FISCAL REFORM IN LIBYA TO BENEFIT FROM NON-PETROLEUM MINERAL POTENTIAL CONSIDERING THE AUSTRALIAN MINERALS RESOURCE RENT TAX

X MODEL Wendy Treasure* August 2012

ABSTRACT: Given the change of political leadership after 2011 and the July 2012 election, the new Libyan government will look to increase and diversify its resource exploitation/production. Equally, there will be more interest in exploring for non-petroleum minerals by foreign and domestic companies. What does Libya have to prepare to take advantage of mining revenues? Companies will want clarity on how taxes will be assessed and collected. The Libyan government will want to extract the largest and most effective amount of revenue. The Libyan people will want to see that the revenues generated by their national assets are invested or utilised for the benefit of Libyans. The question is how best can each of these requirements be met? Australia is an experienced and dynamic mining country that has just introduced a new resource tax. Can the Australian model be of benefit to the new Libyan mining industry? This paper seeks to examine the state of the fiscal regime[s] in Libya and recommend mechanisms to optimally access the resultant mining revenue. The paper establishes the requirements for an ideal fiscal regime, assesses the health of the Libyan mining industry and the utility of the current corporate tax and identifies what can be adopted from the Australian mining industry and their recent minerals resource rent tax. The paper concludes with the belief that a broadly applied minerals resource rent tax would appeal to investors.

The author is an Australian trained solicitor, admitted to practice in Western Australia and the UK with a background in administrative law, mining and native title. She has worked in Australia, South Africa and the UK and is an LLM (Mineral Law and Policy) graduate of the CEPMLP. Her specific interest is in mining operations in West Africa, Australia and emerging industries in North Africa and the Middle East - particularly on development and investment in Libyan mining. She is a member of Women in Mining (UK) and Women in Mining (WA). Email: wendytreasure@yahoo.com Published in CEPMLP Annual Review - CAR Volume 16 (2013) Editor-in-Chief: Wendy Treasure

TABLE OF CONTENTS

ABBREVIATIONS .................................................................................................................... i 1 2 3 INTRODUCTION ...............................................................................................................1 LIBYAN MINING INDUSTRY: PROFILE AND PREPAREDNESS .................................2 IDEAL FISCAL REGIME TO SUPPORT MINING ...........................................................3 3.1 Neutrality ........................................................................................................................4 3.2 Clarity and Transparency .................................................................................................4 3.3 Stability ...........................................................................................................................5 3.4 Equity..............................................................................................................................6 3.5 Government Take ............................................................................................................7 4 REVENUE MANAGEMENT MECHANISMS ..................................................................7 4.1 General Tax Instruments ..................................................................................................8 4.2 Taxation in Libya Application and Flaws ......................................................................9 5 AUSTRALIAN MINING INDUSTRY AND MINERALS RENT RESOURCE TAX ....... 11 5.1 Background ................................................................................................................... 12 5.2 MRRT Assessment and Revenue Collection .................................................................. 13 6 REJECT, ADOPT OR ADAPT - RECOMMENDATIONS AND CONCLUSION ............ 14

BIBLIOGRAPHY ..................................................................................................................... 16

ABBREVIATIONS

AUD CIT MRRT RRT

Australian Dollar Corporate Income Tax Minerals Resource Rent Tax Resource Rent Tax

INTRODUCTION

At first glance, Australia and Libya do not appear to have much in common apart from a hot climate, large arid regions and the occasional camel in the desert. But dig a little under the surface and the two nations may share a similar geological profile and in time, Libya could be seeing the same revenues from natural resources that Australia now enjoys. 1 While Australia has a long and lucrative history of mining, Libyas natural resource wealth has come relatively recently and only through oil. 2

The mining industry in Libya is very limited and has only been exploited at a domestic level. With the 2011 overthrow of Muammar Gaddafi and the first democratic elections in 2012 of the National Congress, the opportunity arises for investment and development in a much wider number of industries. This paper profiles the potential development of mining in Libya under the current tax system, and asks how much can be learned by comparison to Australia? Specifically, can the new Australian Minerals Resource Rent Tax be utilised in Libya to efficiently capture the maximum level of tax?

A successful resource rent tax (also known as an additional profits tax) relies on getting the right balance of additional tax with minimal distortion of production and investment decisions. This is difficult in many scenarios, but even more so for a post-conflict country like Libya which lacks a track record in mining and where exploration is not even at the grassroots stage. 3 Creating a transparent and effective fiscal system is of benefit to government and investor alike.

Chapter 2 profiles the Libyan mining industry and how prepared it is for capitalising on foreign interest and attracting investment. Chapter 3 identifies the factors that create an ideal fiscal regime to support mining and explains the significance to investors of neutrality; clarity and transparency; stability; equity and the level of government take. Chapter 4 briefly explains the
1

Taib, M., The Mineral Industry of Libya 2009 (United States Geological Survey Minerals Yearbook, published April 2011) 2 Al Kilani, I., Libya Oil Regulation 2012 in Getting the Deal Through 2012 www.gettingthedealthrough.com p1 3 Land, B., The Rate of Return Approach to Progressive Profit Sharing in Mining in Otto, J.M., Taxation of Mineral Enterprises (London: Graham & Trotman Ltd, 1995) p 103

revenue management mechanisms of a minerals rent resource tax in comparison to the current corporate taxation in Libya.Chapter 5 discusses the background, application and projected impact of the Australian Minerals Resource Rent Tax (MRRT). Chapter 6 concludes with a comparison between the Libyan and Australian mining sectors and considers whether any elements of the MRRT are appropriate for Libya to adapt or adopt into its own fiscal regime.

LIBYAN MINING INDUSTRY: PROFILE AND PREPAREDNESS

Libya reportedly has the largest iron ore reserve in the world,4 but doesnt have the transport infrastructure to make those commodities commercially viable for foreign export. There has been minimal geological exploration largely due to the remoteness and lack of infrastructure to travel. To date, there are known economic supplies of clays, coal, dimension stone, diatomite, dolomite, gold, gypsum, iron ore, limestone, salt, silica sand, and travertine. 5

Libya utilises a mix of civil law and Islamic law. In relation to mining, in 1971, the Libyan Revolutionary Command Council issued Law No 2/1971 Concerning Mines and Quarries. There have been minor amendments since, but the mining code remains a fairly rudimentary piece of legislation that has not kept pace with developments elsewhere and is silent on many of the issues considered standard in mining legislation around the world.

By comparison, neighbouring Algeria reformed its mining legislation in 2001 and has seen a major increase in mineral exploration and production.6 The equally oil-dominant Saudi Arabia made a conscious decision to diversify beyond oil and gas and now boasts gold, copper, bauxite mining and the worlds largest aluminium smelter.7 Afghanistan, after a prolonged period of conflict, has benefited from an extensive geological survey that reports mineral resources worth
4

Libya: Hydrocarbons and Mining US Library of Congress http://memory.loc.gov/cgibin/query/r?frd/cstdy:@field(DOCID+ly0077) (last accessed 24 July 2012) 5 General Peoples Committee for Industry, Economy and Commerce, 2010, p 5 -12 referred to in 2009 Mineral Yearbook US Geological Survey 6 Michalski, B., The Mineral Industry of Algeria 1994, (United States Geological Survey Minerals Yearbook published May 1995) 7 Mining Sector in the Kingdom of Saudi Arabia U.S.-Saudi Arabian Business Council, 2008 http://www.ussabc.org/files/public/Mining_Brochure.pdf (last accessed 21 July 2012)

USD$3 trillion and significant investment has commenced. 8 In the meantime, countries like Australia have experienced a mining boom due to high commodity prices and/or volumes for iron ore, gold, nickel, copper, bauxite, uranium, coal and zinc - among other minerals. 9

Given the successful change of political leadership in Libya, and if Libya follows the above examples, there may be renewed interest in exploring for non-petroleum minerals by foreign and domestic companies. Equally, the new government may look to increase and diversify its resource exploitation and maximise revenue. This period of optimism and political flux is an opportune time to gather geological data, review the fiscal regime, and to prepare the mining code and licensing/regulatory bodies for the creation of a vibrant and attractive investment climate that benefits both Libya and investors.

IDEAL FISCAL REGIME TO SUPPORT MINING

An effective minerals taxation system must begin with a clear understanding of the objectives and how they relate to the needs, opportunities and decisional criteria of potential investors. 10 For government, taxation policy has both economic and political dimensions and its objectives are broader than that of private industry. In addition to revenue collection, governments often view taxes as a way of encouraging or discouraging various kinds of private sector decisions. Both will share an interest in minimising leakage, promoting efficiency in discovery and recovery, and will want projects that generate high levels of surplus revenue. 11

The criteria by which fiscal regimes are assessed vary slightly between economists, government and investors. This paper has considered several fiscal instruments and chosen to headline them

Farmer, B., Afghanistan claims mineral wealth is worth $3 trillion 17 July 2010 http://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7835657/Afghanistan-claims-mineral-wealth-isworth-3trillion.html (last accessed 29 July 2012) 9 2011 WA Mineral and Petroleum Statistics Digest, Department of Mines and Petroleum http://www.dmp.wa.gov.au/documents/121857_Stats_Digest_2011.pdf (Last accessed 24 July 2012) 10 Otto, J., Batarseh, M.L., and Cordes, J., Global Mining Taxation Comparative Study 2nd ed (Golden, CO, USA: Colorado School of Mines, 2000) p5 11 Otto, J., Batarseh, M.L., and Cordes, J., Global Mining Taxation Comparative Study 2nd ed (Golden, CO, USA: Colorado School of Mines, 2000) p7

under the following five standards: neutrality; clarity and transparency; stability; equity; and government take.

3.1

Neutrality

A tax system that is non-neutral will not realise investment and a too generous or too onerous one will often be subjected to subsequent modification, stripping it of stability. Ideally, a neutral tax system applied to one particular industry and not to others, means that it does not divert investment to or from that industry. 12 In the absence of any taxes, competitive companies are assumed to make decisions that efficiently allocate societys limited resources because a more efficient allocation of resources means a larger overall economy and therefore a higher tax capacity. 13 This concept of efficient allocation includes not imposing special tax incentives or penalties which would otherwise affect an investment decision.

Ensuring neutrality in a fiscal system means ensuring that the action or project remains viable after the fiscal instrument has been applied. 14 It does not change marginal decisions about investment, production, trade or mine closure that would have been made in the absence of tax. A neutral tax policy can however, be used by government to enhance economic efficiency by correcting externalities that arise when private and social interests diverge and the market fails to act. For example, governments may use tax policy to reduce environmental pollution when the market, left to itself, would have polluted in excess of a socially optimal amount. 15

3.2

Clarity and Transparency

A tax system with clarity and transparency is one where investors, government administrators and the larger population are fully aware of (or able to be determine) how tax is assessed and collected. Efficient, non-arbitrary rules and regulations make taxes easy to administer and
12

Garnault, R., and Clunies-Ross, A.C., Taxation of Mineral Rents (Oxford, UK: Oxford University Press, 1983) p126 13 Garnault, R., and Clunies-Ross, A.C., Taxation of Mineral Rents (Oxford, UK: Oxford University Press, 1983) p87 14 Hogan, L., and Goldsworthy, B., International mineral taxation: Experiences and issues in The Taxation of Petroleum and Minerals: Principles, Problems and Practice Daniel, P., Keen, M., and McPherson, C., (Eds) (Abingdon, UK: Routledge, 2010) p132 15 Daniel, P., Goldsworthy, B., Maliszewski, M., Puyo, D.M., and Watson, A., Evaluating fiscal regimes for resource projects: An example from oil development in The Taxation of Petroleum and Minerals: Principles, Problems and Practice Daniel, P., Keen, M., and McPherson, C., (Eds) (Abingdon, UK: Routledge, 2010) p190

difficult to evade. A complicated method of determining tax liability increases both the incentive for companies to focus on finding tax loopholes and the opportunities for corruption. 16

In contrast, a transparent tax system allows companies to better forecast their revenues and returns. For listed companies, projected returns are important to shareholders and affect their share price. Investors are able to model the consequences of alternative project decisions or assess the impact of external events in the international market. Government can better forecast a budget surplus or deficit and pre-emptively act with appropriate measures. It also allows the public to scrutinise what companies pay for extracting the nations assets; what governments receive; and how much should be available for the nations benefit.

The practical application of both clarity and transparency is firstly, where institutions are assigned distinct roles so as to avoid confusion and conflict of interest, and secondly, where there is an explicit basis for taxation so that tax administrators do not carry out their job in a discretionary and non-transparent fashion.17

3.3

Stability

Among the factors that mining companies consider when assessing the risk of a project is the stability of the tax regime. The higher the risk a company is prepared to take, then the higher the return they will expect. If a company is investing millions or billions of dollars in a project then they do not want the tax system or rate to change arbitrarily or detrimentally once their capital is sunk and no longer mobile.

Governments want to be able to adjust the tax rate, application or collection depending upon a change of circumstances. But equally importantly, they want to attract investment. Given the risk-return trade-off for firms, the greater the perception of stability, the lower the return

16

Otto, J., Andrews, C. B., Cawood, F., Mining Royalties : A Global Study of their Impact on Investors, Government, and Civil Society (Herndon, CA, USA: World Bank Publications, 2006) p11 17 Calder, J., Resource tax administration: Functions, procedures and institutions in The Taxation of Petroleum and Minerals: Principles, Problems and Practice (Daniel, P., Keen, M., and McPherson, C., (Eds) Abingdon, UK: Routledge, 2010) p367

expected and therefore the greater share of mining revenue that the government can (in theory) collect by way of taxes.18

Companies often seek a tax stabilisation clause in mining agreements, particularly in high risk countries. Low-income developing countries seeking to attract investment are frequently unable to resist such demands and so accede. But there is no guarantee that subsequent governments will not reject the tax stabilisation, particularly as the commodity price and known quantity or quality increases or the country risk reduces, or simply because the balance of power has shifted. As other investors come in to a country, the economic importance of one project or one company diminishes. A stable fiscal regime is therefore one that can be flexible in accommodating the priorities of both investors and government when commodity prices move high or low.19

3.4

Equity

The concept of equitable or fair allocation of tax burdens among all taxpayers is based upon some definition of ability-to-pay.20 Many nations have applied taxation (in the form of royalties) based upon the ability-to-pay. The approaches vary, but in general take into account both the value of the mineral produced and certain allowable costs (eg capital costs, marketing costs, transportation costs, handling costs, insurance costs).21 Therefore, taxes should be profit-based, the effect of any adjustment should not increase uncertainties for the investor or the government,
22

and its measures should apply equally to participants in the industry. An equitable tax system

should not give competitive advantage to one faction over the others, but arguably tax stabilisation incentives to [large] companies for large pioneering projects are inequitable. A counter-argument would be that pioneering projects take a larger risk than smaller or subsequent projects, and so the uneven risk cancels out the uneven tax application.

18

Otto, J., Andrews, C. B., Cawood, F., Mining Royalties : A Global Study of their Impact on Investors, Government, and Civil Society (Herndon, CA, USA: World Bank Publications, 2006) p12 19 Briggs, S., How competitive are the fiscal regimes of Chile and Colombia for foreign mining investment? (CEPMLP Annual Review Issue 7, 2003) p12 20 Otto, J., Batarseh, M.L., and Cordes, J., Global Mining Taxation Comparative Study (2nd ed )(Golden, CO, USA: Colorado School of Mines, 2000) p6 21 Otto, J., Craig, A., Cawood, F., et al Mining Royalties: A Global Study of Their Impact on Investors, Government and Civil Society (Washington, US: World Bank Publications, 2006) p53 22 Garnault, R., and Clunies-Ross, A.C., Taxation of Mineral Rents (Oxford, UK: Oxford University Press, 1983) p186

3.5

Government Take

Government take can be in the form of state participation or equity in a project, but equally can refer to the level of taxation. While state participation is more common in the petroleum industry, it is not so prevalent in mining where royalties and other taxes are preferred. The level of government take depends upon what the country wants to achieve. A country may have a low take to attract more investment, to compensate for perceptions of high fiscal risk, high costs, small volumes, high geological risk, or simply because of a belief in a low tax environment for business in general. 23 The lower the government take, the more attractive the fiscal regime would be to investors. Australia however, has chosen to raise its government take.

REVENUE MANAGEMENT MECHANISMS

In countries where mineral rights belong to the state, the extraction of mineral resources provides a financial benefit to the government through export earnings. It also supplies revenue through taxation. To successfully balance the objectives of government and investors, taxation should ideally be targeted at the economic rent 24 and no more. Figures 1(a) and 1(b) (over) illustrate a [neutral] rent-based tax against a [non-neutral] unit-based tax.

23

Nakhle, C., Petroleum fiscal regimes: Evolution and challenges in The Taxation of Petroleum and Minerals: Principles, Problems and Practice (Daniel, P., Keen, M., and McPherson, C., (Eds) Abingdon, UK: Routledge, 2010) p105 24 Economic rent is the surplus after subtracting from revenue all costs of production, including: Recurrent and capital costs, and a level of normal profit sufficient to attract and retain investment in a project, i.e. to compensate investors for the timing and risk of its cash flows, but excluding loan interest expenses.

Figure 1(a) A rent-based tax is efficient because changes in the tax rate do not increase the unit cost of production and the cut-off grade.

Figure 1(b) A unit-based tax increases the unit cost of production and therefore the cutoff grade necessary to maintain margins. Highgrading results in a reduction in reserves and inefficient exploitation of the resource.
Source: Pietro Guj, University of Western Australia, 201225

4.1

General Tax Instruments

Having determined that maximising revenue from minerals is the objective and indeed, priority, of a wise and responsible26 government, a sensible balance of conditions is necessary. If (i) mineral exploitation is by private firms, (ii) externalities are compensated, (iii) the tax system is

25

Guj, P., Mineral Resource Rent Tax in Australia (presentation at the CEPMLP Annual Mining Seminar Minerals Taxation and Sustainable Development, London, 2012) 26 Garnault, R., and Clunies-Ross, A.C., Taxation of Mineral Rents (Oxford, UK: Oxford University Press, 1983) p2

otherwise neutral (in the sense of not distorting production decisions), and (iv) the government spends wisely and responsible, then it is better placed to extract the most return. 27

It is logical therefore, that multiple tax instruments will be needed. Ross Garnault and Anthony Clunies Ross identified six broad types of tax28 of which, for the purpose of this discussion, resource rent tax (RRT tax on realised net present value) is most relevant.29

Resource rent taxation is the most efficient in principle as royalties distort extraction and exploration (see figures 1a and 1b above), but royalties may still have an important role. The reason is twofold: to assure some revenue from day one of production; and to set the pace of extraction/avoid over-extraction when contract period is short (implicit depletion policy). Of course, there are problems of regular corporate income tax, but it is usually included to create creditable tax and consistent treatment with other sectors. So the ideal combination then becomes: (1) royalty + (2) CIT30 + (3) rent capture mechanism.31 Taxation in Libya Application and Flaws

4.2

Unlike Australia, Libya does not have a specific tax for mining revenue. Libyas taxation framework dates from pre-independence when the Income Tax Act (Act No. LIV of 1948) was passed. This was reformed by Law No. (11) of 1372 P.D (2004) regarding Income Tax. A new Income Tax Law (Law 7 of 2010) became effective on 28 April 2010. The new law replaces the previous scale rates of 15% to 40%32 on taxable profits with a new flat rate tax of 20%.33

27 28

Garnault, R., and Clunies-Ross, A.C., Taxation of Mineral Rents (Oxford, UK: Oxford University Press, 1983) p3 They are: the fixed fee (a lump sum for access to the resource once the right to mine is granted); specific or ad valorem duty (a royalty based upon the volume or sales value of the mineral); higher rates of proportional income tax (corporate income tax (CIT) at a rate higher than applied to non -mining); progressive profit tax (progressively higher CIT as the rate of return on invested capital rises); resource rent tax (RRT tax on realised net present value); and Brown tax (a tax on cash flow all sales revenue less all cash outlay) 29 Garnault, R and Clunies Ross, A, Taxation of Mineral Rents (Oxford, UK, Clarendon Press, 1983), p7 30 CIT (corporate income tax) 31 Daniel, P., Taxation of Mining: Features, Principles, Issues (presentation at the CEPMLP Annual Mining Seminar Minerals Taxation and Sustainable Development, London, 27 June 2012) 32 Otman, W., and Karlberg, E., The Libyan Economy: Economic Diversification and International Repositioning (London: Springer, 2007) p74-75 33 KPMG Global Corporate Tax Rates Table http://www.kpmg.com/Global/en/services/Tax/tax-tools-andresources/Pages/tax-rates-online.aspx (Last accessed 10 January 2013)

For guidance on taxing of resources in Libya, this paper looks to their petroleum sector. Specific royalties and corporate income tax for petroleum are referred to in standard Exploration and Product Sharing Agreements (EPSA) between the National Oil Company (NOC) and the various international oil companies and services providers. The rates are contained in the Petroleum Act No.25 of 1955 (Amended 2002). A royalty of 14.5% applies to natural gas and petroleum. The royalty rate for crude oil depends upon the market price, but the total rent, royalties and fees must not be more than 16.67% of the value of the crude oil exported. In addition, the concession holder must pay a minimum 65% of profit as tax.34 There is no equivalent royalty or profit tax for non-petroleum minerals.

The 1997 Law No. 5 Concerning Encouragement of Foreign Capital Investment and the subsequent Law No. 9 of 2010 on Investment Promotion allows for 100 per cent foreign equity ownership of companies licensed under the law. It provides for various preferential treatments for licensed projects, such as an exemption from corporate income tax for 5 years with a possible extension of 3 years provided net profits were reinvested in the project. There is an exemption from customs duties on imports of machinery, tools, and equipment needed for the execution of the project to continue for a period of 5 years during the operation of the project. It also provided for an exemption from excise taxes on exported goods.35

Tax is imposed annually on net income accrued through the year. Libyan companies and branches of companies are taxed on the basis of their quarterly submitted tax declarations, duly supported by audited tax statements. Net operating losses may be carried forward for 5 years. 36

Libya has corporate and petroleum taxes, but the reality is that they also have an inefficient tax collection system, which is depriving the Libyan government of massive revenue.37 Anecdotal information from media sources states everyone in Libya is waiting for new laws to liberalise

34 35

Petroleum Act No.25 of 1955 (Amended 2002) Articles 13(1)(c) and 14(1)(a) Otman, W., and Karlberg, E., The Libyan Economy: Economic Diversification and International Repositioning (London: Springer, 2007) p69 36 Income Tax Law (Law 7 of 2010) Article 42 37 Otman, W., and Karlberg, E., The Libyan Economy: Economic Diversification and International Repositioning (London: Springer, 2007) p 407

the economy, which will come. All current agreements will be up for review, and that is bound to include taxation.38 Consideration of other taxation instruments is therefore timely.

AUSTRALIAN MINING INDUSTRY AND MINERALS RENT RESOURCE TAX

Australia has a complicated fiscal framework with both the Commonwealth government (ie Federal government) and State governments having legislative and fiscal rights and responsibilities in respect of mining projects. Ownership of on-shore minerals is vested in the states with State governments having power over mineral leasing, the imposition of royalties and the provision of infrastructure.39

In 2011, the Western Australia (WA) Department of Mines and Petroleum collected more than $3.9 billion in royalties (as opposed to taxation of company income) from mineral producers in WA. 40 Royalties, as a charge for the right to exploit the minerals, are generally based on a fixed amount per tonne of production or on a fixed percentage of the value of production. They are the main source of State government revenue from mining projects. Despite this, the Australian Productivity Commission concluded that Australias current system of state based, mainly ad-valorem royalties was inefficient, a deterrent to investment particularly in relation to marginal projects, prone to price volatility and incapable of capturing windfall profits in periods of high mineral prices. 41 Federal government mining revenue is collected as income tax levied at the corporate tax rate of 30% of taxable income, which is broadly calculated as assessable income less deductible expenses. The application of the corporate tax system to mining companies is similar to other companies with carry-forward loss provisions, capital gains tax, accelerated depreciation for capital equipment, full deductibility of exploration expenses and
38

Email correspondence with Michel Cousins, Editor-in-Chief of the Libya Herald http://www.libyaherald.com/ dated 28 July 2012 39 Garnault, R and Clunies Ross, A, Taxation of Mineral Rents (Oxford, UK, Clarendon Press, 1983), p 244 40 The [Western Australian] Department of Mines and Petroleum Mineral Royalties http://www.dmp.wa.gov.au/4407.aspx#1549 (Last accessed 24 July 2012) 41 Australian Productivity Commission, Mining and Minerals Processing in Australia Volume 3 Chapter 14 Royalties, at pp. 360 - 371, http://www.pc.gov.au/__data/assets/pdf_file/0018/7218/07miningv3.pdf (last accessed 23 July 2012)

deductibility of capital expenditure incurred in certain mining activities 42. In addition to royalties and corporate income tax, mining companies are also liable for a variety of other taxes including the Goods and Services Sales Tax (GST), withholding taxes, stamp duty, payroll tax and fringe benefits tax. And yet, even with this list of taxes, the government determined that there was room for one more mining tax.

5.1

Background

Globally, resource commodity prices increased considerably from 2005 and mining companies in Australia were a major beneficiary. In 2008, the [then] Rudd government commissioned a comprehensive review of Australias tax system. In 2010, Australia's Future Tax System Review now known as the Henry Review - recommended a range of reforms including a new Resource Rent Tax scheme for both mining and petroleum projects, and reduced corporate income tax. 43 Government first adopted the proposal, calling it Resource Super Profits Tax and proposed applying a flat rate of 40% to non-renewable commodities and refunding State and Territory royalties.44 By that stage, the mining boom was well under way and in the period 2005-2010, prices for iron ore had increased by over 400 per cent and prices for black coal had increased over 200 per cent.45 Government wanted a larger share of mining revenues, and had a responsibility to seek it.

The proposal was introduced for discussion, and despite prior industry consultation, a vocal and concerted resistance campaign was run by mining representatives. Prime Minister Rudd was ousted by his political party and replaced by Prime Minister Gillard. A modified Minerals Resource Rent Tax scheme was negotiated with reduced application and a reduced tax rate. Commodities other than iron ore, coal, oil and gas were not included, which reduces the number
42 43

Garnault, R and Clunies Ross, A, Taxation of Mineral Rents (Oxford, UK, Clarendon Press, 1983), at pp 331-42 Department of Treasury Australias Future Tax System http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/papers/Final_Report_Part_1/execu tive_summary.htm (last accessed 21 July 2012) 44 Department of Education, Employment and Workplace Relations, Stronger, Fairer, Simpler: A tax plan for our future Resource Super Profits Tax http://www.deewr.gov.au/Department/Documents/Files/10_Fact_sheet_Resource_Profit_Tax_Final.pdf (last accessed 28 July 2012) 45 Department of Education, Employment and Workplace Relations, Stronger, Fairer, Simpler: A tax plan for our future Mineral Resource Rent Tax http://www.deewr.gov.au/Department/Documents/Files/Final%20Tax%20policy%20Statement.pdf (last accessed 21 July 2012)

of affected companies from 2,500 to around 320. These commodities were not expected to pay significant amounts of resource rent tax, and excluding them allowed many companies to remain in their existing taxation regimes. From 1 July 2012, the MRRT applies to new and existing coal and iron ore projects in Australia and is payable on group mining profits of more than AUD$75 million in a year. 46

5.2

MRRT Assessment and Revenue Collection

MRRT applies at the valuation point which separates upstream and downstream operations, effectively taxing the value of the extracted resources and not the value added in the downstream activities such as processing. The basic MRRT rate is 30%, which is reduced by a 25% extraction allowance, making the effective tax rate 22.5%. Operating and capital expenses incurred from 1 July 2012 are immediately deductible, while unused losses may be carried forward and uplifted. 47

The taxpayer is able to apply pre-mining project losses to the mining project interest which originated from that pre-mining project interest. MRRT will provide a full credit for Commonwealth, State and Territory royalties paid by a taxpayer for a mining project by way of royalty allowances. MRRT will recognise past investments through an allowance, known as the starting base, which can be either:

the market value of past investment, written down over a period of up to 25 years; or the book value of past investment written down over a five year period.

Collection will be by lodging quarterly MRRT instalment liability notices and paying quarterly MRRT instalments.

Australia has decided that a combination of State royalty payment, Federal corporate income tax and a Federal resources tax is the right mix of taxation to be applied to mining. The State gets the royalty up front from the commencement of extraction (which under the MRRT is then refunded
46

Department of Treasury Fact Sheet: A New Resource Taxation Regime http://www.futuretax.gov.au/content/Content.aspx?doc=FactSheets/resource_tax_regime.htm (last accessed 23July) 47 Australian Taxation Office How MRRT affects you http://www.ato.gov.au/content/00319936.htm (last accessed 27 July 2012)

by the Federal Government to the company). The State is content because as the physical source of the asset, it receives an immediate and direct return on the value of their resources rather than a share of the federal allocation. The investor isnt necessarily as positive however, as the imposition of a royalty can make a low-grade ore operation uneconomic.48

The Australian Federal Government applies tax on the corporate income or profit of a mining company. This is more efficient because the tax doesnt change the optimal output of companies who are aiming to maximise profit and a marginal ore remains profitable. 49 A rent resource tax is applied on top of this, but only on the most lucrative resources iron ore and coal and only to those companies whose mining profits are more than AUD$75 million.

REJECT, ADOPT OR ADAPT - RECOMMENDATIONS AND CONCLUSION

Where a country is richly endowed with mineral resources, has a stable political and social environment, an inappropriate or poorly designed tax regime will frustrate efforts to attract investment.50 It is crucial that any new fiscal regime is broadly neutral in its application so that any development of Libyas mining industry is not stifled by investor skittishness.

This paper has reviewed both the Libyan mining industry and its taxation, and the Australian mining sector and revenue collection, but also considers if it is appropriate for a given country to copy and transfer a policy that works across boundaries in order to formulate national mineral policy. The response is that a resource rent tax is held up as the optimum way to maximise mining revenue. Australia has considered and recently implemented a minerals rent resource tax. It has the benefit of an efficient and effective tax system; a transparent and lucrative mining industry; and a robust review system (the Australian parliament and civil society). Libya can take advantage of Australias experience and consider if the MRRT would benefit Libya.
48

Otto, J., Craig, A., Cawood, F., et al Mining Royalties: A Global Study of Their Impact on Investors, Government and Civil Society (Washington, US: World Bank Publications, 2006) p9 49 Otto, J., Craig, A., Cawood, F., et al Mining Royalties: A Global Study of Their Impact on Investors, Government and Civil Society (Washington, US: World Bank Publications, 2006) p10 50 Otto, J., and Cordes, J., The Regulation of Mineral Enterprises: A Global Perspective on Economics, Law and Policy (Denver, Colorado: Rocky Mountain Mineral Law Foundation, 2002) p37

As the extent of Libyas geology is not fully known, it is difficult to determine the economic potential of the sector. However, if the estimates and current indications should prove to be accurate including sizeable, high-grade iron ore deposits then a broad MRRT could be utilised. In Australia, the MRRT was reduced in application to just iron ore and coal because of mining company opposition. The tax was in addition to their existing operating costs and therefore unwelcome. In Libya, where there is minimal domestic mining and no foreign investment, an MRRT could be applied from the outset to all minerals. Incoming companies would be aware that the tax applied universally. The skill would be in determining the appropriate level of tax and ensuring that there was still sufficient commercial reason for investors to take a chance on Libyas fledgling industry.

Libya already has a valuable petroleum industry. It could have a valuable mining industry. The country has tax incentives for foreign investment. But in order to diversify beyond oil and gas, Libya needs to ensure that whatever mining tax system it implements reflects the five standards outlined earlier: neutrality; clarity and transparency; stability; equity; and government take. Afterall, to paraphrase Waniss Otman, 51 Libya still has a long way to go to ensure that foreign investors, with every mineral-endowed country to choose from in a globalised world, would necessarily choose to invest their capital in Libya. A valuable geology combined with a neutral, transparent and stable tax system, that is familiar to foreign mining companies, would give comfort.

51

Otman, W., and Karlberg, E., The Libyan Economy: Economic Diversification and International Repositioning (London: Springer, 2007) p281

BIBLIOGRAPHY PRIMARY SOURCES Legislation Libya Income Tax Act (Act No. LIV of 1948)

Income Tax Law (Law 7 of 2010)

Law No. 5 Concerning Encouragement of Foreign Capital Investment (1997)

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Australia Minerals Rent Resource Tax Act (2012)

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Articles in Books Calder, J., Resource tax administration: Functions, procedures and institutions in The Taxation of Petroleum and Minerals: Principles, Problems and Practice (Daniel, P., Keen, M., and McPherson, C., Eds (Abingdon, UK: Routledge, 2010) p340-377

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