A real options based framework for assessing the international attractiveness of mining taxation regimes

Abstract

In today's globalized world, mining capital is highly mobile. Therefore, countries are in a pressing need to design competitive mining tax codes to attract this capital. A country that has a higher tax rate drives mining investment elsewhere. When this happens, mineral deposits will never be discovered and mines will never be opened. In this paper, a real options based framework for assessing the international attractiveness of mining taxation regimes was developed. The framework integrates three financial metrics, namely, the average effective tax rate, marginal effective tax rate, and the real option to abandon. To illustrate its practical application, the framework was applied to assess the international attractiveness of Zambia's copper taxation regime. The assessment was based on two fiscal instruments, namely, mineral royalty and corporate income tax. Additionally, copper taxation regimes of four countries in the Southern African Development Community (SADC) and three countries outside the borders of Africa were selected for the analysis. These countries are Australia, Chile, Peru, the Democratic Republic of the Congo, Angola, South Africa, and Botswana. It was drawn from the results that Zambia's copper taxation regime yielding an index of 0.65 was the least attractive.