Profit taxation and royalties: evidence from gold mines in Sub-Saharan Africa

Luisito Bertinelli, Arnaud Bourgain and Skerdilajda Zanaj

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: In this paper, we analyze theoretically and empirically the effects of tax changes on firms’ profits in extractive industries. In the theoretical part, we assume a country that levies a profit tax and a royalty on the profits of extractive firms to maximize its tax revenues. The mining companies may reduce their taxable income by cost manipulation. By analyzing the optimal choice of the government and of the firms, we first establish the optimal tax policy and then we investigate the impact of the optimal fiscal policy on firms’ profits. In the empirical part of the paper, we estimate the effect of the profit tax and royalty on the extracting firms’ profit in African countries during the period spanning from 2007 to 2018. We use the Mining Intelligence database to constitute a panel of annual individual data on 363 gold mines located in 21 Sub-Saharan countries. We obtain an inverse relationship between the tax rate change of the two tax instruments and the profit of the firms.

Keywords: Resource countries; Resource taxation; Royalties; Cost misreporting; Extractive industries. (search for similar items in EconPapers)
JEL-codes: H25 H32 O13 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-afr, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:19-15

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