Developing deposits in Kazakhstan has become much more expensive. What will happen to jobs?
Can an increase in the MET rate by 30–50% increase state budget revenues?
Starting next year, mining companies in Kazakhstan will pay more taxes. Legislative amendments were adopted in Kazakhstan, according to which, starting from 2023, it is planned to increase the MET (mineral extraction tax) rate for exchange-traded metals by 50%, and for other solid minerals – by 30%.
Minister of National Economy Alibek Kuantyrov explained that with this bill, the authorities want to increase the tax return from mining. According to him, this decision was made due to the fact that in recent years, prices for exchange metals have grown by more than 40%, and for non-exchange metals (iron, chromium, manganese) – by 20-40%.
Informburo.kz correspondent talked to Almat Daumov, a partner and head of the Natural Resources department at Grata International, about whether the increase in this tax will bring more money to the Kazakh treasury.
– Almat Bolatovich, according to the government, due to the increase in severance tax rates, we will be able to attract an additional 300 billion tenge to the budget. Do you think this is possible?
– I believe that the increase in MET rates will not lead to a proportional increase in budget revenues.
The government probably assumed that if the tax rate was increased by 50%, then the volume of tax revenues would also increase by the same amount. I don’t believe in it.
Let’s take gold mining as an example. Now the tax rate is 5%, in 2023 it will be 7.5%. With such a high rate, some projects may become low-margin or completely unprofitable – that is, they will cease to generate income for the company.
Because of this, subsoil users will start extracting fewer minerals, because some of them will no longer be profitable for extraction. As a consequence, the tax base of companies will simply decrease.
In the short term, we will, of course, increase state budget revenues from the MET, but definitely not by 50%, but by much smaller amounts. However, then we are likely to suffer losses.
– Please explain what losses you are talking about?
– Look, every year we have to discover more deposits and produce more. The industry should grow, and with it the revenues to the budget.
When an investor comes to the country, he analyzes whether the project will pay off and after how much. If the tax burden is high, he is only interested in high-margin projects – that is, those deposits where the content of minerals is high. Other projects will become risky for him.
Consequently, with the growth of taxes, the number of deposits that make sense to develop will decrease, and the volume of production in the country will decrease.
– Can investors even leave?
– I have been working with foreign investors for many years. They were struck by the unpredictability of such a decision. Now all over the world there is a struggle for investments. To attract investment, you need to have a predictable policy.
There are countries in our region, I will not name them, which investors call populist. During every election, especially parliamentary ones, deputies there begin to engage in populism – they offer to collect more money from investors in order to earn points from the population. Investors are ambivalent about such countries.
In Kazakhstan, the MET was introduced in 2008 during the adoption of the first Tax Code. And all this time, our country has been consistent in terms of rates and has not made any sudden movements. But suddenly, in three or four months, we take and unilaterally increase rates by 50%.
Of course, the investor will think that Kazakhstan is unpredictable and inconsistent, because no one discussed such a step with him in advance.
Was the law really adopted very quickly?
– Judge for yourself. The idea of increasing the severance tax was first announced in March 2022, a bill was developed in April, submitted to parliament in May, and adopted in the summer.
That is, investors have been working for the last 13 years at the same rates of the main tax for subsoil users, and in just four months they have changed them. This is wrong, such amendments have been discussed in investment-friendly countries for years, because it is necessary to understand how this will affect the industry, who will suffer losses and to what extent.
There is, for example, a gradual increase in rates. You discuss a solution with the business, build a dialogue so that everyone can prepare and, for example, use the accumulated reserves. And now, imagine, someone took out a big loan in January of this year, and in April they told him that they would increase the severance tax rates by 30-50%. He did not foresee this in his financial model. So, of course, investors didn’t like it.
Yes, we can quickly reverse this decision, for example, in a year, but the investor has already remembered that Kazakhstan can behave this way. What has worked for 13 years cannot be changed in a couple of months. Investment policy must be stable.
– Are our taxes generally high compared to other countries?
– When the draft was still being considered in the Senate, I did a review with the hope that there or in the Presidential Administration they would take a critical look at this bill. Then I came to the conclusion that we have the highest severance tax rates among the CIS countries.
Let’s take copper. Our rate is 5.7%, next year it will be 8.55%. At the same time in Kyrgyzstan – 3%, in Uzbekistan – 7%, in Russia – 8%. And in Australia, for example, – from 2.5 to 5%.
The gold rate in Kazakhstan next year will be 7.5%. In Kyrgyzstan now – 5%, in Uzbekistan – 7%, in Russia – 6%.
It should also be taken into account that Uzbekistan, for example, is a kind of competitor of Kazakhstan for foreign investment in the mining industry. This is a warm country where you can work all year round. In our country, many deposits are located in the northern regions, where there is seasonality – 6-8 months of work, and then it is difficult to extract ore due to weather conditions.
– You speak confidently about the negative consequences of the increase in the severance tax rate. But how can we know for sure if this will happen?
– In the modern world, there were examples when countries rich in minerals also increased the MET or royalties. Therefore, in principle, it is clear how investors will react to a unilateral and significant increase in rates.
As the experience of other countries shows, the first thing that investors did in such a case was to reduce investment in exploration. If earlier they received income from production, and then reinvested them in the search for new reserves, now such additional investments will be a big question.
Since 2018, Kazakhstan has issued more than 1,870 exploration licenses and more than 50 licenses for the extraction of solid minerals. At the same time, there are still 499 contracts left under the old subsoil use model. It turns out that there are more than 2,400 subsoil use projects in the industry. I don’t know how many of them can now be realized under the new tax regime. Among these 2,400 are also our local exploration companies that are investing and are simultaneously looking for large strategic investors.
Therefore, when reforming the taxation regime, the authorities should take into account how the reforms will affect the profitability of already discovered fields and the level of future investment in the industry as a whole. The effect of short-term budget replenishment must be carefully weighed against the long-term benefits that the country can receive from a developing and growing mining industry.
– Can companies cut staff to make up the difference in taxes?
– This is unlikely to be a direct consequence of an increase in the tax burden. At the same time, if the profitability of fields will significantly decrease, then it is obvious that companies will have to optimize their costs. Therefore, in the long term, this may happen – jobs may be reduced or new ones will not be created, especially if companies reduce investment in exploration, that is, in the search for new deposits.
– Was there another way to increase budget revenues and ensure the stability of the tax regime?
– The state has social obligations that must be fulfilled. So the budget needs money. To find them, there are two options. The first is simply to increase taxes. This method is primitive, it was used many centuries ago. To make such a decision, you do not need to have great knowledge.
But there are also complex tools that allow, at current tax rates, to increase budget revenues. It seems to me that it is necessary to improve the investment climate – to increase not the rates, but the tax base. That is, to make sure that business earns more, then the country will earn more. Attract more investors. This is a more difficult task. But if we solve it, we will get a long-term and positive effect.
– A draft of a new Tax Code is currently being developed. What would you recommend to include in this document in order to improve the investment climate?
– As for subsoil users, now it is proposed to return to royalties. We had it until 2008 instead of the NDPI. Their main difference is that royalties are paid after the company has sold minerals, while MET is paid when the ore is mined.
The mineral extraction tax is not very convenient for business, since it can take several months between the extraction of ore and the sale of products obtained from it, and there is a cash gap. You pay taxes on a product before you sell it.
Also, royalties are much easier and clearer to administer, they are calculated from the cost of products already sold. The mineral extraction tax is paid for the volume of minerals actually produced, and it does not matter how much of it is eventually extracted, processed and sold by the subsoil user. Now these points are being discussed.