UNCTAD Secretary-General's High-Level Multi-Stakeholder Dialogue on Commodities in the context of UNCTAD XII 28-29 January 2008 Managing Canada s Mineral Resource Revenues for Sustainable Development By Mr. Keith J. Brewer Consultant, Canada The views expressed are those of the author and do not necessarily reflect the views of UNCTAD
Managing Canada s Mineral Resource Revenues for Sustainable Development Presentation to UNCTAD Secretary General s High Level Multi-Stakeholder Dialogue On Commodities In the Context of UNCTAD XII Geneva January 28, 2008 By: Keith J. Brewer, Ottawa, Canada E-Mail: k.brewer@rogers.com Telephone: +1 613 824 6754 1
Managing Canada s Mineral Resource Revenues for Sustainable Development Private Sector/Open Economy Drives Investment Government Taxation Policies Government Measures for Environmental Sustainability Government Measures for Social Sustainability Getting Consensus on How Mining can Contribute to Sustainable Development The Dimensions of Canada s Success Lessons/Observations 2
Needs of Private Sector Investors Pre-Production Period Production Period 3
Needs of Private Sector Investment Private Sector Determines the Pace of Mineral Development Government Plays a Complementary Role Rules and Regulations Are Known in Advance Range of Stakeholders are Consulted on Proposed Modifications 4
Metal Prices 1971-2006 Indexes: 1971 = 100 800 700 600 500 400 300 200 100 0 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 Nominal Real Linear (Real) 5
Australia Peru Average Production Costs of Major Western World Copper Mining Countries Cash costs US /lb. Australia Indonesia Chile Chile Peru United States Canada Canada 2003 United States 2007 Indonesia Cumulative Production (millions of pounds) Source: Natural Resources Canada. Based on data from AME Mineral Economics. Costs are in 2003 dollars. 6
Managing Canada s Mineral Resource Revenues for Sustainable Development Private Sector/Open Economy Drives Investment Government Taxation Policies Government Measures for Environmental Sustainability Government Measures for Social Sustainability Getting Consensus on How mining can Contribute to Sustainable Development The Dimensions of Canada s Success Lessons/Observations 7
Investment Tax Credit for Exploration Ranges of Tax Treatment by Province/Territory 8
Impact of Deductions on the Tax Base: Project with 10 Percent Internal Rate of Return in Ontario Million dollars Net Revenue Taxable Income Other Tax Expl. & Dev. Write-offs Depreciation Preproduction Years Production Years Taxable income is area remaining between Net Revenue and Write-Offs 9
Impact of Deductions on the Tax Base: Project with 10 Percent Internal Rate of Return in Indonesia Million dollars Net Revenue Taxable Income Other Tax Expl. & Dev. Write-offs Depreciation Pre-production Years Production Years Taxable income is area remaining between Net Revenue and Write-Offs 10
Analyzing Tax Choices Model Combinations of Taxes: 5 Cases Profit Tax Gross Mining Royalty Export Tax Case 1 40% 0% 0% Case 2 35% 2% 0% Case 3 35% 5% 0% Case 4 25% 2% 10% Case 5 25% 0% 0% 11
Calculation of Average Tax Rates for Five Cases with Three Types of Tax (PT - profit tax rate, GR - gross royalty rate, ET - export tax rate) 10% IRR Project 25% IRR Project 87% 44% 36% 37% 41% 35% 54% 40% 22% 23% Case 5 (25% PT, 0% GR, 0% ET) Case 1 (40% PT,0% GR, 0% ET) Case 2 (35% PT,2% GR, 0% ET) Case 3 (35% PT,5% GR, 0% ET) Case 4 (25% PT,2% GR, 10% ET) 12
Average Effective Tax Rates for Project with 10% IRR (PT - profit tax rate, GR - gross royalty rate, ET - export tax rate) 87 18 22 26 26 28 28 30 30 32 36 36 37 40 43 46 48 54 54 13
Average Effective Tax Rates for Project with 25% IRR (PT - profit tax rate, GR - gross royalty rate, ET - export tax rate) 23 26 29 30 32 34 35 37 38 38 38 40 43 44 44 50 14
Other Types of Tax Measures Community Development Water Supplies Hospital Housing Other 15
Sharing Tax Revenue and Financing the Canadian Federation Canada s System of Government Federal Provincial/Territorial 16
Share of Tax on Mine Income 17
Total Federal Transfers 2007/08 $67 Billion to Provinces and Territories Canada Health & Social Transfer $53.7 B Equalization $12.9 B Territorial Formula Financing $2.2 B Other 18
Managing Canada s Mineral Resource Revenues for Sustainable Development Private Sector/Open Economy Drives Investment Government Taxation Policies Government Measures for Environmental Sustainability Government Measures for Social Sustainability Getting Consensus on How mining can Contribute to Sustainable Development The Dimensions of Canada s Success Lessons/Observations 19
Environmental Regulations in Canada: Recent Developments Canada-Wide Accord on Environmental Harmonization Federal-Provincial Agreements to Cooperate on Environmental Assessments Federal Coordination Regulation and Guidelines for Panel Reviews 20
Special Tax Treatment for Mine Reclamation Funds Mechanism Tax Treatment 21
Managing Canada s Mineral Resource Revenues for Sustainable Development Private Sector/Open Economy Drives Investment Government Taxation Policies Government Measures for Environmental Sustainability Government Measures for Social Sustainability Getting Consensus on How mining can Contribute to Sustainable Development The Dimensions of Canada s Success Lessons/Observations 22
There is Increasing Participation of Indigenous Communities and Businesses in Resource Sectors Aboriginal Direct Employment Athabasca Oil Sands Development 1998, 1999 & 2000 85% of the more than 1,300 communities (greater than 20% Aboriginal population) in Canada are located within 200 km of natural resource-based activities. 1,200 D ire c t E m p lo y m e n t The majority of the some 20,000 Aboriginal owned businesses in Canada are owneroperated contractors and sub-contractors to natural resource sectors. 1,400 1,000 800 600 400 200 0 Of Aboriginal Canadians who are employed in the primary resource sectors: 31% were in forestry and logging sectors; and 26% were in mining and energy sectors. Between 1991 and 1996, Aboriginal employment increased by 25% in forestry and 10% in mining, oil and gas. 1998 1999 Company Contractor 2000 Total Source: Athabasca Oil Sands Developers & Canadian Association of Petroleum Producers 23
Impact and Benefits Agreements An arrangement between a company and a local community, Government is not party to the arrangement 24
Managing Canada s Mineral Resource Revenues for Sustainable Development Private Sector/Open Economy Drives Investment Government Taxation Policies Government Measures for Environmental Sustainability Government Measures for Social Sustainability Getting Consensus on How mining can Contribute to Sustainable Development The Dimensions of Canada s Success Lessons/Observations 25
Domestic and International Discussions and Negotiations In Canada: Periodic Stakeholder Discussions & Negotiations on the Investment Climate -Whitehorse Mining Initiative (WMI) - Mines Ministers Conferences - NI 43-101 Qualified Person restraint - Intergovernmental Working Group Internationally: -Mines Ministries of the Americas (CAMMA) - UN/World Bank bilaterals and multilaterals - MMSD - Global Mining Initiative (GMI) - World Mines Ministries Forums 26
Outcome of September 1993 Mines Ministers Conference Multi-stakeholder process Estimated cost $1.1million (approximately one third federal; one third industry; one third provinces) Department of Natural Resources(NRCan) Minister was 1 of 3 co-chairs on the WMI Leadership Council NRCan led the federal participation 27
Structure of the Whitehorse Mining Initiative Process Federal-Provincial Studies 1992, 1993 on the Structure, Conduct, Performance, Competitiveness, and Regulatory Issues facing the Mining Industry Four Issue Groups Finance and Taxation Land Access Environmental Workplace/Work Force/Communities Leadership Council Accord 28
Framework for Sustainable Development RESORTING TO THEORY Economic Efficiency? How Much Environmental Disruption? Social Compensation? 29
Framework for Sustainable Development Resorting to Consultation and Negotiation Who to Consult With and Why? Who to Negotiate With? A Lasting Solution? 30
Managing Canada s Mineral Resource Revenues for Sustainable Development Private Sector/Open Economy Drives Investment Government Taxation Policies Government Measures for Environmental Sustainability Government Measures for Social Sustainability Getting Consensus on How mining can Contribute to Sustainable Development The Dimensions of Canada s Success Lessons/Observations 31
High Wage Rates and Mining $1,000 weekly wages in mining - highest in Canada. $650 average weekly wage in Canada. Over 100 communities (60,000 people) depend on mining alone. 2.5 % of Canadian employment is in mining 32
Exploration Expenditures in Canada 1969-2007 Millions of 2003 dollars 2 000 1 800 Seniors Juniors 1 600 1 400 1 200 1 000 The introduction of the federal Investment Tax Credit for Exploration in October 2000 has helped to increase exploration in Canada 800 600 400 200 0 1969 70 7172 73 74 75 7677 78 1979 80 81 82 8384 85 86 87 88 1989 90 91 92 9394 95 96 97 98 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Survey of Mineral Exploration, Deposit Appraisal and Mine Complex Development Expenditures. 33
Sources of Equity Financing for Global Mineral Exploration and Development 2004 Unspecified 9% C$11.5 Billion United States 7% South Africa 10% Canada 48% United Kingdom 11% Australia 15% Source: Natural Resources Canada, based on Gamah International Limited and company reports. 34
Managing Canada s Mineral Resource Revenues for Sustainable Development Private Sector/Open Economy Drives Investment Government Taxation Policies Government Measures for Environmental Sustainability Government Measures for Social Sustainability Getting Consensus on How mining can Contribute to Sustainable Development The Dimensions of Canada s Success Lessons/Observations 35
Lessons from the Canadian Experience Global Shortage is of Good Projects, not Finance Countries Compete on Geology/Investment climate Private Sector Property Rights have to be Secure Tax System Recognises Public Good/Social Aspects Government Share is Taken by Means of Taxation Taxation Rules as Simple as Possible & Stable Clearly Explain Taxation Regime to Investors Agree Taxation between Levels of Government Do Not Impede the Cross Border Flow of Capital Companies Negotiate Agreements with Communities 36
Lessons from the Canadian Experience Global Shortage is of Good Projects, not Finance Countries Compete on Geology/Investment climate Private Sector Property Rights have to be Secure Tax System Recognises Public Good/Social Aspects Government Share is Taken by Means of Taxation Taxation Rules as Simple as Possible, Stable Clearly Explain Taxation Regime to Investors Agree Taxation between Levels of Government Do Not Impede the Cross Border Flow of Capital Companies Negotiate Agreements with Communities 37
Managing Canada s Mineral Resource Revenues for Sustainable Development END 38