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Creeping Nationalization and Contract Renegotiations: Experience of the Past Five Years

Craig Andrews, International Mining and Oil & Gas Law, Development and Investment (2009)

Abstract

This paper reviews the economic and political factors at work in terms of renegotiations of mining contracts over the past five years. It finds that the rapid increase in commodity prices was a principal factor in the initiation by governments of renegotiations. It also finds that renegotiations are often called for by new governments anxious to redress the supposed errors of previous governments. The renegotiations most often center on adjustment of the tax regime as negotiated in the original mining contract. The traditional mix of royalty, profits based taxes, and other levy has not proved itself to be sufficiently sensitive to rapid increases in commodity prices. Thus, the perception is correct that company profits increase faster than government revenues during a period of rising commodity prices. As a means to increase the proportionate sharing of the benefits streams during commodity price booms, the paper suggests a combination of a sliding scale royalty on net profits, an adjustable tax rate on profits, and/or a rate of return based tax system. It is recognized that these flexible tax regimes would pose implementation difficulties in some countries with weak institutional tax administrations. However progressive and flexible the tax regime, there will always be a danger of unilateral renegotiations due the highly politicized nature of natural resource