Royalties and efficient way to tax mining

Mining companies and miners are continuing to grumble about the royalties they have to pay on the gross value of their output during this time of falling global prices which are crimping their profit margins.

No taxpayer likes paying taxes so the problems facing miners need to be addressed very carefully, to see if the royalty system needs to be adjusted to cope with price cycles or whether the fact that it is a percentage of gross value is self-correcting with the royalty payment rising and falling in line with global prices and growing or falling volumes.

Royalties are a fee charged by the owner of the minerals and paid by those who mine the minerals. In some countries a lot of the minerals are privately owned, either by the owner of the land or by some concern that acquired the mineral rights through some sort of treaty separate from the land, or maintained ownership of the mineral rights when selling the land above.

In these countries, such as the United Kingdom, the landowner can demand royalties from anyone who he grants permission to mine, with the level of the royalties fixed like a rent by the landowner or negotiated in a business deal. There is no set percentage, only what the traffic will bear.

In other countries, such as Zimbabwe after 1933 the mineral rights have been owned by the State, formally vested in the crown when Southern Rhodesia was formally a British colony and then in the President when Zimbabwe became an independent republic, although the UDI regime after 1969 made the same assertion.

As with everything else vested in a head of state this has never meant that the British monarch or the Zimbabwean President actually owned the mineral rights, only that mining rights could only be conferred and miners licensed through laws and through officials in office.

The actual colonisation of Zimbabwe was built on a spurious treaty involving mineral rights, the Rudd Concession. This involved three representatives of a small private company, headed by Cecil Rhodes, negotiating in bad faith with Lobengula for the mineral rights of all his domains, interpreted by the company as Matabeleland, Mashonaland and adjacent territories.

Even if Lobengula had had the proposed concession accurately translated, there were oral assurances he had sought and been given, which basically gave the impression that a dozen or so miners would be active at any one time, which were not in the concession. He tried to repudiate the concession within a year on the basis that the other side had not been genuine, but found in almost impossible to get round obstructive British officials, many of which had been paid off by Cecil Rhodes.

But that concession was used to launch the British South Africa Company, with the concession being the payment for large blocks of shares in the BSA Company by Rhodes and friends. Other blocks went to a rival outfit who had also been negotiating with Lobengula to buy their agreement and make sure there would be a united front for colonisation and no interminable arguments in British courts between rival concerns.

The BSA Company extended its ownership, in British law, of the mineral rights of Southern and then Northern Rhodesia through unequal treaties with other chiefs. It used its ownership, in British law, of the mineral rights of Mashonaland and then Matabeleland, then Manicaland then Barotseland and then the rest of Northern Rhodesia, just being beaten to Katanga by agents of the Belgian king.

With the backing of British courts, and so Cape courts, assured in any dispute the company set the terms for mineral exploration and then mining concessions. Gold claims were dished out as payment to the occupation forces and others could buy in for fairly low fees, the company being keen to have the mineral resources mapped so wanted to encourage prospecting.

But an actual licence to mine was a totally different kettle of fish. Those who wanted to mine had to form and register a company and then assign half the shares to the BSA Company. This meant that if the expected second rand was found, the company would automatically own half.

The royalty income in the meantime would be half the dividend income, or the profits, of the mines. Even right back then most miners could make even the richest mine a losing proposition by manipulating accounts, giving themselves and their friends high salaries, and buying goods and services at extraordinarily high prices from each other. Basically the miners did their best to make sure there were no dividends to share.

There was also reluctance to open mines in the Rhodesias with this royalty In advance of 50 percent of the shares. The BSA company eventually backed down and started giving options of other royalty systems, including a cut of the output.

Even after Southern Rhodesia gained internal self-government in 1923, and at the same time took over the public company lands as public crown or state lands, the mineral rights remained with the BSA company, a fact confirmed by British law officers when colonialists said they had obtained the minerals with the land when they paid off the national debt accumulated by the company.

Eventually, in 1933, the Southern Rhodesia Government bought the Southern Rhodesia mineral rights at a knock-down price since this was when the Great Depression was raging with no end in sight after four years. It was in fact a bargain.

The BSA company held the Zambian rights and made most of its income from the royalties, taking far more out of the copper mines than either the Northern Rhodesian authorities or the shareholders of the copper mining companies. A settler revolt at the end of the Second World War saw an agreement to pay some of the royalties, a minority, to the Northern Rhodesian authorities and a promise to hand over the mineral rights in 1980.

They were in fact handed over in 1964 after Zambian independence and without really any further reason to exist, the British South Africa with now only very modest assets was merged into Anglo American.

In 1933 the Southern Rhodesia Government, on acquiring the mineral rights, set a zero tariff, planning on collecting its tax income at the profit stage when the mining companies paid company tax. That worked for a very long time, five decades at least, without much of a problem but then, and by now it was after independence, the growth of multinationals, transfer pricing when multinationals could make their profits appear in whatever jurisdiction they preferred, generally one without taxes, there were hardly any profits to tax, in fact large and prosperous companies were recording losses year after year.

Zimbabwe was not alone. Many mineral rich countries were in the same boat. This is when the mineral countries, where the State owned the mining rights, decided to switch back the old-fashioned royalties. Australia led the change.

Suddenly tax collection became very simple. Instead of rooms full of accountants having to fight rooms full of accountants all that was needed was a set of scales and the latest metal prices.

Zimbabwe does not have a single royalty percentage. Diamonds, and any other precious stonmes that may be mined, attract a 10 percent royalty. Platinum group metals are on seven percent. Gold is four percent with the first 500g in a month from a small-scale miner at 1 percent and the rest from that group at 2 percent. Base metals, including lithium, are 2 percent.

The actual percentages could be renegotiated, but the any deal that allowed a lower rate when prices were down would have to include much higher rates when prices rose. Australia, once again, has led the way yet again with a significant extra royalty on iron ores when prices and profits rocketed.

Zimbabwe should be careful about messing with the simple royalty system that does work. But having set royalty rates shifting up and down as global mineral prices moved up and down could work, although those administrating the tax would need to be alert to every potential attempt to manoeuvre a company around the rules without actually breaking the law.

Very simple tax codes have that advantage of not being easy to get around.-ebsinessweekl