By David Hansen

Law360 (April 15, 2020, 8:00 PM EDT) -- Targeted tax relief can sustain the mining industries of developing nations during the economic slump caused by the novel coronavirus pandemic, according to a paper from two international development organizations.

Policies such as deferring payroll and value-added taxes will help marginal operations compared with an income tax cut, which only helps profitable businesses, said the paper, published April 8 by the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development and the African Tax Administration Forum.

The coronavirus is already hobbling the mining industries of economically challenged nations, the paper said. Countries such as Mongolia, Peru, Madagascar and Bolivia are shutting down mines, and closure of mine operations in South Africa may cause an 8% drop in the country's gross domestic product in 2020, according to the paper.

Proactive tax policies can blunt the economic impact, the groups said. Mining companies would have an incentive to retain employees if governments exempted them from payroll taxes, and countries that rely heavily on those taxes — such as Zambia, where they made up almost 15% of total government revenue in 2017 — may consider deferring payments, according to the paper.

Value-added tax relief also will help the mining sector, the development organizations said. Speeding up VAT refunds will help company cash flows and take advantage of favorable exchange rates, the paper said. The organizations suggested exempting goods and services used by extractive industries as another approach, along with offsetting VAT credits against other taxes.

Another possible form of tax relief would be suspending tariffs on imported materials essential to mining, such as explosives, chemical reagents and fuel, the paper said. Giving companies a deduction for expenditures necessary to protect the health of employees is another, and reducing or waiving royalty payments paid by mining companies should also be considered, according to the organizations.

Not all forms of tax relief would be effective, the groups said. The paper advised against income tax cuts or holidays, which would only benefit profitable companies, and recommended countries continue to impose withholding taxes on payments abroad, such as interest on foreign loans, because poorer nations rely on them for government revenue and they are easy to collect.

Any aid could come with conditions, the paper said. Governments could require companies to retain all workers at regular salaries, withhold bonuses and salary increases for executives and cancel dividends. They also should mandate transparent transfer pricing practices and abandon tax avoidance practices, the groups said.

Report co-author Alexandra Readhead told Law360 that tax relief aid should be targeted toward mining operations that need the aid. Companies that mine precious metals in high demand probably do not warrant aid, while those mining commodities such as copper and aluminum might, she said. 

"It is really important to do your homework," said Readhead, who is the International Institute for Sustainable Development's lead for tax and extractives. She wrote the report with Thomas Lassourd, IISD policy adviser. 

The response to the paper has been very positive, Readhead said.

"There is a lot of appetite by governments for sector-specific guidance," she said. "Everyone is under pressure to come up with solutions and stimulus packages. We can offer a framework governments can apply when considering relief."

The paper will be the subject of a webinar Thursday by the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development.

Representatives from the African Tax Administration Forum did not respond to requests for comment.

--Editing by Neil Cohen.

Update: This article has been updated to include comment from an IISD official.

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