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Practice Guide to Auditing Mining Revenues and Financial Assurances for Site Remediation


Royalties are the price that the owner of a natural resource charges a private company or consortium for the right to develop this resource.


In practice, the use of the terms “taxes” and “royalties” can be confusing at times. Depending on the terminology and rules adopted in each jurisdiction, “production taxes” or “mining taxes” may be charged instead of royalties. For the sake of clarity and simplicity, this Practice Guide uses the term “royalties” to refer to all mining revenues collected by a government in compensation for the extraction of publicly owned natural resources. The term “taxes” is used to refer to general revenues that are collected from any kind of business, including income and sales taxes.

The right of governments to levy royalties from mining companies derives from their ownership of natural resources. Through royalty payments, governments are compensated by mining companies for the extraction of public natural resources.

In most jurisdictions around the world, governments own mineral resources and manage their development on behalf of their citizens. In Canada, for example, most provinces own the mineral resources found on their public lands. Provincial governments are therefore entitled to collect royalties from mining companies. They can clarify this right through legislation, regulations, and contracts.

Governments generally use one of two systems:

  • a concession system, where regulated royalty rates apply to all producers equally, or
  • a system of production sharing agreements (PSAs) with producers, where rules and rates may vary from contract to contract. In a PSA, a government collects an agreed share of profits from mining production. Some PSAs stipulate that royalty payments must also be made. Because PSAs in the mining sector are rare in most countries, this Practice Guide was prepared for the audit of concession systems. However, many of its sections may also be useful for planning performance audits of PSAs. (Compliance audits are also common for PSAs.)

Royalties apply once production has begun at a new site. There are different types of royalties, the main ones being the following.

  • Unit-based royalties are a regulated price per unit of production (an ounce of gold or a tonne of coal, for example). This type of royalty requires controls to monitor production and to ensure there is no illegal (unrecorded) production.
  • Value-based (ad valorem) royalties are based on the value of the extracted commodities. The value is mass multiplied by price, so the difficulty of establishing price (which is set by the market and can vary day to day) is added to the difficulty of establishing mass (the mine’s production for a given period of time). Often, some production costs (transport, handling, insurance, smelting, and refining) are deductible from the royalty calculation. (This is known as net smelter return.)
  • Profit-based royalties are based on a company’s profits. While this is in many ways similar to an income tax, it is an additional charge for extracting public natural resources. Like an income tax, this type of royalty requires government departments with strong financial, technical, and administrative capacity to regulate and collect the royalties while minimizing the risk of tax evasion. (Transfer mispricing is a common example of tax evasion in the natural resources sector.) The challenge is substantial because many extractive companies are global market players that are not regulated by any single government.

Mining companies pay royalties in addition to their regular income taxes. However, royalty payments are deductible for income tax purposes in many jurisdictions.