Revenues, Costs, Taxes, Cash Flows
Taxes and Royalties
MNTC 409 - Mineral Economics
Doug Macaulay
Learning Outcomes
This video will assist you in
achieving the following Learning
Outcome(s) for this week:
• Explain factors that affect the
amount of tax a company will
pay, and calculate tax in set
problems [CLO 3, 6]
This material is copyrighted and is for the sole use of students registered in MNTC 409. This material shall not be distributed or disseminated to anyone other than students registered in MNTC 409.
Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the Queen’s University Senate’s Academic Integrity Policy Statement.
Key topics
• Effective tax rates
• Factors driving tax payable
• Example of tax calculations
This material is copyrighted and is for the sole use of students registered in MNTC 409. This material shall not be distributed or disseminated to anyone other than students registered in MNTC 409.
Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the Queen’s University Senate’s Academic Integrity Policy Statement.
Caveats
• Individual taxes, and tax regimes, are complex and subject to changes that
may be frequent and/or major
• This video aims to enhance understanding of generic aspects of taxes and
royalties and of the way they are calculated
• Examples are drawn from various sources and different tax years and systems
• Examples are simplified, and illustrative of general principles
Effective tax rates
Translating a pre-tax figure to post-tax
• Why translate?
• payment of taxes is mandatory
• more accurate measure of return to an investor or company
Effective tax rates
Translating a pre-tax figure to post-tax
• Why translate?
• payment of taxes is mandatory
• more accurate measure of return to an investor or company
• Effective tax rate can be used
• early stage of analysis or assessment
• rough estimate of tax impact
• before all information to calculate tax payable is available
Effective tax rates
Translating a pre-tax figure to post-tax
Estimated tax = effective tax rate X pre-tax income
Effective tax rates
Translating a pre-tax figure to post-tax
Estimated tax = effective tax rate X pre-tax income
Post-tax income = Pre-tax income - estimated tax
= Pre-tax income - (effective tax rate X pre-tax income)
= Pre-tax income (1 – effective tax rate)
Effective tax rates
Translating a pre-tax figure to post-tax
Estimated tax = effective tax rate X pre-tax income
Post-tax income = Pre-tax income - estimated tax
= Pre-tax income - (effective tax rate X pre-tax income)
= Pre-tax income (1 – effective tax rate)
So if effective tax rate is 38.5%
(1 – effective tax rate) = (1 – 0.385) = 0.615 = 61.5%
Effective tax rates
James Otto (2004)
• Copper mine financial model
• tax systems of 24 jurisdictions
• Measures of effective tax rate in each jurisdiction
• all major taxes and fees, including royalties
• Ranked jurisdictions from lowest to highest effective tax rate
From: “Mining Royalties: A Global Study of Their Impact on Investors, Government, and Civil Society” by James Otto, Craig Andrews, Fred Cawood,
Michael Doggett, Pietro Guj, Frank Stermole, John Stermole, and John Tilton. The International Bank for Reconstruction and Development (2006) (35)
Effective tax rates
Extracted from: Table 2.4. Comparative Economic Measures for a Model Copper Mine in Selected Jurisdictions, in:“Mining Royalties: A
Global Study of Their Impact on Investors, Government, and Civil Society” by James Otto, Craig Andrews, Fred Cawood, Michael Doggett,
Pietro Guj, Frank Stermole, John Stermole, and John Tilton. The International Bank for Reconstruction and Development (2006) (36)
Effective tax rates
Extracted from: Table 2.4. Comparative Economic Measures for a Model Copper Mine in Selected Jurisdictions, in:“Mining Royalties: A
Global Study of Their Impact on Investors, Government, and Civil Society” by James Otto, Craig Andrews, Fred Cawood, Michael Doggett,
Pietro Guj, Frank Stermole, John Stermole, and John Tilton. The International Bank for Reconstruction and Development (2006) (36)
Effective tax rates
Extracted from: Table 2.4. Comparative Economic Measures for a Model Copper Mine in Selected Jurisdictions, in:“Mining Royalties: A
Global Study of Their Impact on Investors, Government, and Civil Society” by James Otto, Craig Andrews, Fred Cawood, Michael Doggett,
Pietro Guj, Frank Stermole, John Stermole, and John Tilton. The International Bank for Reconstruction and Development (2006) (36)
Effective tax rates
Extracted from: Table 2.4. Comparative Economic Measures for a Model Copper Mine in Selected Jurisdictions, in:“Mining Royalties: A
Global Study of Their Impact on Investors, Government, and Civil Society” by James Otto, Craig Andrews, Fred Cawood, Michael Doggett,
Pietro Guj, Frank Stermole, John Stermole, and John Tilton. The International Bank for Reconstruction and Development (2006) (36)
Factors driving tax payable
Generic elements of each tax
• Type/kind of tax or royalty
• Tax base
• Tax rate
Following: “Mine Investment Analysis” by Dr. Donald W. Gentry and Dr. Thomas J. O’Neill. Society of Mining
Engineers of American Institute of Mining, Metallurgical, and Petroleum Engineers (1984) (165-166)
Factors driving tax payable
Generic approach to calculate each tax
• Type/kind of tax or royalty
• Tax base
Tax base X tax rate = amount payable
• Tax rate
Following: “Mine Investment Analysis” by Dr. Donald W. Gentry and Dr. Thomas J. O’Neill. Society of Mining
Engineers of American Institute of Mining, Metallurgical, and Petroleum Engineers (1984) (165-166)
Factors driving tax payable
Generic approach to calculate each tax
• Type/kind of tax or royalty Mining tax/royalty
Tax
Royalty
• Tax base Unit/value
NSR
Profit
• Tax rate Flat
Progressive
Factors driving tax payable
Generic approach to calculate each tax
• Type/kind of tax or royalty Mining tax/royalty Income tax
Tax Provincial
Royalty Federal
• Tax base Unit/value Taxable income
NSR Deductions
Profit
• Tax rate Flat General
Progressive Mining specific
Example of tax calculations
Steps to apply generic approach
• Determine what type(s) of tax is (are) to be calculated
• Ensure you have all appropriate information required
• Determine the order in which individual taxes should be calculated
• For each tax
• calculate the tax base
• determine the tax rate
• multiply the tax base by the tax rate
• Sum the individual taxes
Example of tax calculations
Illustrative worked example
• Problem – calculate total mining taxes payable
• Jurisdiction imposes two types of mining tax
• Royalty – 2% of net revenue (revenue less milling costs and
processing allowance)
• Tax – 16% of net profit over $100,000 (net profit is revenue less
operating costs, less permitted deductions and allowances); note
permitted deductions includes royalty paid
Example of tax calculations
Illustrative worked example
From: “Canadian mining taxation 2016”; PwC; accessed at: www.pwc.com/ca/canminingtax
Example of tax calculations
Illustrative worked example
• Determine type(s) of tax
• Ensure all information
• Determine order of taxes
• For each tax
• calculate the tax base
• determine the tax rate
• tax base X tax rate
• Sum the individual taxes
From: “Canadian mining taxation 2016”; PwC; accessed at: www.pwc.com/ca/canminingtax
Example of tax calculations
Illustrative worked example
• Determine type(s) of tax
• Ensure all information
• Determine order of taxes
• For each tax
• calculate the tax base
• determine the tax rate
• tax base X tax rate
• Sum the individual taxes
From: “Canadian mining taxation 2016”; PwC; accessed at: www.pwc.com/ca/canminingtax
Example of tax calculations
Illustrative worked example
• Determine type(s) of tax
• Ensure all information
• Determine order of taxes
• For each tax
• calculate the tax base
• determine the tax rate
• tax base X tax rate
• Sum the individual taxes
From: “Canadian mining taxation 2016”; PwC; accessed at: www.pwc.com/ca/canminingtax
Example of tax calculations
Illustrative worked example
• Determine type(s) of tax
• Ensure all information
• Determine order of taxes
• For each tax
• calculate the tax base
• determine the tax rate
• tax base X tax rate
• Sum the individual taxes
From: “Canadian mining taxation 2016”; PwC; accessed at: www.pwc.com/ca/canminingtax
Example of tax calculations
Illustrative worked example
• Determine type(s) of tax
• Ensure all information
• Determine order of taxes
• For each tax
• calculate the tax base
• determine the tax rate
• tax base X tax rate
• Sum the individual taxes
From: “Canadian mining taxation 2016”; PwC; accessed at: www.pwc.com/ca/canminingtax
Example of tax calculations
Illustrative worked example
• Determine type(s) of tax
• Ensure all information
• Determine order of taxes
• For each tax
• calculate the tax base
• determine the tax rate
• tax base X tax rate
• Sum the individual taxes
From: “Canadian mining taxation 2016”; PwC; accessed at: www.pwc.com/ca/canminingtax
Example of tax calculations
Illustrative worked example
• Determine type(s) of tax
• Ensure all information
• Determine order of taxes
• For each tax
• calculate the tax base
• determine the tax rate
• tax base X tax rate
• Sum the individual taxes
From: “Canadian mining taxation 2016”; PwC; accessed at: www.pwc.com/ca/canminingtax
Example of tax calculations
Illustrative worked example
• Determine type(s) of tax
• Ensure all information
• Determine order of taxes
• For each tax
• calculate the tax base
• determine the tax rate
• tax base X tax rate
• Sum the individual taxes
From: “Canadian mining taxation 2016”; PwC; accessed at: www.pwc.com/ca/canminingtax
Example of tax calculations
For assigned problems
• You will be provided information relevant to the type(s) of taxes to be
calculated to solve the problem
• In a two-part question, part 1 will be included in a pre-work
assessment to be completed before starting work on the assignment
Example of tax calculations
“Is a 2 percent ad valorem royalty more onerous than a
4 percent net profits royalty? This question is difficult to
answer because in reality each mineral deposit is
different and the tax system will affect it differently.“
From: “Mining Royalties: A Global Study of Their Impact on Investors, Government, and Civil Society” by James Otto, Craig Andrews, Fred Cawood,
Michael Doggett, Pietro Guj, Frank Stermole, John Stermole, and John Tilton. The International Bank for Reconstruction and Development (2006) (118)
Summary
• Effective tax rates can be
helpful, but use with caution
• Type, base, rate
• Generic approach
• base X rate = tax payable
• tax vs financial accounting
• order of taxes/royalties
• Specialist input critical
This material is copyrighted and is for the sole use of students registered in MNTC 409. This material shall not be distributed or disseminated to anyone other than students registered in MNTC 409.
Failure to abide by these conditions is a breach of copyright, and may also constitute a breach of academic integrity under the Queen’s University Senate’s Academic Integrity Policy Statement.
