One week before the Forum on mining royalties, the government of Quebec released a consultation document (available in French only) to feed the discussions that will take place during this event.
The government sets out in this document its intention to increase the royalty rate applicable in Quebec. In particular, it deplores the fact that half of the mining companies operating in Quebec did not pay royalties in 2011. In addition, in the government's view, the society has not benefited adequately from the exploitation of mineral resources, in light of the high commodity prices since the early 2000s.
The reform of the mining royalty regime that the government is committed to implement will be guided by two principles:
- Each company operating a mine in Quebec shall pay a minimum royalty to the government;
- All Quebecers shall get a greater share of the profits of mining companies when they are high.
Moreover, the government's decision as to the new mining tax regime will take into account the following tax policy considerations:
- Adequate sharing of the rent: The government intends to collect a portion of the excess profits of mining companies when the commodity prices are very high.
- Optimal tax base: The chosen tax base shall raise sufficient revenues for the government, encourage the influx of additional capital and be self-sufficient in the absence of excess profits.
- Economic efficiency: The new regime shall generate a stable cash inflow to the government and be fair to the mining companies. In this regard, companies generating the same amount of economic rent (i.e. profits beyond a threshold of acceptable performance based on risk) should be subject to the same tax rate. In addition, royalties paid by mining companies should be based on their operating results, regardless of the level of economic rent.
- Transparency and stability: The new regime shall allow mining companies to predictably assess the long-term tax liability associated with their activities. It shall also be transparent to the citizens.
- Administrative efficiency: The new regime shall be simple to administer, both for mining companies and the tax authorities.
- Competitiveness: The new regime shall allow mining companies operating in Quebec to be competitive on the global stage in order to maintain their activities and attract investment.
Based on the foregoing, the government favours the implementation of a hybrid system that would ensure minimum royalty revenues as well as an appropriate sharing of the economic rent. This regime would include the following two components:
- Guaranteed minimum revenues: Ad valorem royalties representing, for example, 5% of the gross value of the annual production of mining companies would be levied. Royalties could be modulated by adjusting the rate in respect of value added products or by setting the tax base to avoid penalizing processing activities.
- Sharing of the economic rent: Two options are being contemplated by the government to ensure that mining companies pay more royalties when they are highly profitable.
One approach would be to introduce a mining tax based on profits that would have the same base as the current regime, but the marginal rate would increase gradually once a certain level of profitability is reached. Thus, the higher the profitability of a mining company is, the higher the marginal tax rate would be.
Alternatively, it is proposed to establish a royalty regime based on economic rent. Rent would be calculated by subtracting from the mining profits a deduction corresponding to a reasonable return on investment. The amount thus obtained would be reduced by the ad valorem royalties paid by the company, then a tax rate of 30% would be applied to these "excess profits".
Actors in the mining industry are invited to share their comments and suggest changes to the proposed regime by participating in the forum on March 15, 2013 or by submitting a brief to the government.
Click here for a more detailed review of the consultation document.
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