The Finnish Mining Tax Takes Steps forward

Finland does not currently have a mining tax regime. To examine mining tax alternatives in Finland, the Finnish Government commissioned a research group to conduct a study on various options. The research group published its report on 28 May 2021. The research group considers that taxing mining profits would be the most efficient option when compared to production-based royalties if a separate mining tax will be introduced. Although political consensus is still unclear, the report may have implications on the potential introduction of a separate mining tax in Finland.

Currently, no separate mining tax exists in Finland, and the mining companies are subject to the normal corporate income tax system. In addition to the corporate income tax levied on the mining companies, they are obliged to pay an excavation fee of 0.15% of the extracted minerals to the landowners of the mining area.

In its political programme, the Finnish Government calls for exploring the possibility of introducing a separate mining tax and how such tax could ensure a fair compensation for the extraction of non-renewable mineral resources in the bedrock. For this purpose, the Finnish Government assigned the study to a research group that would analyse mining tax regimes abroad and compare tax model alternatives that could potentially be implemented in Finland. An impact assessment on the economy and tax revenues was also conducted. The final report was published as part of the implementation of the Finnish Government’s Assessment and Research Plan.

The study concentrated on tax models that would primarily provide tax revenues to Finland and compensate the Finnish society for the extraction of minerals. The study considered four types of taxes, two of which were taxes on production (volume-based royalties and value-based royalties), and the other two were taxes on taxable net income (profit tax) and rent (rent tax). For profit tax purposes, the profit corresponds more or less to the taxable income, whereas for rent tax purposes, the capital cost is also deductible and the losses are fully credited.

The research group suggests that taxing mining profits through profit or rent tax would be the most efficient way to implement a separate mining tax compared to production-based royalties. Contrary to production-based royalties, profit and rent taxes were considered to have little impact on corporations’ investments, financial choices, mining activities, and the continuation of operations. If the objective is to collect tax revenue with little or no economic distortions, a tax levied on economic rent is the most highly recommended option.

However, disadvantages were also found with regard to profit and rent taxes. The report considers that the implementation of net-income based taxes may be challenging and that tax revenues are poorly predictable. The report suggests that the irregular inflow of tax revenues could be mitigated by combining a profit tax with a value-based royalty that would be collected already from the early stages of mining, even if it may have negative impacts on investments and production.

The report did not propose any concrete legislative proposals for a mining tax. However, there are political ambitions for introducing a mining tax, and the mining tax that will potentially be introduced may differ significantly from the report’s conclusions. In addition to the Finnish Government’s political programme, the Finnish Parliament has called for an assessment on whether it would be possible to implement a mining tax reform may be swiftly and diligently implemented by 2023. The various alternatives of a mining tax model are currently examined by the Finnish Ministry of Finance.

The details of a potential tax remain to be seen, but more information might be available by the end of 2021 when the Finnish Government is expected to motion its legislative proposals regarding the Mining Act Reform. Further preparations are needed to ensure that the mining tax conforms with the existing tax system as well as to consider the economic impacts of the tax alongside the implications of the Mining Act Reform. In addition, the constitutional and EU law requirements relating to the fundamental freedoms and state aid rules should be assessed in connection with the preparation.

Borenius will continue monitoring the legislative preparation process and will provide updates on any progress in the preparation of the potential mining tax model. If you have any questions regarding the matter, please feel free to contact any of Borenius’ attorneys listed in this alert or those with whom you usually work.