194
Mining Royalties
environment of depressed metal prices, widespread concerns over sovereign risk, and the general political situation within the country. By 2000, it was clear that the country had become uncompetitive in attracting new investment into its mineral sector. While exploration declined worldwide over the 1996–2000 period because of depressed metal markets, exploration within Papua New Guinea contracted even more rapidly, and the country’s share of global exploration fell significantly. With the assistance of the Asian Development Bank, the country undertook a study of its fiscal regimes for mining and hydrocarbons. That study, known as the Bogan review, proposed a number of changes. Responding to the recommendations of the Bogan review, the government in 2000 scrapped the mining levy for all new projects and proposed phasing it out for existing operations over a period of time. It also lowered the tax rate for the additional profits tax (APT) but simultaneously lowered the threshold IRR at which the APT comes into effect, from 20 percent to 15 percent. The mining industry and investment community welcomed the elimination of the mining levy but were unhappy with the reduction in the threshold rate of return for the APT, a tax that from its initiation had caused concern. As a result, the country remained uncompetitive, and its share of world exploration expenditures failed to recover. In the hope of improving this situation, the government in 2002 conducted another study of its mining taxation regime. This review led to the complete elimination of the APT in early 2003, with reductions in the corporate income tax to 30 percent and the dividend withholding tax to 10 percent. The royalty rate was fixed at 2 percent of net smelter returns, and the restrictions on deducting off-site exploration expenditures were relaxed. The government also agreed to reassess its policy regarding the option it retains to acquire up to 30 percent of the equity in new mining projects. Though it is still too early to assess the long-run effects of these changes, the initial signs are promising. Exploration has rebounded in the country, and its share of world exploration expenditures has begun to recover. Table 5.2 provides further support for this conclusion. The table, which is based on a study conducted for the 2002 government review, shows the IRR earned by foreign investors on a representative copper mine across 24 mining countries and states. The figures for Papua New Guinea are estimated twice—once under the tax regime that prevailed in 1999, and then for the tax regime in 2003. In 1999, Papua New Guinea was ranked