Eye on Malawi’s Extractives: Tax incentives and Malawi’s mining sector

Eye on Malawi's Extractives Rachel Etter-Phoya


Tax incentives and Malawi’s mining sector

Tax incentives are put in place to attract foreign direct investment (FDI), to compensate businesses for other challenges (like high-cost, unreliable electricity provision), and to compete with other countries. Yet their long-term effectiveness is contested. Investment   climate surveys usually indicate that tax incentives are not as decisive for investors as other aspects of the business environment, such as access to infrastructure, the rule of law, or stability [1].

Tax incentives – ‘any special tax provisions granted to qualified investment projects or firms that provides favourable deviation from the general tax code’ [2] – include reductions in taxes like corporate income tax (CIT), tax breaks, credits and holidays, stability agreements, accelerated depreciation, and investment allowances.

The effectiveness and impact of tax incentives is much debated. Opponents post that they can distort the economy by encouraging otherwise unprofitable ventures to go ahead, encourage tax abuse, reduce public revenue, and may result in the high grading of mineral reserves. Evidence seems to point in both directions about whether incentives really lead to an increase FDI. One of the most extensive studies of tax holidays in 51 developing countries using data from 1985 to 2014 in the manufacturing sector concludes that their effect on FDI is negligible and does not translate into capital accumulation or growth, they have overall a negative impact on sustainable development, and they are negatively correlated with tax revenues [3].

The 2007 mining development agreement signed for Kayelekera Uranium Mine included, among others, a reduction of the royalty rate for the life of the project, a CIT reduction, exemption from resource rent tax (RRT), accelerated depreciation, and a stability clause [4].

The government argued that this was necessary given the risk Paladin took providing the largest FDI at the time and as the first multinational large-scale mining project. According to the agreement, reductions in CIT and RRT were in exchange for the government’s 15% equity stake in Paladin Africa that held the mining licence. As Paladin Africa has not declared a profit, they have not had to pay CIT and the RRT would not have taken effect if there was no exemption. Would Paladin have invested without these incentives?

In a financial model, Grain Malunga and I worked on with OpenOil [5], we show that the reduction in royalty rate did not greatly affect the break-even price for the company although it did result in forgone revenue for the government. Preparing financial models to assess potential revenue streams and losses is key when the government designs a fiscal package that deviates from the general tax code or general fiscal regime for mining. In Malawi, with the passage of the mining fiscal regime as part of the general tax code [6], it appears the government does not plan to introduce project-specific tax incentives going forward although it still has room to offer sector-wide incentives.

On another topic – this will be my last column for several months as I head on maternity leave.

References for further reading, look at:

  1. James, S., 2013. Effectiveness of Tax and Non-Tax Incentives and Investments: Evidence and Policy Implications (SSRN Scholarly Paper No. ID 2401905). Social Science Research Network, Rochester, NY, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2401905.
  2. The World Bank, 2015. Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN  and World Bank (No. 100756), https://www.imf.org/external/np/g20/pdf/101515a.pdf.
  3. Stausholm, S.N., 2017. Rise of ineffective incentives: New empirical evidence on tax holidays in developing countries. SocArXiv. https://doi.org/10.17605/OSF.IO/4SN3K
  4. See the Mining Development Agreement, February 2007; the Fiscal Regime is set out in ‘Attachment B’, http://resourcecontracts.org/contract/ocds-591adf-4270474629/view#/pdf.
  5. Malunga, G. & Etter-Phoya, R. 2016. Kayelekera Uranium Mine Narrative Report and Financial Model. OpenOil, http://openoil.net/kayelekera-model-narrative-report/.
  6. Malawi’s mineral fiscal regime was passed as an amendment to the Taxation Act in 2016, https://mininginmalawi.files.wordpress.com/2013/04/taxation-amendment-2016-mining-fiscal-regime.pdf.


This piece was initially published in Malawi’s Mining & Trade Review Issue Number 60 (April 2018).

The full edition is available for download here. This monthly publication is edited by Marcel Chimwala.


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