Something Certain about Formalisation and Taxes

To tax or not to tax? On the government side the default answer is an obvious yes. Governments looking to formalize their artisanal gold sectors often see the ability to collect taxes as one of the primary benefits. But what if taxes are actually the problem? What if imposition of taxes, royalties and other fees are in fact one of the primary factors driving gold exporters and artisanal gold miners into informality? 

A new study commissioned by planetGOLD looks closely at this question, focussing on the question of taxes and formality in the nine phase 1 planetGOLD countries: Burkina Faso, Colombia, Ecuador, Guyana, Indonesia, Kenya, Peru, Mongolia and the Philippines. The study first documents the full fiscal regime in each country: the sum total of taxes, fees and royalties applied to miners, traders and exporters. This may be the most comprehensive comparison of ASGM fiscal regimes collated to date. 

Using this data the study then turns to the export sector. Here the relationship between high royalties and contraband exports is fairly clear. Once gold royalties rise above a certain, fairly low level, gold exports vanish rapidly into clandestine channels. This economic precept is demonstrated generally by the experience of African planetGOLD countries, which have high to very high royalty rates (5% in Kenya, 7.5% in Burkina Faso) and near total absence of legal gold exports.  

Further evidence is provided by two other planetGOLD countries – Mongolia and the Philippines – both of which conducted what amount to natural experiments on royalty rates and illegal exports. In both countries the central bank operated gold buying programs which successfully purchased large quantities of artisanal gold. And in both countries, the central banks opted to drastically raise tax rates (in Mongolia to 10% and the Philippines to 7%) which led to an immediate and drastic crash in legal gold sales. Both countries then reversed course, generating a slow but steady recovery in gold sales.  

Given this evidence, why don’t more governments keep royalties at a reasonable level? The study found that most of the policy advice on mineral royalties focusses on the large-scale mining sector where double digit royalty levels are not uncommon. Because these studies often originate in highly credentialed institutions such as the World Bank, they tend to be influential within finance ministries and central banks where royalties are often set. Unfortunately, these analyses have little applicability to the artisanal sector.

In the ASM gold supply chain, margins tend to be very small: a field trader’s margins typically run from 4-7%; unfortunately, an exporter’s margins run from 2-5%. A 2% royalty increase that sounds small in the finance ministry represents anywhere from 50-100% of an exporter's gross profit. How many businesses can lose half their gross revenue and survive? In such a situation many exporters seek out a clandestine land route to a neighbouring country with a lower royalty rate. 

Given this, how should governments set ASM gold royalty rate? 

One successful example is Guyana, which considers the feedback of miners and exporters and carefully monitors the royalty rates in neighbouring countries. Its current rate of 3.5% lies a full 1% below neighbouring Suriname, and was endorsed after long discussion by Guyana’s main miners and exporters association. 

When it comes to formalizing artisanal miners, the role of taxation is less clear cut. The capacity of governments to provide some form of secure mining tenure to ASM producers remains the major roadblock to formalizing artisanal miners. Where taxation does seem to play a role is with those miners who have acquired some form of mining title but then stalled on the road to full formalisation. For these miners, legal gold sales and income taxes are but one of cascading series of regulatory costs which also include environmental assessments, work place safety requirements, payroll taxes, equipment licensing fees and all the other fees associated with running a legal small business.  Many miners balk at this point, unable or unwilling to part with the income and time required for full legal conformity.  

Governments in the planetGOLD countries have shown only limited interest in lessening the fiscal and regulatory burdens of formality. Several have created simplified environmental licensing procedures. Guyana has suspended collection of payroll taxes. More than this seems unlikely to be forthcoming; regulatory authorities believe ASM producers simply have to accept some level of tax and administrative oversight as the cost of legally doing business.  

However, governments do have a vested interest in ensuring that those miners who have formalized sell the gold they produce via legal channels to legal gold exporters. Here the planetGOLD countries have tried a mix of incentives and enforcement. On the incentive side, both Ecuador and the Philippines have reduced or eliminated their export royalties for ASM producers selling their gold through their respective central bank (the legal exporter in both countries). On the enforcement side, several of the South American countries, including Colombia, Ecuador and Peru, have created electronic chain of custody databases as a way to track legal production and sales. Colombia cross refences its database with other domestic databases in order to check whether miners are spending gold proceeds they haven’t legally declared. 

Guyana, the most fully formalized of the planetGOLD countries, uses a mix of both stick and carrot: gold is tracked from production to export via a well-developed production tracking and traceability scheme. Officials at the Guyana Geology and Mines Commission regularly audit production records to verify that a producer’s volumes are broadly in line with that of neighbouring producers and the reasonable capacity of the area being worked. And for registered miners who can provide a track record of legal sales and proof they’ve been paying their income taxes, Guyana offers extensive tax breaks on production related costs such as fuel and lubricating oils, the importation of new equipment, and transportation in the mining interior. Beyond the one-time benefit of mineral tenure, these tax breaks offer gold miners an incentive to stay within the legal gold chain year after year.

In summary then, to tax or not to tax? The results of the new study suggest governments should tax lightly, harmonize closely with neighbours, monitor constantly, and consult widely with their own miners and exporters.  

Shawn Blore is an independent consultant and researcher with over 20 years’ experience working to ensure the compliance of high-value artisanal mineral supply chains with international standards.