fiscal reform in libya

8/21/2019 FISCAL REFORM IN LIBYA

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FISCAL REFORM IN LIBYA TO BENEFIT

FROM NON-PETROLEUM MINERAL

POTENTIALCONSIDERING THE

AUSTRALIAN MINERALS RESOURCE

RENT TAX MODEL

Wendy Treasure*

August 2012

ABSTRACT: Given the change of political leadership after 2011 and the July 2012 election,

the new Libyan government will look to increase and diversify its resourceexploitation/production. Equally, there will be more interest in exploring for non-petroleumminerals by foreign and domestic companies. What does Libya have to prepare to takeadvantage of mining revenues? Companies will want clarity on how taxes will be assessed and

collected. The Libyan government will want to extract the largest and most effective amount ofrevenue. The Libyan people will want to see that the revenues generated by their national assetsare invested or utilised for the benefit of Libyans. The question is how best can each of theserequirements be met? Australia is an experienced and dynamic mining country that has just

introduced a new resource tax. Can the Australian model be of benefit to the new Libyan miningindustry? This paper seeks to examine the state of the fiscal regime[s] in Libya and recommend

mechanisms to optimally access the resultant mining revenue. The paper establishes the

requirements for an ideal fiscal regime, assesses the health of the Libyan mining industry and theutility of the current corporate tax and identifies what can be adopted from the Australianmining industry and their recent minerals resource rent tax. The paper concludes with the belief

that a broadly applied minerals resource rent tax would appeal to investors.

* The author is an Australian trained solicitor, admitted to practice in Western Australia and the UK with abackground in administrative law, mining and native title. She has worked in Australia, South Africa and the UKand is an LLM (Mineral Law and Policy) graduate of the CEPMLP. Her specific interest is in mining operations inWest Africa, Australia and emerging industries in North Africa and the Middle East - particularly on developmentand investment in Libyan mining. She is a member of Women in Mining (UK) and Women in Mining (WA). Email:[email protected] in CEPMLP Annual Review - CAR Volume 16 (2013) Editor-in-Chief: Wendy Treasure
mailto:[email protected]:[email protected]:[email protected]


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TABLE OF CONTENTS

ABBREVIATIONS .................................................................................................................... i

1 INTRODUCTION ...............................................................................................................1

2 LIBYAN MINING INDUSTRY: PROFILE AND PREPAREDNESS .................................2

3 IDEAL FISCAL REGIME TO SUPPORT MINING ...........................................................3

3.1 Neutrality ........................................................................................................................4

3.2 Clarity and Transparency .................................................................................................4

3.3 Stability ...........................................................................................................................5

3.4 Equity ..............................................................................................................................6

3.5 Government Take ............................................................................................................7

4 REVENUE MANAGEMENT MECHANISMS ..................................................................7

4.1 General Tax Instruments ..................................................................................................8

4.2 Taxation in LibyaApplication and Flaws ......................................................................9

5 AUSTRALIAN MINING INDUSTRY AND MINERALS RENT RESOURCE TAX ....... 11

5.1 Background ................................................................................................................... 12

5.2 MRRT Assessment and Revenue Collection .................................................................. 13

6 REJECT, ADOPT OR ADAPT - RECOMMENDATIONS AND CONCLUSION ............ 14

BIBLIOGRAPHY ..................................................................................................................... 16


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i

ABBREVIATIONS

AUD Australian Dollar

CIT Corporate Income Tax

MRRT Minerals Resource Rent Tax

RRT Resource Rent Tax


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1

1 INTRODUCTION

At first glance, Australia and Libya do not appear to have much in common apart from a hot

climate, large arid regions and the occasional camel in the desert. But dig a little under the

surface and the two nations may share a similar geological profile and in time, Libya could be

seeing the same revenues from natural resources that Australia now enjoys. 1While Australia has

a long and lucrative history of mining, Libyas natural resource wealth has come relatively

recently and only through oil.2

The mining industry in Libya is very limited and has only been exploited at a domestic level.

With the 2011 overthrow of Muammar Gaddafi and the first democratic elections in 2012 of the

National Congress, the opportunity arises for investment and development in a much wider

number of industries. This paper profiles the potential development of mining in Libya under the

current tax system, and asks how much can be learned by comparison to Australia? Specifically,

can the new Australian Minerals Resource Rent Tax be utilised in Libya to efficiently capture the

maximum level of tax?

A successful resource rent tax (also known as an additional profits tax) relies on getting the right

balance of additional tax with minimal distortion of production and investment decisions. This is

difficult in many scenarios, but even more so for a post-conflict country like Libya which lacks a

track record in mining and where exploration is not even at the grassroots stage.3 Creating a

transparent and effective fiscal system is of benefit to government and investor alike.

Chapter 2 profiles the Libyan mining industry and how prepared it is for capitalising on foreign

interest and attracting investment. Chapter 3 identifies the factors that create an ideal fiscal

regime to support mining and explains the significance to investors of neutrality; clarity and

transparency; stability; equity and the level of government take. Chapter 4 briefly explains the

1Taib, M., The Mineral Industry of Libya 2009(United States Geological Survey Minerals Yearbook, publishedApril 2011)2Al Kilani, I.,LibyaOil Regulation 2012in Getting the Deal Through 2012www.gettingthedealthrough.comp13Land, B., The Rate of Return Approach to Progressive Profit Sharing in Miningin Otto, J.M., Taxation of MineralEnterprises (London: Graham & Trotman Ltd, 1995) p 103
http://www.gettingthedealthrough.com/http://www.gettingthedealthrough.com/http://www.gettingthedealthrough.com/http://www.gettingthedealthrough.com/


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revenue management mechanisms of a minerals rent resource tax in comparison to the current

corporate taxation in Libya.Chapter 5 discusses the background, application and projected

impact of the Australian Minerals Resource Rent Tax (MRRT). Chapter 6 concludes with a

comparison between the Libyan and Australian mining sectors and considers whether any

elements of the MRRT are appropriate for Libya to adapt or adopt into its own fiscal regime.

2 LIBYAN MINING INDUSTRY: PROFILE AND PREPAREDNESS

Libya reportedly has the largest iron ore reserve in the world,4but doesnt have the transport

infrastructure to make those commodities commercially viable for foreign export. There has been

minimal geological exploration largely due to the remoteness and lack of infrastructure to

travel. To date, there are known economic supplies of clays, coal, dimension stone, diatomite,

dolomite, gold, gypsum, iron ore, limestone, salt, silica sand, and travertine.5

Libya utilises a mix of civil law and Islamic law. In relation to mining, in 1971, the Libyan

Revolutionary Command Council issued Law No 2/1971 Concerning Mines and Quarries. There

have been minor amendments since, but the mining code remains a fairly rudimentary piece of

legislation that has not kept pace with developments elsewhere and is silent on many of the

issues considered standard in mining legislation around the world.

By comparison, neighbouring Algeria reformed its mining legislation in 2001 and has seen a

major increase in mineral exploration and production.6The equally oil-dominant Saudi Arabia

made a conscious decision to diversify beyond oil and gas and now boasts gold, copper, bauxite

mining and the worlds largest aluminium smelter.7 Afghanistan, after a prolonged period of

conflict, has benefited from an extensive geological survey that reports mineral resources worth

4Libya: Hydrocarbons and MiningUS Library of Congresshttp://memory.loc.gov/cgi-bin/query/r?frd/cstdy:@field(DOCID+ly0077) (last accessed 24 July 2012)5General Peoples Committee for Industry, Economy and Commerce, 2010, p 5-12 referred to in 2009 MineralYearbook US Geological Survey6Michalski, B.,The Mineral Industry of Algeria 1994, (United States Geological Survey Minerals Yearbook

published May 1995)7Mining Sector in the Kingdom of Saudi Arabia U.S.-Saudi Arabian Business Council, 2008http://www.us-sabc.org/files/public/Mining_Brochure.pdf(last accessed 21 July 2012)
http://memory.loc.gov/cgi-bin/query/r?frd/cstdy:@field(DOCID+ly0077)http://memory.loc.gov/cgi-bin/query/r?frd/cstdy:@field(DOCID+ly0077)http://memory.loc.gov/cgi-bin/query/r?frd/cstdy:@field(DOCID+ly0077)http://memory.loc.gov/cgi-bin/query/r?frd/cstdy:@field(DOCID+ly0077)http://www.us-sabc.org/files/public/Mining_Brochure.pdfhttp://www.us-sabc.org/files/public/Mining_Brochure.pdfhttp://www.us-sabc.org/files/public/Mining_Brochure.pdfhttp://www.us-sabc.org/files/public/Mining_Brochure.pdfhttp://www.us-sabc.org/files/public/Mining_Brochure.pdfhttp://www.us-sabc.org/files/public/Mining_Brochure.pdfhttp://memory.loc.gov/cgi-bin/query/r?frd/cstdy:@field(DOCID+ly0077)http://memory.loc.gov/cgi-bin/query/r?frd/cstdy:@field(DOCID+ly0077)


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USD$3 trillion and significant investment has commenced.8 In the meantime, countries like

Australia have experienced a mining boom due to high commodity prices and/or volumes for

iron ore, gold, nickel, copper, bauxite, uranium, coal and zinc - among other minerals.9

Given the successful change of political leadership in Libya, and if Libya follows the above

examples, there may be renewed interest in exploring for non-petroleum minerals by foreign and

domestic companies. Equally, the new government may look to increase and diversify its

resource exploitation and maximise revenue. This period of optimism and political flux is an

opportune time to gather geological data, review the fiscal regime, and to prepare the mining

code and licensing/regulatory bodies for the creation of a vibrant and attractive investment

climate that benefits both Libya and investors.

3 IDEAL FISCAL REGIME TO SUPPORT MINING

An effective minerals taxation system must begin with a clear understanding of the objectives

and how they relate to the needs, opportunities and decisional criteria of potential investors.10For

government, taxation policy has both economic and political dimensions and its objectives are

broader than that of private industry. In addition to revenue collection, governments often view

taxes as a way of encouraging or discouraging various kinds of private sector decisions. Both

will share an interest in minimising leakage, promoting efficiency in discovery and recovery, and

will want projects that generate high levels of surplus revenue.11

The criteria by which fiscal regimes are assessed vary slightly between economists, government

and investors. This paper has considered several fiscal instruments and chosen to headline them

8Farmer, B.,Afghanistan claims mineral wealth is worth $3 trillion 17 July 2010http://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7835657/Afghanistan-claims-mineral-wealth-is-worth-3trillion.html(last accessed 29 July 2012)92011 WA Mineral and Petroleum Statistics Digest, Department of Mines and Petroleumhttp://www.dmp.wa.gov.au/documents/121857_Stats_Digest_2011.pdf(Last accessed 24 July 2012)10Otto, J., Batarseh, M.L., and Cordes, J., Global Mining Taxation Comparative Study 2nded (Golden, CO, USA:Colorado School of Mines, 2000) p511Otto, J., Batarseh, M.L., and Cordes, J., Global Mining Taxation Comparative Study 2nded (Golden, CO, USA:Colorado School of Mines, 2000) p7
http://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7835657/Afghanistan-claims-mineral-wealth-is-worth-3trillion.htmlhttp://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7835657/Afghanistan-claims-mineral-wealth-is-worth-3trillion.htmlhttp://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7835657/Afghanistan-claims-mineral-wealth-is-worth-3trillion.htmlhttp://www.dmp.wa.gov.au/documents/121857_Stats_Digest_2011.pdfhttp://www.dmp.wa.gov.au/documents/121857_Stats_Digest_2011.pdfhttp://www.dmp.wa.gov.au/documents/121857_Stats_Digest_2011.pdfhttp://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7835657/Afghanistan-claims-mineral-wealth-is-worth-3trillion.htmlhttp://www.telegraph.co.uk/news/worldnews/asia/afghanistan/7835657/Afghanistan-claims-mineral-wealth-is-worth-3trillion.html


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under the following five standards: neutrality; clarity and transparency; stability; equity; and

government take.

3.1 NeutralityA tax system that is non-neutral will not realise investment and a too generous or too onerous

one will often be subjected to subsequent modification, stripping it of stability. Ideally, a neutral

tax system applied to one particular industry and not to others, means that it does not divert

investment to or from that industry.12 In the absence of any taxes, competitive companies are

assumed to make decisions that efficiently allocate societys limited resources because a more

efficient allocation of resources means a larger overall economy and therefore a higher tax

capacity.13This concept of efficient allocation includes not imposing special tax incentives or

penalties which would otherwise affect an investment decision.

Ensuring neutrality in a fiscal system means ensuring that the action or project remains viable

after the fiscal instrument has been applied.14 It does not change marginal decisions about

investment, production, trade or mine closure that would have been made in the absence of tax.

A neutral tax policy can however, be used by government to enhance economic efficiency by

correcting externalities that arise when private and social interests diverge and the market fails to

act. For example, governments may use tax policy to reduce environmental pollution when the

market, left to itself, would have polluted in excess of a socially optimal amount.15

3.2 Clarity and TransparencyA tax system with clarity and transparency is one where investors, government administrators

and the larger population are fully aware of (or able to be determine) how tax is assessed and

collected. Efficient, non-arbitrary rules and regulations make taxes easy to administer and

12

Garnault, R., and Clunies-Ross, A.C., Taxation of Mineral Rents (Oxford, UK: Oxford University Press, 1983)p12613Garnault, R., and Clunies-Ross, A.C., Taxation of Mineral Rents (Oxford, UK: Oxford University Press, 1983)

p8714Hogan, L., and Goldsworthy, B.,International mineral taxation: Experiences and issues in The Taxation ofPetroleum and Minerals: Principles, Problems and Practice Daniel, P., Keen, M., and McPherson, C., (Eds)(Abingdon, UK: Routledge, 2010) p13215Daniel, P., Goldsworthy, B., Maliszewski, M., Puyo, D.M., and Watson, A.,Evaluating fiscal regimes forresource projects: An example from oil development in The Taxation of Petroleum and Minerals: Principles,Problems and Practice Daniel, P., Keen, M., and McPherson, C., (Eds) (Abingdon, UK: Routledge, 2010) p190


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difficult to evade. A complicated method of determining tax liability increases both the incentive

for companies to focus on finding tax loopholes and the opportunities for corruption.16

In contrast, a transparent tax system allows companies to better forecast their revenues and

returns. For listed companies, projected returns are important to shareholders and affect their

share price. Investors are able to model the consequences of alternative project decisions or

assess the impact of external events in the international market. Government can better forecast a

budget surplus or deficit and pre-emptively act with appropriate measures. It also allows the

public to scrutinise what companies pay for extracting the nations assets; what governments

receive; and how much should be available for the nations benefit.

The practical application of both clarity and transparency is firstly, where institutions are

assigned distinct roles so as to avoid confusion and conflict of interest, and secondly, where there

is an explicit basis for taxation so that tax administrators do not carry out their job in a

discretionary and non-transparent fashion.17

3.3 StabilityAmong the factors that mining companies consider when assessing the risk of a project is the

stability of the tax regime. The higher the risk a company is prepared to take, then the higher the

return they will expect. If a company is investing millions or billions of dollars in a project then

they do not want the tax system or rate to change arbitrarily or detrimentally once their capital is

sunk and no longer mobile.

Governments want to be able to adjust the tax rate, application or collection depending upon a

change of circumstances. But equally importantly, they want to attract investment. Given the

risk-return trade-off for firms, the greater the perception of stability, the lower the return

16Otto, J., Andrews, C. B., Cawood, F., Mining Royalties : A Global Study of their Impact on Investors,Government, and Civil Society (Herndon, CA, USA: World Bank Publications, 2006) p1117Calder, J.,Resource tax administration: Functions, procedures and institutionsin The Taxation of Petroleum andMinerals: Principles, Problems and Practice (Daniel, P., Keen, M., and McPherson, C., (Eds) Abingdon, UK:Routledge, 2010) p367


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expected and therefore the greater share of mining revenue that the government can (in theory)

collect by way of taxes.18

Companies often seek a tax stabilisation clause in mining agreements, particularly in high risk

countries. Low-income developing countries seeking to attract investment are frequently unable

to resist such demands and so accede. But there is no guarantee that subsequent governments will

not reject the tax stabilisation, particularly as the commodity price and known quantity or quality

increases or the country risk reduces, or simply because the balance of power has shifted. As

other investors come in to a country, the economic importance of one project or one company

diminishes. A stable fiscal regime is therefore one that can be flexible in accommodating the

priorities of both investors and government when commodity prices move high or low.19

3.4 EquityThe concept of equitable or fair allocation of tax burdens among all taxpayers is based upon

some definition of ability-to-pay.20Many nations have applied taxation (in the form of royalties)

based upon the ability-to-pay. The approaches vary, but in general take into account both the

value of the mineral produced and certain allowable costs (eg capital costs, marketing costs,

transportation costs, handling costs, insurance costs).21Therefore, taxes should be profit-based,

the effect of any adjustment should not increase uncertainties for the investor or the government,

22and its measures should apply equally to participants in the industry. An equitable tax system

should not give competitive advantage to one faction over the others, but arguably tax

stabilisation incentives to [large] companies for large pioneering projects are inequitable. A

counter-argument would be that pioneering projects take a larger risk than smaller or subsequent

projects, and so the uneven risk cancels out the uneven tax application.

18

Otto, J., Andrews, C. B., Cawood, F., Mining Royalties : A Global Study of their Impact on Investors,Government, and Civil Society (Herndon, CA, USA: World Bank Publications, 2006) p1219Briggs, S.,How competitive are the fiscal regimes of Chile and Colombia for foreign mining investment?(CEPMLP Annual Review Issue 7, 2003) p1220Otto, J., Batarseh, M.L., and Cordes, J., Global Mining Taxation Comparative Study (2nd ed )(Golden, CO, USA:Colorado School of Mines, 2000) p621Otto, J., Craig, A., Cawood, F., et al Mining Royalties: A Global Study of Their Impact on Investors, Governmentand Civil Society (Washington, US: World Bank Publications, 2006) p5322Garnault, R., and Clunies-Ross, A.C., Taxation of Mineral Rents (Oxford, UK: Oxford University Press, 1983)

p186


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3.5 Government TakeGovernment take can be in the form of state participation or equity in a project, but equally can

refer to the level of taxation. While state participation is more common in the petroleum

industry, it is not so prevalent in mining where royalties and other taxes are preferred. The level

of government take depends upon what the country wants to achieve. A country may have a low

take to attract more investment, to compensate for perceptions of high fiscal risk, high costs,

small volumes, high geological risk, or simply because of a belief in a low tax environment for

business in general.23The lower the government take, the more attractive the fiscal regime would

be to investors. Australia however, has chosen to raise its government take.

4 REVENUE MANAGEMENT MECHANISMSIn countries where mineral rights belong to the state, the extraction of mineral resources provides

a financial benefit to the government through export earnings. It also supplies revenue through

taxation. To successfully balance the objectives of government and investors, taxation should

ideally be targeted at the economic rent24and no more. Figures 1(a) and 1(b) (over) illustrate a

[neutral] rent-based tax against a [non-neutral] unit-based tax.

23Nakhle, C.,Petroleum fiscal regimes: Evolution and challengesin The Taxation of Petroleum and Minerals:Principles, Problems and Practice (Daniel, P., Keen, M., and McPherson, C., (Eds) Abingdon, UK: Routledge, 2010)

p10524Economic rent is the surplus after subtracting from revenue all costs of production, including:Recurrent andcapital costs, anda level of normal profit sufficient to attract and retain investment in a project, i.e. tocompensate investors for the timing and risk of its cash flows, but excluding loan interest expenses.


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Figure 1(a) A rent-basedtax

is efficient because changes

in the tax rate do not

increasethe unit cost of production

and

the cut-off grade.

Figure 1(b) A unit-based

taxincreases the unit cost of

production and therefore

the cutoff grade necessaryto

maintain margins. High-

grading

results in a reduction in

reserves

and inefficient exploitation

of

the resource.

Source: Pietro Guj, University ofWestern Australia, 201225

4.1 General Tax InstrumentsHaving determined that maximising revenue from minerals is the objective and indeed, priority,

of a wise and responsible26 government, a sensible balance of conditions is necessary. If (i)

mineral exploitation is by private firms, (ii) externalities are compensated, (iii) the tax system is

25Guj, P.,Mineral Resource RentTax in Australia(presentation at the CEPMLP Annual Mining Seminar MineralsTaxation and Sustainable Development, London, 2012)26Garnault, R., and Clunies-Ross, A.C., Taxation of Mineral Rents (Oxford, UK: Oxford University Press, 1983) p2


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otherwise neutral (in the sense of not distorting production decisions), and (iv) the government

spends wisely and responsible, then it is better placed to extract the most return.27

It is logical therefore, that multiple tax instruments will be needed. Ross Garnault and Anthony

Clunies Ross identified six broad types of tax28 of which, for the purpose of this discussion,

resource rent tax (RRT tax on realised net present value) is most relevant.29

Resource rent taxation is the most efficient in principle as royalties distort extraction and

exploration (see figures 1a and 1b above), but royalties may still have an important role. The

reason is twofold: to assure some revenue from day one of production; and to set the pace of

extraction/avoid over-extraction when contract period is short (implicit depletion policy). Of

course, there are problems of regular corporate income tax, but it is usually included to create

creditable tax and consistent treatment with other sectors. So the ideal combination then

becomes: (1) royalty + (2) CIT30

+ (3) rent capture mechanism.31

4.2 Taxation in LibyaApplication and FlawsUnlike Australia, Libya does not have a specific tax for mining revenue. Libyas taxation

framework dates from pre-independence when the Income Tax Act (Act No. LIV of 1948) was

passed. This was reformed by Law No. (11) of 1372 P.D (2004) regarding Income Tax. A new

Income Tax Law (Law 7 of 2010) became effective on 28 April 2010. The new law replaces the

previous scale rates of 15% to 40%32on taxable profits with a new flat rate tax of 20%.33

27Garnault, R., and Clunies-Ross, A.C., Taxation of Mineral Rents (Oxford, UK: Oxford University Press, 1983) p328They are: the fixed fee (a lump sum for access to the resource once the right to mine is granted); specific or advalorem duty (a royalty based upon the volume or sales value of the mineral); higher rates of proportional incometax (corporate income tax (CIT) at a rate higher than applied to non-mining); progressive profit tax (progressively

higher CIT as the rate of return on invested capital rises); resource rent tax (RRT tax on realised net presentvalue); and Brown tax (a tax on cash flow all sales revenue less all cash outlay)29Garnault, R and Clunies Ross, A, Taxation of Mineral Rents (Oxford, UK, Clarendon Press, 1983), p730CIT (corporate income tax)31Daniel, P., Taxation of Mining: Features, Principles, Issues(presentation at the CEPMLP Annual MiningSeminar Minerals Taxation and Sustainable Development, London, 27 June 2012)32Otman, W., and Karlberg, E., The Libyan Economy: Economic Diversification and International Repositioning(London: Springer, 2007) p74-7533KPMG Global Corporate Tax Rates Tablehttp://www.kpmg.com/Global/en/services/Tax/tax-tools-and-resources/Pages/tax-rates-online.aspx (Last accessed 10 January 2013)
http://www.kpmg.com/Global/en/services/Tax/tax-tools-and-resources/Pages/tax-rates-online.aspxhttp://www.kpmg.com/Global/en/services/Tax/tax-tools-and-resources/Pages/tax-rates-online.aspxhttp://www.kpmg.com/Global/en/services/Tax/tax-tools-and-resources/Pages/tax-rates-online.aspxhttp://www.kpmg.com/Global/en/services/Tax/tax-tools-and-resources/Pages/tax-rates-online.aspxhttp://www.kpmg.com/Global/en/services/Tax/tax-tools-and-resources/Pages/tax-rates-online.aspxhttp://www.kpmg.com/Global/en/services/Tax/tax-tools-and-resources/Pages/tax-rates-online.aspx


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For guidance on taxing of resources in Libya, this paper looks to their petroleum sector. Specific

royalties and corporate income tax for petroleum are referred to in standard Exploration and

Product Sharing Agreements (EPSA) between the National Oil Company (NOC) and the

various international oil companies and services providers. The rates are contained in the

Petroleum Act No.25 of 1955 (Amended 2002). A royalty of 14.5% applies to natural gas and

petroleum. The royalty rate for crude oil depends upon the market price, but the total rent,

royalties and fees must not be more than 16.67% of the value of the crude oil exported. In

addition, the concession holder must pay a minimum 65% of profit as tax.34 There is no

equivalent royalty or profit tax for non-petroleum minerals.

The 1997 Law No. 5 Concerning Encouragement of Foreign Capital Investment and the

subsequent Law No. 9 of 2010 on Investment Promotion allows for 100 per cent foreign equity

ownership of companies licensed under the law. It provides for various preferential treatments

for licensed projects, such as an exemption from corporate income tax for 5 years with a possible

extension of 3 years provided net profits were reinvested in the project. There is an exemption

from customs duties on imports of machinery, tools, and equipment needed for the execution of

the project to continue for a period of 5 years during the operation of the project. It also provided

for an exemption from excise taxes on exported goods.35

Tax is imposed annually on net income accrued through the year. Libyan companies and

branches of companies are taxed on the basis of their quarterly submitted tax declarations, duly

supported by audited tax statements. Net operating losses may be carried forward for 5 years.36

Libya has corporate and petroleum taxes, but the reality is that they also have an inefficient tax

collection system, which is depriving the Libyan government of massive revenue.37

Anecdotal

information from media sources states everyone in Libya is waiting for new laws to liberalise

34Petroleum Act No.25 of 1955 (Amended 2002) Articles 13(1)(c) and 14(1)(a)35Otman, W., and Karlberg, E., The Libyan Economy: Economic Diversification and International Repositioning(London: Springer, 2007) p6936Income Tax Law (Law 7 of 2010) Article 4237Otman, W., and Karlberg, E., The Libyan Economy: Economic Diversification and International Repositioning(London: Springer, 2007) p 407


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theeconomy, which will come. All current agreements will be up for review, and that is bound to

include taxation.38Consideration of other taxation instruments is therefore timely.

5 AUSTRALIAN MINING INDUSTRY AND MINERALS RENT RESOURCE TAX

Australia has a complicated fiscal framework with both the Commonwealth government (ie

Federal government) and State governments having legislative and fiscal rights and

responsibilities in respect of mining projects. Ownership of on-shore minerals is vested in the

states with State governments having power over mineral leasing, the imposition of royalties and

the provision of infrastructure.39

In 2011, the Western Australia (WA) Department of Mines and Petroleum collected more than

$3.9 billion in royalties (as opposed to taxation of company income) from mineral producers in

WA.40Royalties, as a charge for the right to exploit the minerals, are generally based on a fixed

amount per tonne of production or on a fixed percentage of the value of production. They are the

main source of State government revenue from mining projects.

Despite this, the Australian Productivity Commission concluded that Australias current system

of state based, mainly ad-valorem royalties was inefficient, a deterrent to investment particularly

in relation to marginal projects, prone to price volatility and incapable of capturing windfall

profits in periods of high mineral prices.41Federal government mining revenue is collected as

income tax levied at the corporate tax rate of 30% of taxable income, which is broadly calculated

as assessable income less deductible expenses. The application of the corporate tax system to

mining companies is similar to other companies with carry-forward loss provisions, capital gains

tax, accelerated depreciation for capital equipment, full deductibility of exploration expenses and

38Email correspondence with Michel Cousins, Editor-in-Chief of the Libya Heraldhttp://www.libyaherald.com/dated 28 July 201239Garnault, R and Clunies Ross, A, Taxation of Mineral Rents (Oxford, UK, Clarendon Press, 1983), p 24440The [Western Australian]Department of Mines and PetroleumMineral Royaltieshttp://www.dmp.wa.gov.au/4407.aspx#1549(Last accessed 24 July 2012)41Australian Productivity Commission,Mining and Minerals Processing in AustraliaVolume 3 Chapter 14Royalties, at pp. 360 - 371,http://www.pc.gov.au/__data/assets/pdf_file/0018/7218/07miningv3.pdf (last accessed23 July 2012)
http://www.libyaherald.com/http://www.libyaherald.com/http://www.libyaherald.com/http://www.dmp.wa.gov.au/4407.aspx#1549http://www.dmp.wa.gov.au/4407.aspx#1549http://www.pc.gov.au/__data/assets/pdf_file/0018/7218/07miningv3.pdfhttp://www.pc.gov.au/__data/assets/pdf_file/0018/7218/07miningv3.pdfhttp://www.pc.gov.au/__data/assets/pdf_file/0018/7218/07miningv3.pdfhttp://www.pc.gov.au/__data/assets/pdf_file/0018/7218/07miningv3.pdfhttp://www.dmp.wa.gov.au/4407.aspx#1549http://www.libyaherald.com/


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deductibility of capital expenditure incurred in certain mining activities 42. In addition to royalties

and corporate income tax, mining companies are also liable for a variety of other taxes including

the Goods and Services Sales Tax (GST), withholding taxes, stamp duty, payroll tax and fringe

benefits tax. And yet, even with this list of taxes, the government determined that there was room

for one more mining tax.

5.1 BackgroundGlobally, resource commodity prices increased considerably from 2005 and mining companies in

Australia were a major beneficiary. In 2008, the [then] Rudd government commissioned a

comprehensive review of Australias tax system. In 2010, Australia's Future Tax System Review

now known as the Henry Review - recommended a range of reforms including a new Resource

Rent Tax scheme for both mining and petroleum projects, and reduced corporate income tax. 43

Government first adopted the proposal, calling it Resource Super Profits Tax and proposed

applying a flat rate of 40% to non-renewable commodities and refunding State and Territory

royalties.44By that stage, the mining boom was well under way and in the period 2005-2010,

prices for iron ore had increased by over 400 per cent and prices for black coal had increased

over 200 per cent.45 Government wanted a larger share of mining revenues, and had a

responsibility to seek it.

The proposal was introduced for discussion, and despite prior industry consultation, a vocal and

concerted resistance campaign was run by mining representatives. Prime Minister Rudd was

ousted by his political party and replaced by Prime Minister Gillard. A modified Minerals

Resource Rent Tax scheme was negotiated with reduced application and a reduced tax rate.

Commodities other than iron ore, coal, oil and gas were not included, which reduces the number

42Garnault, R and Clunies Ross, A, Taxation of Mineral Rents (Oxford, UK, Clarendon Press, 1983), at pp 331-4243Department of TreasuryAustralias Future Tax System

http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/papers/Final_Report_Part_1/executive_summary.htm (last accessed 21 July 2012)44Department of Education, Employment and Workplace Relations, Stronger, Fairer, Simpler: A tax plan for our

future Resource Super Profits Taxhttp://www.deewr.gov.au/Department/Documents/Files/10_Fact_sheet_Resource_Profit_Tax_Final.pdf (lastaccessed 28 July 2012)45Department of Education, Employment and Workplace Relations, Stronger, Fairer, Simpler: A tax plan for our

futureMineral Resource Rent Taxhttp://www.deewr.gov.au/Department/Documents/Files/Final%20Tax%20policy%20Statement.pdf(last accessed 21July 2012)
http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/papers/Final_Report_Part_1/executive_summary.htmhttp://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/papers/Final_Report_Part_1/executive_summary.htmhttp://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/papers/Final_Report_Part_1/executive_summary.htmhttp://www.deewr.gov.au/Department/Documents/Files/10_Fact_sheet_Resource_Profit_Tax_Final.pdfhttp://www.deewr.gov.au/Department/Documents/Files/10_Fact_sheet_Resource_Profit_Tax_Final.pdfhttp://www.deewr.gov.au/Department/Documents/Files/Final%20Tax%20policy%20Statement.pdfhttp://www.deewr.gov.au/Department/Documents/Files/Final%20Tax%20policy%20Statement.pdfhttp://www.deewr.gov.au/Department/Documents/Files/Final%20Tax%20policy%20Statement.pdfhttp://www.deewr.gov.au/Department/Documents/Files/10_Fact_sheet_Resource_Profit_Tax_Final.pdfhttp://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/papers/Final_Report_Part_1/executive_summary.htmhttp://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/papers/Final_Report_Part_1/executive_summary.htm


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of affected companies from 2,500 to around 320. These commodities were not expected to pay

significant amounts of resource rent tax, and excluding them allowed many companies to remain

in their existing taxation regimes. From 1 July 2012, the MRRT applies to new and existing coal

and iron ore projects in Australia and is payable on group mining profits of more than AUD$75

million in a year.46

5.2 MRRT Assessment and Revenue CollectionMRRT applies at the valuation point which separates upstream and downstream operations,

effectively taxing the value of the extracted resources and not the value added in the

downstream activities such as processing. The basic MRRT rate is 30%, which is reduced by a

25% extraction allowance, making the effective tax rate 22.5%. Operating and capital expenses

incurred from 1 July 2012 are immediately deductible, while unused losses may be carried

forward and uplifted.47

The taxpayer is able to apply pre-mining project losses to the mining project interest which

originated from that pre-mining project interest. MRRT will provide a full credit for

Commonwealth, State and Territory royalties paid by a taxpayer for a mining project by way of

royalty allowances. MRRT will recognise past investments through an allowance, known as the

starting base, which can be either:

the market value of past investment, written down over a period of up to 25 years; or the book value of past investment written down over a five year period.

Collection will be by lodging quarterly MRRT instalment liability notices and paying quarterly

MRRT instalments.

Australia has decided that a combination of State royalty payment, Federal corporate income tax

and a Federal resources tax is the right mix of taxation to be applied to mining. The State gets the

royalty up front from the commencement of extraction (which under the MRRT is then refunded

46Department of TreasuryFact Sheet:A New Resource Taxation Regimehttp://www.futuretax.gov.au/content/Content.aspx?doc=FactSheets/resource_tax_regime.htm(last accessed 23July)47Australian Taxation OfficeHow MRRT affects you http://www.ato.gov.au/content/00319936.htm(last accessed27 July 2012)
http://www.futuretax.gov.au/content/Content.aspx?doc=FactSheets/resource_tax_regime.htmhttp://www.futuretax.gov.au/content/Content.aspx?doc=FactSheets/resource_tax_regime.htmhttp://www.ato.gov.au/content/00319936.htmhttp://www.ato.gov.au/content/00319936.htmhttp://www.ato.gov.au/content/00319936.htmhttp://www.futuretax.gov.au/content/Content.aspx?doc=FactSheets/resource_tax_regime.htm


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by the Federal Government to the company). The State is content because as the physical source

of the asset, it receives an immediate and direct return on the value of their resources rather than

a share of the federal allocation. The investor isnt necessarily as positive however, as the

imposition of a royalty can make a low-grade ore operation uneconomic.48

The Australian Federal Government applies tax on the corporate income or profit of a mining

company. This is more efficient because the tax doesnt change the optimal output of companies

who are aiming to maximise profit and a marginal ore remains profitable.49A rent resource tax is

applied on top of this, but only on the most lucrative resources iron ore and coal and only to

those companies whose mining profits are more than AUD$75 million.

6 REJECT, ADOPT OR ADAPT - RECOMMENDATIONS AND CONCLUSION

Where a country is richly endowed with mineral resources, has a stable political and social

environment, an inappropriate or poorly designed tax regime will frustrate efforts to attract

investment.50It is crucial that any new fiscal regime is broadly neutral in its application so that

any development of Libyas mining industry is not stifled by investor skittishness.

This paper has reviewed both the Libyan mining industry and its taxation, and the Australian

mining sector and revenue collection, but also considers if it is appropriate for a given country to

copy and transfer a policy that works across boundaries in order to formulate national mineral

policy. The response is that a resource rent tax is held up as the optimum way to maximise

mining revenue. Australia has considered and recently implemented a minerals rent resource tax.

It has the benefit of an efficient and effective tax system; a transparent and lucrative mining

industry; and a robust review system (the Australian parliament and civil society). Libya can take

advantage of Australias experience and consider if the MRRT would benefit Libya.

48Otto, J., Craig, A., Cawood, F., et al Mining Royalties: A Global Study of Their Impact on Investors, Governmentand Civil Society (Washington, US: World Bank Publications, 2006) p949Otto, J., Craig, A., Cawood, F., et al Mining Royalties: A Global Study of Their Impact on Investors, Governmentand Civil Society (Washington, US: World Bank Publications, 2006) p1050Otto, J., and Cordes, J., The Regulation of Mineral Enterprises: A Global Perspective on Economics, Law andPolicy (Denver, Colorado: Rocky Mountain Mineral Law Foundation, 2002) p37


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As the extent of Libyas geology is not fully known, it is difficult to determine the economic

potential of the sector. However, if the estimates and current indications should prove to be

accurate including sizeable, high-grade iron ore deposits then a broad MRRT could be

utilised. In Australia, the MRRT was reduced in application to just iron ore and coal because of

mining company opposition. The tax was in addition to their existing operating costs and

therefore unwelcome. In Libya, where there is minimal domestic mining and no foreign

investment, an MRRT could be applied from the outset to all minerals. Incoming companies

would be aware that the tax applied universally. The skill would be in determining the

appropriate level of tax and ensuring that there was still sufficient commercial reason for

investors to take a chance on Libyas fledgling industry.

Libya already has a valuable petroleum industry. It could have a valuable mining industry. The

country has tax incentives for foreign investment. But in order to diversify beyond oil and gas,

Libya needs to ensure that whatever mining tax system it implements reflects the five standards

outlined earlier: neutrality; clarity and transparency; stability; equity; and government take.

Afterall, to paraphrase Waniss Otman,51Libya still has a long way to go to ensure that foreign

investors, with every mineral-endowed country to choose from in a globalised world, would

necessarily choose to invest their capital in Libya. A valuable geology combined with a neutral,

transparent and stable tax system, that is familiar to foreign mining companies, would give

comfort.

51Otman, W., and Karlberg, E., The Libyan Economy: Economic Diversification and International Repositioning(London: Springer, 2007) p281


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