt, Ghana, Guinea, Indonesia, Laos, Madagascar, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Romania, Vietnam, Yemen and Zambia. Some information conveyed in this table may become out of date and should be treated with caution. Check local statutes for the current treatment. Observation on Loss Carry Forward Time Limit

Some nations have moved to eliminate any maximum time limit on the carry forward of losses for income tax purposes. The time limit in nations that set a time limit is typically in the 5 to 10 year range. The loss carry forward time Romania is currently 5 years.

8.2.3 Deductibility of Pre-production Exploration and Other Expenses Substantial costs will be incurred by a company before it commences mining. For example, exploration, preparation of feasibility studies and work plans, and site development will all need to be done and can be quite costly. Most governments allow such costs to be deducted. Since there is no income during pre-production many governments provide for some form of deferred deductibility. The most common approach is to allow such costs to be accumulated, then deducted beginning in the first year of commercial sales. The deductions are usually either expensed in that year with a provision for the carry-forward of unused deductions, or amortized over a defined time period. In Romania intangible costs such those associated with pre-production exploration, feasibility studies and development can be amortized over the life of the mine. Tax treatment of pre-production exploration and similar costs by other nations varies widely and descriptions are provided in Table 18. Observation on Pre-production Exploration and Other Expenses

Most mining tax systems allow certain pre-production costs to be accumulated and then either expensed in the first year of production or amortized over a number of years. In many nations, the amortization period is accelerated. In Romania, preproduction costs of establishment (pre-production exploration, site development, feasibility and similar costs) may be recovered through amortization over the life of the mine.

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Table 18. Deductibility of Pre-Production Exploration Costs Country Treatment of Pre-Production Exploration Costs Argentina 200% deduction; 100% expensed and 100% depleted Bolivia expensed in year incurred Burkina Faso amortized straight-line over 3 years Chile deducted in 1st year of production China amortize over at least one year in 1st year of production Egypt expensed as incurred Ghana 80% in the year of investment, remainder declining

balance method at 50% Greenland may be carried forward for future deduction Indonesia Expensed Ivory Coast amortize over 5 years starting the 1st year of production Kazakhstan 15% declining balance Lao PDR Expensed Mexico expensed fully as incurred or may elect to amortize

straight-line at 10%/yr Mongolia amortize over 5 yrs, commencing in first year of

production Papua N.G 200%, 100% expensed as incurred, 100% amortized at

25% declining balance from start of production Peru expensed in year incurred or amortized over the life of

the mine Philippines amortized at twice the normal straight-line rate, or may

be added to and taken as part of a depletion allowance Poland amortized straight-line over 5 years Romania amortized over the life of the mine South Africa expensed fully in 1st year of production Sweden expensed in year incurred Tanzania expensed in 1st year of production

USA-Arizona depleted over life of mine Uzbekistan amortized straight-line over 10 years Vietnam Amortized straight-line over 3 years W. Australia deductible in year incurred Yemen amortized over 3 years Zimbabwe expensed in year incurred or 1st year of production Source: James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study 53 (2d ed. 2000) (except for Bolivia, Egypt, Ghana, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Romania, Vietnam, and Yemen).

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8.2.4 Deductibility of Investment in Communities and Infrastructure There is intense interest by many mining companies in furthering the development of communities and peoples affected by a mine. This is motivated by a company concern that it will be able to maintain a “social licence” to operate in harmony with the community. One way to foster such harmony is to invest in developing communities that are impacted by mining. Attention is also increasingly paid to instituting sustainable development practices so that when the mine closes, the affected communities will be able to carry-on with alternative economic activities. Thus, investments made in the community during the mine life are important to investors, and they will be concerned about how these investments will be treated for tax purposes. The current Romanian tax system partially recognizes the value of money spent by a mining company on infrastructure and allows such expenditure to be expensed in the year incurred, but only if the infrastructure also is directly related to the needs of the mining project. Such expenses can be carried forward five years. However, investment in recurrent types of local community costs such as salaries of educators and health workers is not deductible for tax purposes. Observation on Deductibility of Investment in Communities and Public Infrastructure

Companies are often willing to invest in local community infrastructure, services and sustainable development initiatives, and many nations encourage such investment by allowing such expenditures to be tax deductible. Romania allows expenditure on infrastructure such as roads and building to be expensed as incurred, and carried forward for five years, but only if the infrastructure also serves the needs of the mine. Romania does not allow expenditure on community services to be deducted. The fiscal system does not provide a significant incentive for mines to invest in communities and sustainable development.

8.2.5 Ring Fencing Ring fencing (where an accounting wall is imposed on a discrete mine as opposed to allowing all activities of a company operating in the country to be combined in a single accounting) is a concept that is applied by some nations to mines that are subject to different taxation systems. Most nations do not ring fence mining unless individual mines are subject to one of the three following situations: (1) a mine is subject to a distinct and unique negotiated tax system; (2) the tax system or some part of the tax system to which a mine is subject is stabilized for a term of years; or (3) the tax system is subject to a resource rent type of tax. If any one of these three situations apply, most nations would ring fence that mine (see Table 19). The rationale for ring fencing is obvious in the above cases where combining the books of two or more mines that have different tax systems would be an administrative challenge. However, there may certain types of activities where it makes sense to modify a ring fencing scheme. For example, take the situation of exploration. The reserves at any one mine are finite, and unless further exploration takes place, the mine will eventually close and the contribution to government revenue will be lost. By allowing exploration expenditures in areas off the mining lease to be deductible, a mining company is encouraged to undertake such exploration.

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In Romania, all operations of a single taxable entity may be reflected in a single accounting (i.e. no ring fencing). However, if a company has several separate legal entities each must account and pay tax separately. Observation on Ring-Fencing

Most nations do not ring fence mining projects. In other words if a single legal entity runs and operates multiple exploration and mining projects, it can combine the revenues and costs from all of them for taxation purposes. This is also the practice in Romania. However, if such operations are run by separate legal entities, each of those entities is separately taxed for its respective operations.

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Table 19. Ring Fencing Policy in Selected Jurisdictions

Country Mines are ring fenced?

(Yes or No?) Comments Argentina No Bolivia No Burkino Faso Yes Canada (Ontario) No Chile No China Yes Egypt No Ghana Yes Greenland No Indonesia Sometimes contract of work mines are ring-fenced,

other mines are not Ivory Coast No Kazakhstan Yes Lao PDR No Madagascar No Mexico No Mongolia No Mozambique Sometimes Papua New Guinea Sometimes mines operating under negotiated special

mining leases are ring fenced; other mines are not

Peru Sometimes there is no ring fencing unless the tax entity has entered into differing tax stabilization agreements for different mines

Philippines No Poland No Romania No South Africa Yes Sweden No Tanzania No USA No Uzbekistan No Vietnam No W. Australia No Yemen Sometimes mines with negotiated Exploitation

Contracts which stabilize fiscal terms are ring fenced; other mines/quarries are not

Zimbabwe No may consolidate books if mines are not registered as Ltd.

Source: James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study 53 (2d ed. 2000) (except for Bolivia, Egypt, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Vietnam, and Yemen). Caution: Information in this table may be out of date. Check local statutes for the current treatment.

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8.3 Royalties Over the past century, there has been a trend to de-emphasize tax systems based on royalties and to instead implement systems that rely on tax mechanisms that are based on “ability to pay”, i.e., profit-based taxes. A few nations have eliminated mineral royalties entirely, while others have reduced their importance. Table 20 provides a list of nations surveyed and whether or not they use mineral royalties as a form of raising mineral sector fiscal revenues. Most nations that impose an ad valorem royalty based on gross sales value (or net smelter return) generally do so at a rate less than 5% (except for diamonds and other precious stones). In most nations minerals belong to the state. Like any other form of property the owner of property expects to receive payment when the property is transferred to another party. In some years, a typical mine will generate no taxable income for purpose of calculating income tax and thus were only an income tax to be applied, the state would receive no money even though the mine produced and sold minerals. The use of a royalty insures that regardless of profitability, the nation will receive at least a minimum payment for the sale of its non-renewable resource. Most nations impose at least a minimal royalty for this reason. There are many types of royalties, and it is not useful to report on comparative rates because the amount of royalty will be based on both the rate and the basis. There are many methods by which governments determine a royalty basis including the following: sales invoice value, market value, net smelter return, sales value less costs, and so forth. A comprehensive book on mineral royalties has been published by the World Bank (Otto et al, 2006) which contains an analysis of different royalty types, the rates at which they are applied, and the legislation for about forty nations. In Romania, a royalty of 4% is applied to gold revenues on a net smelter return basis. Romania has varied the determination of the royalty basis in the recent past and is reportedly considering changes in the near future. Table 21 shows the impact of imposing rates ranging from 0 to 5% on the model gold mine. In the base case model, it is assumed that the only product is gold. However, some types of deposits will also produce saleable by-products. To illustrate this, the impact of producing both gold and silver and paying royalty and all other relevant taxes on their combined revenue has also been assessed. For the purpose of the duel metal model it has been assumed that silver will be produced in a ratio of silver to gold of 2.5, and that it will sell for USD7.00 ounce initially with its price escalating at 2.5% annually.

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Table 20. Presence of Mineral Royalty Tax Systems in Selected Jurisdictions

Country Royalty Imposed? Comment

Argentina No/Yes Set by each state; some have royalties others don’t. Bolivia Yes Burkino Faso Yes Canada (Ontario)

No No royalty in most provinces, some exceptions.

Chile Yes China Yes Egypt No No royalty in the mining law but may be imposed in an

agreement Ghana Yes Greenland No Guinea Yes Indonesia Yes Ivory Coast Yes Kazakhstan Yes Lao PDR Yes Madagascar Yes Mexico No Mongolia Yes Mozambique Yes PNG Yes Peru Yes Philippines Yes Poland Yes Romania Yes South Africa No Except on certain lands. Under consideration in 2007. Sweden No Tanzania Yes USA No No federal tax, some states impose severance tax Uzbekistan Yes Vietnam Yes W. Australia Yes Yemen Yes Zambia Yes Zimbabwe No Under consideration.

Source: James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study (2nd ed. 2000, p.60) except for Bolivia, Egypt, Ghana, Guinea, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Romania, Vietnam, Yemen and Zambia. Caution: Some information conveyed in this in this table may be out of date. Check local statutes for the current treatment.

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Table 21. Tax System Sensitivity to a Royalty Tax

Royalty Tax on Gross Sales Revenue

Effective Tax Rate

(%)

Investor IRR (%)

Government Revenue: All Major Taxes & Fees

(million USD) Mine produces only gold

0% 59 11.0 103 2% 65 9.4 114 3% 69 8.4 120

4% (base case) 73 7.4 127 5% 77 6.4 134

Mine produces silver and gold and silver (at a ratio of 2.5 Ag to 1 Au)* 0% 53 15.3 117 2% 59 13.5 131 3% 63 12.6 138 4% 66 11.6 145 5% 69 10.6 152

*Assumes 2.5 ounces silver produced for each ounce of gold production, and that in the first year of production silver sells for $7.00 ounce. Observation on Royalties

Romania imposes a 4% net smelter return royalty on gold. This rate is similar to that imposed in many other nations. It has been reported that the royalty basis has changed from time to time and may in the near future be changed again.

8.4 Import and Export Duties 8.4.1 Import Duties Mining is capital intensive and utilizes specialized equipment that is usually imported. This means that an import duty on equipment has a direct impact on project economics in the project’s early years. Project feasibility studies calculate various projections of profitability, such as internal rate of return and net present value, and such quantitative measures are very sensitive to large costs in the early years of a project. Even modest levels of equipment import duties can sink a marginal project. Competition for mineral sector investment worldwide is fierce, and most countries have either eliminated import duties on mine equipment or have found ways to exempt projects or their equipment from such duties. Table 22 lists typical import duties in a cross-section of mining nations around the world. As can be seen in the table, most of the sample nations impose no or low duty and those nations with higher duty usually have some means of exempting mines. The imposition of customs duty carries with it substantial burdens and costs for government in terms of the manpower and time required for tax collection. Most countries are in the process of reducing import duties to values of zero or close thereto. Many nations find that over time, corrupt practices can creep into customs services, particularly where high import duties are levied.

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Table 22. Typical Import Duties on Mine Equipment

Country Typical import duty on large equipment

Comments

Argentina None 1% “control fee” applies to most imports Bolivia 5% Refundable Burkino Faso 11% only applicable at exploitation Canada (Ontario) 0.5% may be less if from within NAFTA Chile 10% added to depreciable costs and recovered through

depreciation China None Ghana Exempt / 5.5% imported mining equipment is exempt; most other items

that appear on a mining list are rated at 0% to 5%; import related fees and levies other than duty add up to at least 5.5% of import value

Greenland None Guinea Partially exempt Exempt during construction then 5.6%; 0.5%

registration tax regardless of phase Indonesia None to 10% 7th generation COW: exempt

non-COW: can apply for exemptions, in practice most pay at 2.5% and then receive refund or tax credit,; if no exemption most mine equipment is rated at 1 to 10%

Ivory Coast 0.75% exemptions can be negotiated on an individual mine basis

Kazakhstan None Lao PDR Probably exempt Negotiable Madagascar None* *for qualifying large-scale mines--during exploration:

exempt; during construction: exempt; during mining: combined import duty rate is 5% paid at time of import but is then deductible as depreciation

Mexico 35% exemptions available to some types of mines, may be less if from NAFTA region

Mongolia 5% Specific types of equipment listed in a regulation are exempt

Mozambique Exempt Papua New Guinea None Peru 5 to 7% rates vary widely depending on the import Philippines 1% may be exempt if application is approved under

either the Investment Act or the Mining Act Poland 9% If imported from another E.U. nation, exempt. Romania Rates vary South Africa None import duty may apply to spares and parts Sweden None zero-rated if from within the European Union, otherwise

0.6% unless it is not available in the EU, then 0% Tanzania None USA Rates vary Uzbekistan None normal rate is 3 to 6%, but can be exempted Vietnam Exempt W. Australia 5% Yemen Exempt? Negotiable in an Exploitation Agreement Zimbabwe 5%

Source: derived from James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study (2nd ed. 2000, p.32) except for Ghana, Guinea, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Philippines, Vietnam, Yemen and Peru. Caution: Information conveyed in this table may become out of date. Check local statutes for the current treatment. In Romania mines are exempted from import duty.

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Observation on Import Duty

Import duty is mainly paid during the period in which a mine is being constructed during which there is no sales revenues. Thus, companies view such an input tax very negatively. Most mining nations have exempted mines from import duty during construction or zero-rated most mine type equipment categories. In Romania, mines may be exempt from paying import duty subject to certain European Union directives.

8.4.2 Export Duties In the past, export duties were levied to both raise revenue and provide a tool to encourage downstream processing (ores and concentrates were charged at a higher rate than were metals and metal goods). However, in today’s competitive global market, most nations no longer impose export duty on minerals (see Table 23). In today’s global economy nations are steadily reducing or eliminating export duties as they encourage their domestic industries to maintain competitiveness and enter into the global marketplace. Minerals are widely available and export duties tend to discourage investment by foreign and local producers alike who need to be able to sell to the highest paying customer, whether domestic or foreign. Romania does not currently impose export duties on mineral sales. Observation on Export Duty

Almost all nations have exempted minerals from export duties or zero-rated mineral export categories. It is probable that many mining companies avoid investing in nations with appreciable export duties. Like most nations today, Romania does not impose export duties on minerals.

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Table 23. Export Duties on Minerals in Selected Jurisdictions

Country Export duty on most minerals?

(Yes or No?) Argentina No Bolivia No Burkino Faso No Canada (Ontario) No Chile No China No Egypt Yes (some base metals) Ghana No Greenland No Indonesia No Ivory Coast No Kazakhstan No Lao PDR No Madagascar No Mexico No Mongolia No Mozambique No Papua New Guinea No Peru No Philippines No Poland No Romania No South Africa No Sweden No Tanzania No USA No Uzbekistan No Vietnam Yes W. Australia No Yemen No Zambia No Zimbabwe No

Source: James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study (2nd ed. 2000, p.32) except for Egypt, Ghana, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Vietnam, Yemen and Zambia. Caution: Information conveyed in this table may become out of date. Check local statutes for the current treatment. 8.5 Value Added Tax - VAT This type of tax is becoming more common worldwide. In nations where such a tax is in use, it is commonly applied to most purchases, both in terms of capital goods as well as services. Because it is a “consumer” tax and export minerals must compete globally, almost all mineral exporting nations have chosen to eliminate the impact of the tax in one way or another on both export mineral sales and imported equipment and service purchases. The means to achieve this negation vary widely and involve varying degrees of complexity and government administration. The simplest form of negation is exempting VAT on all mining

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inputs and outputs for qualifying projects. More complex schemes involve rebates, crediting, refunds, deferrals, and a host of other mechanisms. While many nations negate the effect of VAT on exported products, many do apply VAT to mining products that serve domestic markets. Table 24 lists for selected tax jurisdictions whether or not they assess VAT. It also indicates whether relief from VAT is available to mines for purchased equipment. Romania currently imposes a value added tax of 19% on goods and services. However, if the taxpayer sources a project input from outside the country but from within the E.U., the transaction is exempt. If the mineral produced is exported, the taxpayer may a claim a refund on VAT paid on inputs. Refunds typically take from 3 to 5 months. Observation on VAT

Value added tax is becoming widespread and largely has replaced general sales tax in most nations. Typically, mining nations handle VAT in two ways. Where the mineral produced is sold for consumption within the country the normal VAT system is applied. However, where the output is exported, the sales transaction is free of VAT (zero-rated or exempt) and there is a way for VAT to be negated on inputs (exemption, zero-rated, refund or credit scheme). The approach in Romania follows the typical approach with VAT applying in the normal way if the mineral is sold for local consumption, but if the product is exported, the sale is exempt from VAT and input VAT is refundable.

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Table 24. VAT on Imported Goods and Services in Selected Jurisdictions

Country VAT is payable on purchase of goods and

services

If the product is exported, means are available to negate the VAT effect on foreign

goods and services purchased by a mine (exempt, zero-rated, credits, deferral, refund,

etc.) Argentina Yes Yes Bolivia Yes Yes Burkino Faso Yes Yes Canada (Ontario) Yes Yes Chile Yes Yes China Exempt - Ghana Yes/Exempt Companies pay an upfront VAT on imported

inputs other than mining machinery and equipment and reclaim it later on

Greenland None - Guinea Exempt - Indonesia Yes Yes Ivory Coast Yes None Kazakhstan Yes Yes Lao PDR Exempt VAT system is not being implemented at

present Madagascar Yes Yes Mexico Yes Yes Mongolia Yes Yes Mozambique Yes Yes Papua New Guinea Yes Yes Peru Yes Yes Philippines Yes If the mine will export all of its production, VAT

paid on services may either be refunded or claimed as a tax credit certificate by the taxpayer. The tax credit certificate may be used by the taxpayer in payment of internal revenue taxes. VAT paid on the importation or purchase of capital goods cannot be refunded and can only be claimed as input VAT credits deductible against output VAT. Since VAT on exported minerals is zero rated, no crediting is available in the mine product is exported.

Poland Yes Yes Romania Yes Yes, if from within the E.U. – exempt, and if

product is exported - input VAT is refundable South Africa Yes Yes Sweden Yes Yes Tanzania Exempt - USA None - Uzbekistan Exempt - Vietnam Yes Yes W. Australia Yes Yes Yemen Exempt? Probably (negotiated agreement) Zimbabwe None -

Source: derived from James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study (2nd ed. 2000, p.48) except for Ghana, Guinea, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Philippines, Romania, Vietnam, Yemen and Peru.

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Caution: Information conveyed in this table may become out of date. Check local statutes for the current treatment.

8.6 Dividend and Loan Interest Withholding Tax Many nations impose various forms of withholding taxes, for example on remitted dividends, loan interest, and foreign services. These taxes can be appreciable for large mines. Tables 26 and 27 list withholding tax rates for a number of countries. The general rates described in the tables must be used with some caution. Although many governments define a high dividend withholding tax rate, perhaps with the objective of promoting reinvestment or providing national mining companies with an advantage over foreign firms, they often enter into bilateral investment treaties or double taxation treaties that lower or eliminate such taxes for companies headquartered in key trading partner countries. Romania imposes withholding taxes at the general rate of 16%. Tax treaties provide lower rates for some countries. The impact of a range of withholding taxes on dividends, loan interest, and service contracts remitted outside Romania using the mine model are shown in Table 25. Table 25. Tax System Sensitivity to Withholding Tax

Withholding Tax (on dividends, loan interest, service contracts remitted

outside the E.U)*

Effective Tax Rate

(%)

Investor IRR (%)


(millions USD)

0% 60 10.9 103 1.5% 61 10.6 106 5% 63 10.0 109

10% 67 8.8 118 16% (base case) 73 7.4 127

* Withholding on payments remitted applies to all service providers, even within the E.U. but outside Romania. Observation on Dividend Withholding and Loan Interest Withholding

Most nations impose withholding tax on remitted dividends, loan interest and on payments for foreign sourced services. Romania does so also at a rate of 16%. For remitted dividends and loan interest to E.U. recipients the rate is often zero. The rate can be less than 16% in countries that have tax treaties with Romania.

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Table 26. Dividend Withholding and Similar Taxes in Selected Jurisdictions

Country Dividend

Withholding Tax rate (%)

Comment

Argentina 0 35% on the excess of the accumulated taxable net income

Bolivia 12.5 Burkino Faso 12.5 Canada (Ontario)

25

Chile 35 15% income tax is credited against the withholding tax

China None Egypt None Ghana 8 may be exempted by negotiated agreement Greenland 35 Guinea 15 Indonesia 20 Most tax treaties reduce the rate to 15% Ivory Coast 12 Kazakhstan 15 Lao PDR None Madagascar 10 Mexico 35 Mongolia 20 Mozambique 10 PNG 10 Peru 0 An additional rate of 4.1% on income tax

applies when dividends are distributed. Philippines 35* Nonresident foreign corporations; 35%,

reducing to 30% in 2009 Nonresident alien individuals: 25% Philippine individuals: 10%

Poland 20 Romania 16 South Africa 12.5 Secondary Tax on companies is levied on

dividend basis Sweden None Tanzania 10 USA 30 Uzbekistan 15 Vietnam None W. Australia 30 0% if dividend is fully franked Yemen None Zambia None Zimbabwe 20% Credited against income tax

* where rates are given they refer to the general rate. Many nations have bilateral investment or double taxation treaties that greatly lower the rate or eliminate. Source: James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study (2nd ed. 2000, p.45) except for Bolivia, Egypt, Ghana, Guinea, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Romania, Vietnam, Yemen and Zambia. Some information conveyed in this in this table may be out of date. Check local statutes for the current treatment.

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Table 27. Loan Interest Withholding Tax in Selected Jurisdictions

Country Loan interest

withholding tax rate (%)*

Comment

Argentina 15.05 35% on inter-company loans Bolivia 12.5 Burkino Faso 12.5 Canada (Ontario) 25 note: local finance is available Chile 4% 4% when loan is granted by foreign bank;

35% otherwise. China none Egypt none Ghana 8 may be exempted by negotiated agreement Greenland none Guinea none Indonesia 20 most tax treaties reduce this to 10% Ivory Coast 18 Kazakhstan 15 Lao PDR none Madagascar 25 Mexico 15 Mongolia 20 PNG exempt Peru 4.99 4.99% when loan is granted by foreign bank

or exceeds a cap; 30% otherwise. Philippines 20 Poland 20 (in 2000) Romania 16 South Africa none Sweden none Tanzania none USA 30 Note: local financing available Uzbekistan 15 Vietnam 10 W. Australia 10 Note: local financing available Yemen none Zambia 0 (for copper and

cobalt) 15 for other

minerals

Zimbabwe 10 may be used as an income tax credit * where rates are given they refer to the general rate. Many nations have bilateral investment or

double taxation treaties that greatly lower the rate or eliminate it for loans originating in the treaty country.

Source: James M. Otto, John Cordes & Maria L. Batarseh, Global Mining Taxation Comparative Study (2nd ed. 2000, p.45) except for Bolivia, Egypt, Ghana, Guinea, Indonesia, Lao PDR, Madagascar, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Romania, Vietnam, Yemen and Zambia. Some information conveyed in this in this table may be out of date. Check local statutes for the current treatment.

8.7 Tax for Forestry Land and Wood Values (deforestation) Mineral deposits are often located in remote regions or mountainous regions which may enjoy forest cover. The value of the timber on such land can be appreciable. In most nations,

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the licence or lease granting the mining right will provide the holder the exclusive right to use all timber occurring in the licence/lease area for the purposes of mining. More rarely, other mining codes require that the timber be logged and sold through a government tender process by the government, and in the absence of a sale, the miner is free to proceed to mining. More rarely, the miner is required to pay a stumpage fee based on some measure of the value of timber on the licence area. The later approach can be flawed if a standardized approach is taken which does not take into account present market conditions, location and so forth. In Romania, substantial deforestation related taxes and charges are payable. Unfortunately, the system appears to be flawed. In one instance reported to the Author of this study, the deforestation taxes payable by the holder of a mining licence amounted to over USD 24 million, although the actual market value of the timber thereon is less than USD1.0 million. The deforestation charges have a large impact on the model mine’s profitability measures such as Internal Rate of Return and Net Present Value. This occurs for two reasons. First, the deforestation charges are large accounting for over 7% of the total fiscal load (see Figure 2 in the Executive Summary section). Secondly, the charges are paid during project development so their time value of money impact is large. The combined effect of the charges and their timing are one reason that the model mine economics have low profitability measures (an IRR of only 7.4%, and a negative NPV at a discount rate of 12%). Using the mine model and assuming that approximately 10% of the 1,000 hectare site is classified as forest area with the deforestation/reforestation charges being calculated at USD90,000/hectare. As compared to most nations, where such a tax is nonexistent or minimal, this is a major disincentive to potential mineral sector investors. In fact, it is doubtful that small and medium sized would be able to bear this tax and remain economically viable. The impact of the deforestation tax is shown in Table 28 and Table 29. Observations on Tax for Forestry Land and Wood Values (Deforestation)

In most nations, the holder of a mining licence is granted the right to use timber found on the licence area for the purposes of mining free of charge. More rarely, the state conducts an auction for the clearing of the timber prior to the commencement of mining. Still more rare is where the miner must pay for cutting down of the timber. In Romania, substantial taxes must be paid for forestry land and wood values, and additionally there is a requirement to reforest a new area three times the size and five times the value of area deforested. The intent of the legislation requiring payment/replanting was probably to curtail and discourage conversion of forested area to other uses and to recover the market value of the current timber and potential future timber. In practice, the State may require very substantial payments even when the timber has little or no commercial value or when land classified as forest has no trees. It is doubtful that any small or medium sized gold mine would be economic to develop if a substantial portion of the mining licence area is forested. For a medium sized gold mine, deforestation taxes will play a significant role in decision making because the charges are payable during the early years of the project and thus they will have a major and negative impact on measures of profitability (see Figure 2).

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Table 28. Tax System Sensitivity to Tax for Forestry Land and Wood Values & Reforestation Charges

Deforestation taxes/planting (USD per hectare)

Effective Tax Rate

(%)

Investor IRR (%)


(millions USD - not discounted)

0 68 9.4 119 25,000 70 8.8 122 50,000 71 8.3 124

90,000 (base case) 73 7.4 127 200,000 78 5.5 137 470,000 89 2.2 156 500,000 91 1.9 159 600,000 96 0.8 168

Table 29. Sensitivity of Net Present Value to Tax for Forestry Land and Wood Values

and Reforestation Charges*

Net Present Value (million USD) Discount at 0% Discount at 5% Discount at 12%

Investor IRR (%)

Deforestation Tax – none per hectare Investor 55 20 -9 9.4 Government 119 87 60 Not applicable Project 175 108 50 9.4

Deforestation Tax – USD 25,000 per hectare Investor 53 18 -12 8.8 Government 122 90 62 Not applicable Project 175 108 50 8.8

Deforestation Tax – USD 50,000 per hectare (base case) Investor 51 16 -14 8.3 Government 124 92 64 Not applicable Project 175 108 50 8.3

Deforestation Tax – USD 90,000 per hectare Investor 47 12 -18 7.4 Government 127 95 68 Not applicable Project 175 108 50 7.4

Deforestation Tax – USD 470,000 per hectare Investor 18 -19 -51 2.2 Government 156 127 101 Not applicable Project 175 108 50 2.2 *Note: Government revenues would in practice be 0 for all cases because investor profit measures are too low to justify investment and there would be no tax revenue. 8.8 Royalties on Aggregates (Sand, Gravel, Stone …) Mines require sand, gravel, and stone for the construction of mining facilities and infrastructure. The amounts required can be large, particularly when water, tailings dams and haul roads are required. Most mining laws provide the holder of a mining licence to extract and use aggregate type materials sourced from within the licence area for the purposes of mining (and which are not for commercial sale) free of royalty.

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In contrast, it is reported that Romania imposes a 10% royalty on the value of such aggregate. Observations on Construction Mineral Royalty

In most nations, the holder of a mining licence is granted the right to use sand, gravel and stone found within the licence area for the purposes of mining free of royalty. The quantities of such materials required to build a mine is large, and Romania’s atypical imposition of royalty on these “non-revenue producing” minerals puts its mines at a competitive disadvantage.

8.9 Tax Collection and Distribution There is no function of government more controversial than tax collection and distribution. It is a key way in which power is allocated in a regulated society. Governments have many options regarding the distribution of taxes. Traditionally, the option chosen by many developing nations is that most tax revenues flowed to central government and then were distributed according to the budgeting process. The area or region in which a mine was located did not receive any particular preference except as resulted from budget decisions. However, there has been a recent move to provide a greater level of tax participation at provincial and local levels. This is particularly true in nations with strong local governments (or where tribal customary law acts in parallel with government). In some nations if there is strong local opposition to a mine, perhaps because there is a perception that local minerals are being mined with little fiscal benefit to the local community, that opposition can effectively stop mine development regardless of whether the government has granted development permission. There are a variety of policy options. One option is to distribute revenue collections by allocating taxing power--some taxes to be collected by central government, some by local government. In allocating tax collection power, care must be taken to take into account two main factors: (1) limitations should be imposed to constrain too high a level of locally imposed tax and fees (i.e., the need for a closed list of local taxes and taxes that are capped), and (2) the capability of local government to effectively collect the tax. Another option is for taxes to be collected by central government but then, as required by statutory allocation, to remit the required portion to local government. Central government is often better equipped for the tax collection (and auditing) function than is local government. However, there is a danger that irrespective of what the statute says, local government will not receive its due. For this reason, most mining companies prefer to pay the intended level of government directly rather than rely on an internal remittance system. Local governments prefer to receive taxes directly from the taxpayer rather than relying on remittance from central government. A third option, and one that was discussed in another section above, is for central government to forgo some portion of taxes by allowing the company to deduct qualified investments made in local communities. Another distribution option is for the government to mandate that a special tax, fee, contribution or distribution be made by the company for the benefit of a designated class of beneficiaries. Examples of such “targeted” distributions include mandatory contributions linked to salaries of employees such as contributions to insurance, retirement funds, profit sharing and so forth and contributions to special purpose funds such as for local sustainable development efforts.

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In Romania most taxes and fees on mines and quarries are paid to the central government but property taxes and land area fees are payable locally. Property land tax is appreciable, and is probably set at a level that when taken into account with other taxes, would be prohibitive for a typical, medium sized mine (see next section). 8.10 Land Area Fees Most nations assess a rent or usage fee on exploration, mines and quarries based on the land area that they occupy or use under licence or contract. Usually such rent/fee is uniform for all holders of a like type of licence and rates and collections are low relative to most other taxes such as income tax and royalty. Such rental is usually deductible for computing income subject to income tax. It is not uncommon for mine and quarry rentals to be paid to local rather than central government but it is uncommon for rental rates to be set by local government. The reason for this is that local government will naturally seek to maximize rent from such sources and if given unfettered authority to set rents for individual operations, will be prone to develop corrupt and abusive practices. Additionally, many governments that have given rental setting and collecting authority to local government have found that the expenditure of such revenues may take place in a nontransparent way. In Romania, uniform land use fees are applied to prospecting area, exploration area and to mines under the mining law, and are set at rates similar to those in many other nations. Where Romania differs from many other nations is that it in addition to setting a land use fee under the mining law, it also assesses an appreciable property tax based on a set fee per unit area. In most developing nations such a tax is not applied unless the mine is located within the legal boundaries of a municipality. Mines take up appreciable land area. Table 30 shows the impact of the land-based property tax on the model gold mine (which has an assumed land area of 1,000 hectares). Table 30. Tax System Sensitivity to Property Tax on Land Value

Property tax (RON per hectare)

Effective Tax Rate

(%)

Investor IRR (%)


(millions USD) 0 70 8.4 121

500 71 8.0 123 1000 72 7.7 125

1511 (base case) 73 7.4 127 2000 74 7.1 129

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Observation on Land Area Fees

The annual area related fees set out in the Romanian mining law for prospecting, exploration and mining area are similar to the fees imposed in other nations. However, in addition to these fees Romania assesses an annual “property tax” based on a set fee per unit area. Such a “land value” based tax is rare in most developing economies. Unlike many other economic activities, mines occupy substantial area in order to accommodate tailings, water reservoirs, the mine, and mining and processing facilities.

8.11 Government Equity Today, very few governments are interested in taking up an equity interest in mining (see Table 31). In the past, the rationale behind the government taking an equity role was based mainly on two perceptions: (1) the government needed to exert a high level of control over its natural resources, and (2) the government would benefit financially from an equity stake. However, with improvements in mining laws and tax laws, and with a greater appreciation of the risks involved with mining, most nations have now rejected taking an equity stake and exert the desired level of control through laws. Improvements in mining tax systems have prompted governments to focus on risk-free tax measures rather than on risk-prone equity as the primary means by which to reap financial benefits. Of the few governments that still take an equity share, there are several approaches used. One is where the government takes a working interest, i.e. pays it full share of all costs and takes its share of profit distributions. While almost all mining companies would prefer no state participation, if such participation is necessary for political reasons, this is the approach that will least dissuade investors. The government of Papua New Guinea uses this working interest approach and has been able to attract substantial investment. Such an approach does not alter the investor’s rate of return. Another approach is where the government requires an interest and pays no share of costs but is entitled to a proportionate equity share of distributed profits. The impact on the investor’s rate of return is very similar to a dividend or remitted profits withholding tax. This free equity approach is not acceptable to most companies who will look to other jurisdictions in which to invest. The free equity approach is used almost exclusively in the West Africa region where mining investment remains relatively low although it is highly prospective for many minerals. Some nations in that region, such as Guinea, have the ability under the law to take a free equity share but have concluded that requiring such a share is in the long term counterproductive because it drives away investors who would otherwise invest, pay taxes and contribute to development. In Romania the state equity situation is unclear. The law does not apparently require government equity participation but an equity requirement can be asserted in some projects. For example, in one gold project the state has a 19.3% free equity interest. In that project the state pays no part of any cost, has no shareholder input into decision making, but after the project has repaid its loan and equity costs, the state participates in profit distributions in proportion to its free equity share. Table 32 shows the impact of free equity on the economic indicators. It should be noted that because other taxes result in low profits, there is a relatively small amount to be distributed between the government and the company.

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Table 31. Equity Requirements in Selected Jurisdictions Country Mandatory local private equity

interest required by law or policy?

Mandatory state equity interest required by law or policy?

Argentina No No Bolivia No No Burkina Faso No Yes, 10% free equity Canada (Ontario) No No Chile No No China No No Egypt No No/Yes (required only for gold

projects granted licenses in 2006/7) Ghana No Yes, 10% free equity Greenland No No Guinea No No, (recent agreements don't

include gov’t equity) Indonesia No/Yes, some generations of

COWS require phased offering of shares to nationals

Policy not certain at this time

Ivory Coast No Yes, 10% free or carried interest Kazakhstan No No Lao PDR Yes/No (no specific

requirement, negotiable) Yes/No (no specific requirement, negotiable)

Mali No Yes Mongolia Yes No/Yes (the state has an option to take

up to a 50% equity stake in strategic deposits it helped explore and up to 34% in other strategic deposits)

Mexico No No Mozambique No No Papua New Guinea No/Yes (local landowners

may opt for a paid equity interest)

No/Yes (the state may opt for a paid equity interest)

Peru No No Philippines Yes/No (60% ownership by

nationals required unless investment is made under certain constitutionally defined agreements such as an FTAA)

No

Poland No No Romania No Sometimes, for example up to

19.3% for some gold projects South Africa No No Sweden No No Tanzania Yes No USA No No Uzbekistán No No Vietnam No No W. Australia No No Yemen No No Zambia No No Zimbabwe No No Source: except for Bolivia, Egypt, Indonesia, Lao PDR, Mongolia, Mozambique, Papua New Guinea, Peru, Philippines, Romania, Vietnam, Yemen and Zambia, derived from Global Mining Taxation

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Comparative Study, 2nd edition 2000. Observation on Equity Participation

Most nations today do not participate as an equity partner in mining projects. The few that require a free equity interest do so in the range of around 10% percent. The very few nations that require or retain an option for more than 10% equity acquire their equity on a paid basis. The situation in Romania is not clear, with the State taking a free equity share of up to 19.3% in at least one gold project.

Table 32. Tax System Sensitivity to Free Government Equity

Free Government Equity (%)

Effective Tax Rate

(%)

Investor IRR (%)


(millions USD) 0 0 64 112

10 10 69 121 15 15 71 124

19.3% (base case) 19.3 73 127

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8.12 Excess Profits Tax Commodity prices fluctuate greatly reflecting supply and demand in the world economy. There are a variety of fiscal methods available to governments which can be used to collect additional revenues in times of high prices including for example, a form of resource rent tax, a graduated royalty that increases as the price of the commodity increases, and a graduated income tax. However, it is important for tax policy makers to plan for both periods of high prices and low prices (note: loss carry forward tends to smooth out and reduce the impact of extreme price fluctuations). Profit based taxes such as income tax and dividend withholding track profitability in times of high prices. Some, but very few governments, levy a special form of excess profits tax. Of the very few nations that do levy a form of excess profits tax, the most common approach is a graduated royalty rate which increases as some measure of either commodity price (such as in Bolivia) or profitability (such as in Ghana) increases. Observation on Excess Profits Taxes

Very few nations impose excess profits on mines. Such taxes, regardless of their form, are viewed very negatively by investors. When profits are high, companies pay more income tax. Many mines lose money when commodity prices are low and may require funds saved from higher price periods to remain in business. It is usually in the interest of both the investor and the government to keep a mine open so that future revenue flows will occur. Unlike a petroleum producing field, mines are not easily opened, closed and reopened. Romania does not impose an excess profits tax.

8.13 Bonus Payments and Mining Licence Fees There are three main types of bonus payments that are used in the petroleum sector: a signature bonus, a triggered bonus, and an annual bonus. A signature bonus is a lump sign paid to the government upon signature of a production sharing or other form of contract. A trigger bonus is a one time lump sum paid to the government when an agreed event takes place, such as reaching a certain number of barrels per day production target. An annual bonus, which is rare, is an annual lump sum payment to government. Bonus payments of any type are not used in the mining industry except in rare occasions where a known deposit is tendered by bid. It is common for nations to assess a mining licence fee upon the issuance of the mining authorization. In almost all mining countries the fee is nominal amounting to just a few hundred or thousands of dollars. This is also the case in Romania. Observation on Bonus Payments and Mining Licence Fees

Bonus payments are common in the petroleum industry but very few nations impose bonus payments on the mining industry. Like most nations, Romania does not apply bonus payment requirements on the mining industry. Almost all nations impose a one-time mining licence fee at the time that the mining authorization is issued. The fee is usually nominal, just a few hundred or thousands of dollars.

8.14 Effect of Leveraging a Project Many mines today are paid for by a combination of debt, equity and later in the project, project generated cash flow. The financings are often complex such as where the debt portion is “project financed” through a consortia of lenders, and the equity portion reflects capital raised in

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the equity markets or through cash contributions from a variety of joint venture partners. In some instances the cost of the mine will be wholly debt financed with both project financed loans as well as a loan from a parent company. With regard to taxation, the method of paying for the project has an impact. The reason for this is that some taxes may directly apply to a loan, such as stamp tax on the value of loan transactions or a withholding tax on loan interest. Additionally, income tax may be affected because loan interest is often allowed as a deductible cost when calculating income subject to income tax. For this later reason, some nations impose a debt to equity limit on mines. In some instances, this is a real limit in the sense that the mine is not allowed to borrow beyond the ratio cap. Often though, the limit merely applies to the amount of interest that is allowed to be deducted when calculating the income tax. In the case of at least one gold mine, Romania has imposed a 3:1 (75%:25%) debt-equity limit on the deductibility of loan interest, but in general does not require any particular minimum percentage of a project to be funded from equity. In the model gold mine base case it has been assumed that the debt to equity is 60:40, and that a debt-equity interest deduction limit applies at 3:1. Table 33 illustrates the impact on the model mine of other debt to equity scenarios. In each scenario, while the debt to equity percentage is changed, the deductibility limit remains the same at 3:1. Table 33. Tax System Sensitivity to Debt to Equity Funding*

Debt to Equity (%)

Effective Tax Rate

(%)

Investor IRR (%)


(millions USD) 0: 100 71 6.5 138 50:50 72 7.2 129

60:40 (base case) 73 7.4 127 75:25 74 7.8 124 85:15 73 8.8 123 100:0 71 10.8 120

*Note: the impact of debt to equity is complex with regard to taxes. For example, while the government receives more withholding on loan interest with higher debt, it also receives less income tax because interest payments and withholding on interest is deductible.

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9. Summary and Final Observations This study has analyzed the competitive position of the Romanian mineral sector statutory tax system to determine if it is internationally competitive. The tax systems of over twenty nations, including Romania’s, were assessed using a standardized gold mine model. Based on well accepted measures of comparison, internal rate of return (IRR) and overall effective tax rates (ETR), it was determined that the current Romania mineral sector statutory tax system is not internationally competitive. While Romania applies the same types of taxes on its mines as do most other countries, it also has additional imposts. In particular, it in some cases imposes: a free government equity distribution, forest land and wood taxes, reforestation charges, property taxes based on land area, and royalty on aggregates used for constructing a mine. It is interesting to note that if these taxes/shares were not assessed, the Romanian fiscal system would be about mid-range among the countries compared in this study (Table 34). To facilitate a better grasp of the mine model results a variety of graphs are included in this section.

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Table 34. Effect of Fiscal Reform on Competitiveness (Model Gold Mine) (reform: no free equity, no forest land and wood taxes, no tax on aggregates, no property tax on land)

Country


(%)

Total Effective Tax Rate

(%)

Lowest taxing quartile Sweden 19.2 29.1 South Africa 18.8 32.6 Chile 18.3 36.8 Argentina 16.6 42.5 W. Australia 15.2 43.1 Peru (2005) 15.0 45.2 Egypt (2007) 13.7 45.2

Second lowest taxing quartile Zimbabwe 15.7 45.9 USA (Nevada) 15.1 49.3 Papua New Guinea (2002) 13.3 52.6 Bolivia 12.2 52.4 Kazakhstan 13.5 54.4 Greenland 14.7 54.9 Tanzania 12.7 57.9

Second highest taxing quartile Mozambique (2002) 12.6 59.9 Romania (w/o taxes listed above) 12.0 56.3 Ghana (2009) 11.4 59.0 Uzbekistan 11.2 62.0 Mexico 10.4 62.9 Philippines (2007) 8.3 67.8 Ontario Canada 10.7 68.3

Highest taxing quartile Dominican Republic (2001) 8.2 68.6 Ivory Coast 9.1 69.1 Indonesia (non-COW 2007) 7.9 72.8 Romania (base case 2009) 7.4 72.8 China 7.1 73.9 Vietnam (2007) 6.2 77.5 Poland 3.0 90.2 Burkina Faso -1.6 106.0

Source: values in the table for all jurisdictions except Dominican Republic, Egypt, Ghana, Indonesia, Mozambique, Papua New Guinea, Peru, Philippines, Romania and Vietnam are extracted from: J. Otto, J. Cordes and M. Betarseh, Global Mining Taxation Comparative Study, second edition, IGRPM Colorado School of Mines, March 2000.

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Figure 8. Distribution of Mine Revenues (from sales)

Romania - Cost and Profit Distribution (not discounted)

0

100,

000,

000

200,

000,

000

300,

000,

000

400,

000,

000

500,

000,

000

600,

000,

000

700,

000,

000

Operating Costs

Capital Costs

Loan Costs

Taxes & FreeEquity Dividends

Company profits

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May 2009

Figure 9. Breakdown of Total Taxes Paid Over Life of Model Gold Mine

Romania - Model Gold Mine(base case not discounted)

W/H Dividends17.4%

Royalty (gold)30.2%

Land fee0.9%

W/H Tax Foreign Services

6.7%

W/H Tax Loan Interest2.7%

Royalty (Aggregate)

0.3%

Income Tax13.2%

Stamp tax0.3%

Permit fees0.9%

Govt dividends13.3%

Deforestation fees7.1%

Property Tax (land)6.1%

Property Tax (buildings)

1.0%

74


Figure 10. Summary of Taxes, Fees and Government Equity Distribution

Breakdown of Cumulative Taxes (not discounted) Total Value % of Gross % of TaxGross Revenue 959,354,589 - Royalty (on metals sold) 38,374,184 4.0% 30.2% - Withholding Tax (dividends) 22,155,301 2.3% 17.4% - Withholding (foreign services) 8,549,302 0.9% 6.7% - Withholding Tax (Interest remitted) 3,390,674 0.4% 2.7% - Mining Licence Area Rental Fee 1,122,037 0.1% 0.9% - Royalty (on aggregates) 400,000 0.0% 0.3% - Income tax 16,751,874 1.7% 13.2% - Stamp Tax on Property Transfers 400,000 0.0% 0.3% - Construction Permit Fees 1,176,000 0.1% 0.9% - Distribution to government free equity share 16,883,557 1.8% 13.3% - Forest related charges 9,000,000 0.9% 7.1% - Property Tax (on land) 7,696,160 0.8% 6.1% - Property Tax (buildings) 1,215,000 0.1% 1.0% = Total Taxes & Free Equity Dividends Paid 127,114,087 13.2% 100.0%

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Figure 11. Model Mine Spreadsheet MODEL GOLD MINE CASH FLOWS: Romania, (All Values in US $)

Year 0 1 2 3 4 5 6 7 8 9 10Production (Au, oz / Year) 0 0 150,000 300,000 300,000 300,000 300,000 300,000 300,000 300,000 100,000Selling Price, (Au, $ / oz) $0.00 $0.00 $370.03 $379.28 $388.76 $398.48 $408.44 $418.65 $429.12 $439.84 $450.84Production (Ag, oz / Year) 0 0 0 0 0 0 0 0 0 0 0Selling price, (Ag, $ / oz) $0.00 $7.00 $7.18 $7.35 $7.54 $7.73 $7.92 $8.12 $8.32 $8.53 $8.74Operating Cost, (Au, $ / oz) $0.00 $210.00 $216.30 $222.79 $229.47 $236.36 $243.45 $250.75 $258.27 $266.02 $274.00Revenue from Gold sales 0 0 55,503,750 113,782,688 116,627,255 119,542,936 122,531,509 125,594,797 128,734,667 131,953,034 45,083,953Revenue from Silver sales 0 0 0 0 0 0 0 0 0 0 0Gross Revenue 0 0 55,503,750 113,782,688 116,627,255 119,542,936 122,531,509 125,594,797 128,734,667 131,953,034 45,083,953 - Royalty (on metals sold) 0 0 -2,220,150 -4,551,308 -4,665,090 -4,781,717 -4,901,260 -5,023,792 -5,149,387 -5,278,121 -1,803,358 - Royalty (on aggregates) -100,000 -200,000 -100,000 0 0 0 0 0 0 0 0 - Reclamation cost 0 0 0 0 0 0 0 0 0 0 -10,000,000 - Operating Cost 0 0 -32,445,000 -66,836,700 -68,841,801 -70,907,055 -73,034,267 -75,225,295 -77,482,054 -79,806,515 -27,400,237Operating Earnings -100,000 -200,000 20,738,600 42,394,680 43,120,364 43,854,164 44,595,982 45,345,711 46,103,227 46,868,397 5,880,358 - Depreciation 0 0 -45,000,000 -8,356,818 -8,780,249 -9,216,384 -9,665,603 -10,128,298 -9,971,489 -9,059,414 -7,917,738 - Pre-production exploration amortization 0 0 -555,556 -555,556 -555,556 -555,556 -555,556 -555,556 -555,556 -555,556 -555,556 - Development amortization 0 0 -4,444,444 -4,444,444 -4,444,444 -4,444,444 -4,444,444 -4,444,444 -4,444,444 -4,444,444 -4,444,444 - Feasibility amortization 0 0 -1,111,111 -1,111,111 -1,111,111 -1,111,111 -1,111,111 -1,111,111 -1,111,111 -1,111,111 -1,111,111 - Depletion allowance 0 0 0 0 0 0 0 0 0 0 0 - Loan Interest (deductible) 0 -1,440,000 -4,794,543 -5,595,806 -4,360,403 -3,026,168 -1,585,194 -389,599 0 0 0 - Reinvestment in other projects 0 0 0 0 0 0 0 0 0 0 0 - Stamp Tax on Govt Equity 0 0 0 0 0 0 0 0 0 0 0 - Stamp Tax on Loans 0 0 0 0 0 0 0 0 0 0 0 - Stamp Tax on Property Transfers -200,000 -200,000 0 0 0 0 0 0 0 0 0 - Forest related charges -9,000,000 - Import Duties on Equipment (not recoverable) 0 0 0 0 0 0 0 0 0 0 0 - Export Duties on Mineral Sales 0 0 0 0 0 0 0 0 0 0 0 - Goods and Services Tax (not recoverable) 0 0 0 0 0 0 0 0 0 0 0 - Withholding (foreign services) -2,320,000 -1,040,000 -499,560 -578,403 -595,755 -613,627 -632,036 -650,997 -660,393 -659,328 -299,202 - Withholding Tax (Interest remitted) 0 -230,400 -767,127 -895,329 -697,664 -484,187 -253,631 -62,336 0 0 0 - Withholding Tax (dividends) 0 0 0 0 -2,104,089 -1,885,673 -1,883,241 -2,285,567 -4,110,335 -4,180,369 -4,629,109 - Property Tax (buildings) 0 0 -225,000 -202,500 -180,000 -157,500 -135,000 -112,500 -90,000 -67,500 -45,000 - Property Tax (on land) -616,508 -631,921 -647,719 -663,912 -680,510 -697,522 -714,961 -732,835 -751,155 -769,934 -789,183 - Educational Levy 0 0 0 0 0 0 0 0 0 0 0 - Local Business Tax 0 0 0 0 0 0 0 0 0 0 0 - Local Community Tax 0 0 0 0 0 0 0 0 0 0 0 - Construction Permit Fees -504,000 -600,000 -72,000 0 0 0 0 0 0 0 0 - Mining Licence Area Rental Fee -102,003 -102,003 -102,003 -102,003 -102,003 -102,003 -102,003 -102,003 -102,003 -102,003 -102,003Taxable income before loss forward -12,842,512 -4,444,324 -37,480,463 19,888,799 19,508,579 21,559,988 23,513,203 24,770,465 24,306,741 25,918,736 -14,012,988 - Loss Forward Deduction 0 -12,842,512 -17,286,836 -54,767,299 -34,878,500 -15,369,921 0 0 0 0 0Taxable Income -12,842,512 -17,286,836 -54,767,299 -34,878,500 -15,369,921 6,190,068 23,513,203 24,770,465 24,306,741 25,918,736 -14,012,988 Income Tax before exemption 0 0 0 0 0 -990,411 -3,762,112 -3,963,274 -3,889,078 -4,146,998 0 - amount exempted 0 0 0 0 0 0 0 0 0 0 0 Income Tax before VAT services credit 0 0 0 0 0 -990,411 -3,762,112 -3,963,274 -3,889,078 -4,146,998 0 + VAT credits 0 0 0 0 0 0 0 0 0 0 0 - Income tax 0 0 0 0 0 -990,411 -3,762,112 -3,963,274 -3,889,078 -4,146,998 0Net Income -12,842,512 -17,286,836 -54,767,299 -34,878,500 -15,369,921 5,199,657 19,751,090 20,807,191 20,417,662 21,771,738 -14,012,988 + Depreciation 0 0 45,000,000 8,356,818 8,780,249 9,216,384 9,665,603 10,128,298 9,971,489 9,059,414 7,917,738 + Pre-production exploration amortization 0 0 555,556 555,556 555,556 555,556 555,556 555,556 555,556 555,556 555,556 + Development amortization 0 0 4,444,444 4,444,444 4,444,444 4,444,444 4,444,444 4,444,444 4,444,444 4,444,444 4,444,444 + Feasibility amortization 0 0 1,111,111 1,111,111 1,111,111 1,111,111 1,111,111 1,111,111 1,111,111 1,111,111 1,111,111 + Depletion allowance 0 0 0 0 0 0 0 0 0 0 0 + Loss Forward Deduction 0 12,842,512 17,286,836 54,767,299 34,878,500 15,369,921 0 0 0 0 0

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May 2009

- Capital Expenditures: Depreciable Equipment -10,000,000 -50,000,000 -30,000,000 -5,463,635 -5,627,544 -5,796,370 -5,970,261 -6,149,369 -5,067,080 -2,609,546 0 Pre-production exploration costs -5,000,000 0 0 0 0 0 0 0 0 0 0 Development costs -20,000,000 -20,000,000 0 0 0 0 0 0 0 0 0 Feasibility costs -10,000,000 0 0 0 0 0 0 0 0 0 0 Working Capital Additions 0 -5,000,000 -5,000,000 -300,000 -309,000 -318,270 -327,818 -337,653 -347,782 -358,216 12,298,739 + Borrowed Money Inflow 18,000,000 45,000,000 21,000,000 0 0 0 0 0 0 0 0 - Principal Payments 0 -3,068,216 -10,984,214 -15,442,537 -16,677,940 -18,012,175 -14,944,932 -4,869,987 0 0 0 - Loan interest (non-deductible) 0 0 0 0 0 0 0 0 0 0 0 - Import Duties on Equipment (recoverable) 0 0 0 0 0 0 0 0 0 0 0 - Goods and Services Tax (recoverble) 0 0 0 0 0 0 0 0 0 0 0 - VAT on services 0 0 0 0 0 0 0 0 0 0 0 - VAT on equipment 0 0 0 0 0 0 0 0 0 0 0 - W/H Tax (foreign services) 0 0 0 0 0 0 0 0 0 0 0 - W/H Tax (Interest remitted) 0 0 0 0 0 0 0 0 0 0 0 - W/H Tax (Dividends remitted) 0 0 0 0 0 0 0 0 0 0 0Project Cash Flow before equity distributions -39,842,512 -37,512,540 -11,353,566 13,150,556 11,785,456 11,770,257 14,284,792 25,689,591 31,085,400 33,974,502 12,314,600 - Worker Profit Share 0 0 0 0 0 0 0 0 0 0 0 - Distribution to government free equity share 0 0 0 0 0 0 0 0 -4,958,091 -5,042,571 -5,583,863Project cashflow -39,842,512 -37,512,540 -11,353,566 13,150,556 11,785,456 11,770,257 14,284,792 25,689,591 26,127,308 28,931,931 6,730,737

Net Present Value @ discount rate - Project Basis -17,530,507Rate of return - Project 7.4%Net Present Value @ discount rate - Foreign Investor -17,530,507Rate of return - Foreign Investor 7.4%NPV @ Discount Rate - Gov't Working Interest 0Rate of return - Gov't Working Interest NA

Tax & Cash Flow Calculations

Year 0 1 2 3 4 5 6 7 8 9 10Gross Revenue 0 0 55,503,750 113,782,688 116,627,255 119,542,936 122,531,509 125,594,797 128,734,667 131,953,034 45,083,953 - Operating Cost 0 0 -32,445,000 -66,836,700 -68,841,801 -70,907,055 -73,034,267 -75,225,295 -77,482,054 -79,806,515 -37,400,237 - Capital Costs -45,000,000 -75,000,000 -35,000,000 -5,763,635 -5,936,544 -6,114,640 -6,298,080 -6,487,022 -5,414,863 -2,967,762 12,298,739 - Reinvestment in other projects 0 0 0 0 0 0 0 0 0 0 0 - Borrowed $ / Principal & Interest 18,000,000 40,491,784 5,221,243 -21,038,342 -21,038,342 -21,038,342 -16,530,126 -5,259,586 0 0 0Before-Tax Cash Flow -27,000,000 -34,508,216 -6,720,007 20,144,010 20,810,567 21,482,898 26,669,037 38,622,895 45,837,751 49,178,757 19,982,455Total Taxes & Free Govt equity dividend -12,842,512 -3,004,324 -4,633,559 -6,993,454 -9,025,111 -9,712,641 -12,384,245 -12,933,304 -19,710,443 -20,246,825 -13,251,718Project Cash Flow -39,842,512 -37,512,540 -11,353,566 13,150,556 11,785,456 11,770,257 14,284,792 25,689,591 26,127,308 28,931,931 6,730,737Project Profit/Dividend Pool 0 0 0 13,150,556 11,785,456 11,770,257 14,284,792 25,689,591 26,127,308 28,931,931 6,730,737

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Annex A - Outline of Services

Overall Objective:

Review the current Romanian mining fiscal system as applied to gold mines, compare the taxation system to that in about 20 other mining nations, and in a written report, determine whether the system is competitive with mining tax systems in other nations.

Phase 1

• The mining fiscal system of Romania for a typical gold mine will be examined and compared to fiscal systems in about 20 other nations by the Consultant. The comparison will include at least two economic yardsticks as a basis: the investor's internal rate of return and the effective tax rate.

Specifically:

• The analysis for the mining sector will be based on the gold mine model reported in Global Mining Taxation Comparative Study 2nd Edition (a well-accepted reference work used by the World Bank, United Nations and many countries undertaking mining fiscal reform projects) so that the total impact of the Romanian mining fiscal system can be compared with those imposed in a cross-section of other countries.

• For these purposes it shall be assumed that the projects are owned by foreign investors.

• Provision shall be made in the analysis to accommodate the impact of government equity participation.

• To better understand the existing and possible new tax structures, the Client may request a reasonable number (up to 6) other hypothetical Romanian tax situations be included in the analysis. Examples of such scenarios might include increases or reduction in the existing rates for various taxes, additional new taxes, removal of existing taxes, the impact of various tax incentive schemes, and government equity options.

• The report will draw a conclusion about the competitiveness of the Romanian mining taxation system.

Work Plan

• The Client will designate a counterpart person responsible for providing the Consultant with information about the Romanian mining tax system. Such person will have email access and a working knowledge of English. The Consultant will send the designated counterpart person a questionnaire (copyrighted by the Consultant) designed to identify the key elements of the mineral sector tax system. The designated person will have the responsibility to interface with such persons and entities as are necessary to complete the questionnaire and to answer such additional questions that are important for tax analysis purposes. Information provided through the questionnaire by the designated person will be the sole source of Romanian tax information used by the Consultant for Phase 1.

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• The Consultant will then use the information contained in the questionnaire to construct a base case tax assumption set for analysis and modeling purposes. The assumption set will be sent to the designated counterpart person for verification that all fiscal system assumptions are accurate.

• After verification of the base case tax assumption set by the counterpart person, the Consultant will create a computer based mine model that is directly comparable to the standard gold mine model described in the Colorado School of Mines Global Mining Taxation Comparative Study 2nd Edition. This reference is well known to many nations who have undertaken mining sector fiscal reform and copies were circulated to all interested developing nations governments by UNCTAD with further distribution by the World Bank Group.

• Where the designated person is not able to provide detailed information, the Consultant will use an approximation based on his best judgment.

• The consultant will then prepare a written report of not less than 40 pages titled “Romanian Mining Taxation System: Competitive Position.” The report will be in the English language and contain at least the following information:

• an executive summary; • a summary of Romania’s existing mining taxation system (as applied to

gold mines); • a section describing different types of mining taxes and incentives, tables

comparing each major form of tax levied in Romania with similar taxes levied by about 20 other nations, and the risks posed to the government and to the investor by each tax type;

• a description of the base case gold mine model used for the total effective tax rate comparative analysis;

• a description of the assumptions used to construct the Romanian mining tax model;

• a table showing the results of the model (including the economic measures such as IRR and effective tax rate) in comparison to the results from analyses for about 20 other countries as reported in Global Mining Taxation Comparative Study 2nd edition or in later analyses by the Consultant;

• a description of up to 6 variations of the Romanian tax model; • a table showing the effect of such variations on the Romanian tax model; • hard-copy printouts of the model results (note: the actual software

spreadsheets are proprietary to the Consultant and are not to be a transferred to the Client)

• The Consultant shall provide to the Client three copies of the report, one copy being unbound and suitable for photocopying. The ownership of the report shall reside with the Client. The Consultant shall be entitled to keep a copy of the report and all data, and they shall be handled as confidential for a period of two years from the date that the Phase 1 report is submitted to the Client.

2008 Revision

To update the December 2007 edition of the report to take into account different assumptions regarding the fees to be paid with regard to forested land used for mining (raising the amount from a base case assumption of USD350,000/h to USD470,000/h), and to better illustrate the effect of time value of money by applying a range of discount rates to project, government and investor revenues.

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2009 Revision To update the November 2008 edition of the report to take into account different assumptions regarding charges to be paid that relate to forested land used for mining (lowering the amount from a base case assumption of USD470,000/h to 90,000/h, to update tables that are based on annual surveys (i.e. Behre Dolbear, Fraser Institute), to update all tables affected by the “forestry fee” change, and to add additional comparative data.

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Annex B – References

Behre Dolbear (2009), “2009 Ranking of Countries for Mining Investment – Where not to Invest,” www.dolbear.com. Johnson, Charles (1990), “Ranking countries for mineral exploration,” Natural Resources Forum 14(3). McMahon, Fred and Miguel Cervantes (2009), Fraser Institute Annual Survey of Mining Companies 2008/2009, Vancouver: Fraser Institute. Naito, Koh and Felix Remy (2001a), Mining Sector Reform and Investment Results of a Global Survey, London: Mining Journal Books for the World Bank Group Mining Department and Metal Mining Agency of Japan. Naito, Koh, Felix Remy and John Williams (2001b), Review of Legal and Fiscal Frameworks for Exploration and Mining, London: Mining Journal Books for the World Bank Group Mining Department and Metal Mining Agency of Japan. Otto, James (1992a), "Criteria for Assessing Mineral Investment Conditions," Mineral Investment Conditions in Selected Countries of the Asia-Pacific Region, New York: United Nations ST/ESCAP/1197. Otto, James (1992b), "A Global Survey of Mineral Company Investment Preferences," Mineral Investment Conditions in Selected Countries of the Asia-Pacific Region, New York: United Nations ST/ESCAP/1197. Otto, James and John Cordes (2002). The Regulation of Mineral Enterprises: A Global Perspective on Economics, Law and Policy, Chapter 2; Westminster (CO): Rocky Mountain Mineral Law Foundation. Otto, James; Maria Loiusa Beraun and John Cordes (2000). Global Mining Taxation Comparative Study 2nd edition; Golden (CO): Colorado School of Mines (note: Chinese edition 2006, Beijing: Geological Publishing House of the Ministry of Land and Resources). Otto, James et al, (2006) Mining Royalties: A Global Study of their Impact on Investors, Government, and Civil Society; Washington DC: World Bank Press (available in English and Spanish).

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Annex C. Fraser Institute Tabular Data

Fraser Institute Survey Rankings of Selected Nations by Policy Potential Index Table 1: Policy potential index

Source: derived from Fraser Institute Annual Survey of Mining Companies (McMahon and Cervantes, 2009, p.13)

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Fraser Institute Survey Rankings of Selected Nations by Policy Potential Index

(continued)

Source: derived from Fraser Institute Annual Survey of Mining Companies (McMahon and Cervantes, 2009, p.14)

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Annex D. Behre Dolbear Tabular Data

2009 Behre Dolbear Overall Ranking of Countries for Mining Investment

Socio Political System Rank Country

Econ. Political Social

Permitting Delays Corruption Currency

Stability Tax

Regime Total

Points1/

1 Australia 10 9 8 8 10 8 7 60 2 Canada 10 10 6 5 10 8 7 56 3 Chile 9 8 7 7 8 7 4 50 4 United States 10 9 4 2 10 8 5 48 5 Mexico 8 8 2 7 7 5 8 46 6 Brazil 7 7 6 5 5 6 6 42 7 Ghana 6 6 3 7 4 6 6 38 8 Columbia 6 6 6 6 4 5 4 37 9 Botswana 6 5 5 5 4 5 6 36 10 China 8 2 4 5 2 8 5 34 10 Namibia 5 6 3 5 4 5 6 34 12 Argentina 4 5 6 6 4 4 4 33 13 Mongolia 6 4 5 6 3 6 2 32 13 Tanzania 5 5 3 7 3 4 5 32 15 Peru 6 3 2 3 4 7 5 30 16 India 6 6 2 3 3 5 4 29 17 Philippines 5 5 3 5 2 4 4 28 18 Zambia 5 4 2 5 3 2 4 24 19 Kazakhstan 4 4 4 3 1 4 4 24 20 South Africa 3 3 1 5 2 6 2 22

21 Papua New Guinea 4 4 1 2 2 4 5 22

22 Indonesia 3 5 3 3 1 1 3 19 23 Russia 2 1 3 3 1 2 6 18 23 Bolivia 2 1 1 4 3 4 3 18 25 D.R. Congo 2 3 3 3 1 1 4 17

1/ A perfect score would be 70 total points, and within any criterion a perfect (risk free) score is 10. Source: www.dolbear.com, accessed on 10 May 2009.

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2009 Behre Dolbear Ranking of Countries for Mining Investment: Ranked by Tax Regime

Tax Rank

Country Tax Regime Total Points

(includes all factors)

1 Mexico 8 46 2 Australia 7 60 3 Canada 7 56 4 Brazil 6 42 5 Ghana 6 38 6 Botswana 6 36 7 Namibia 6 34 8 Russia 6 18 9 United States 5 48

10 China 5 34 11 Tanzania 5 32 12 Peru 5 30 13 Papua New Guinea 5 22 14 Chile 4 50 15 Colombia 4 37 16 Argentina 4 33 17 India 4 29 18 Philippines 4 28 19 Zambia 4 25 20 Kazakhstan 4 24 21 D.R. Congo 4 17 22 Indonesia 3 19 23 Bolivia 3 18 24 South Africa 2 22 25 Mongolia 2 32

Note: a perfect Total Points score would be 70 total points, and the maximum (risk free) score for Tax Regime is 10. Source: www.dolbear.com, accessed on 10 May 2009.

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Annex E - About the Author

Professor James Otto (retired) holds degrees in law, mineral economics and engineering. He has worked for multilateral agencies, governments and mining companies in over fifty nations on matters relating to mining policy, laws and taxation. His accomplishments include leading or participating with teams to write mining laws and/or designing fiscal systems in over twenty nations. His books and studies on mining policies, laws, regulation and taxation have become standard references for many governments and companies. He is co-author of The Regulation of Mineral Enterprises: A Global Perspective on Economics, Law and Policy (RMMLF, 2002), editor and co-author of The Taxation of Mineral Enterprises (Graham and Trotman/Kluwer, 1995), and co-author of Global Mining Taxation Comparative Study (Colorado School of Mines, 1996, 2000). His latest book, on mineral royalties, was published by the World Bank in 2006. He has published two edited books with the United Nations on sustainable development and mining. He has edited/co-authored three books on Asia/Pacific mineral sector regulation, investment and taxation: Mining Legislative Frameworks in Asian Countries (Mining Journal Books Ltd. in conjunction with the United Nations Revolving Fund, 1998), Minerals Industry Taxation Policies for Asia and the Pacific (United Nations ESCAP, 1992), and Mineral Investment Conditions in Selected Countries of the Asia-Pacific Region (United Nations ESCAP, 1992). Professor Otto was formerly United Nations Chief Technical Advisor (UNDTCD), Assistant Director and Riotinto Senior Lecturer at the Centre for Petroleum and Mineral Law and Policy at the University of Dundee (the largest natural resources law program in Europe), Director of the Institute for Global Resources Policy and Management at the Colorado School of Mines, and Director of the Environmental and Natural Resources Law Graduate Studies Program at the University of Denver Sturm College of Law (the largest natural resources law program in North America).

James Otto Attorney and Mineral Economist 1344 Scrub Oak Circle Boulder, Colorado 80305 USA [email protected] phone: 1-303-494-8241 fax: 1-303-554-0227

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