A Critique of the Mineral Extraction Tax in the Mining and Metallurgical Sector

The revenue side of our budget is replenished primarily by subsoil use. While oil revenues go to the National Fund, tax receipts from the mining and metallurgical complex go directly into the national budget. To be clear, the main tax in subsoil use is the mineral extraction tax (MET), which is essentially a portion of the rent that subsoil users pay to the state for the use of our natural resources. MET is calculated as the volume of extraction multiplied by the market price of the product. Advanced economies, however, switched to royalties long ago, which are both easier to calculate and fairer. For some reason, though, we are reluctant to make the switch. That is another story: a royalty would not require maintaining such an enormous staff at the Geology Committee to calculate changes in reserves.

But the most interesting point lies elsewhere. In our mining and metallurgical sector, MET does not depend on the market price. It is absurd, but true. I wrote about this as far back as 2010, using uranium as an example. MET does not depend on the sale price; it depends on the cost of extraction. Since most metallurgical output goes to secondary processing, income for such producers is calculated as cost plus 20%.

First, the state is missing out on huge sums in tax revenue, because the prices of metals and everything else are rising while costs are not. Second, poor mines with low ore grades pay more tax than rich ones, which makes it unviable to develop low-grade deposits. The state is wondering how to raise taxes, when what the "New Kazakhstan" needs is to break free of the mining lobby, introduce a proper tax base and increase revenue. The gain would amount to hundreds of billions of tenge.