Doggett Final Review - Independent Review - Tax and Royalty Benchmark:

General Overview
The authors of the PWC report provide a thorough examination of the competitive position of the NWT in terms of overall tax burden for selected mine models and comparative jurisdictions. Their report meets the Objective (section 5) and Scope of Work (section 6) outlined in the Request for Proposals (Event ID 0000003040) posted by the GNWT for this study.

The jurisdictions chosen for evaluation and comparison, although partially pre-determined to mirror the previous (2008) competitive tax study (“Two Ducks Report”), are appropriate for the deposit models and assumptions used in the study.

The approach of first analyzing fixed deposit models across various jurisdictions followed by the consideration of variable models with cost structures specific to each jurisdiction adds an extra level of detail to the evaluation that was not present in the Two Ducks Report.

The models developed in The Two Ducks report and subsequently reused in the PWC report could have been more economically robust in order to better mesh with minimum corporate investment criteria. Having said that, the competitive ranking of jurisdictions and overall conclusions of either study would not change with modified models.

The addition of indirect taxes to the evaluation further augments the findings by fully capturing the tax burden in the various jurisdictions. While these values vary considerably across the dataset of mining jurisdictions, it is highly useful to see them enumerated by type of tax and jurisdiction. The addition of these extra charges to the original models developed in the Two Ducks Report negatively impacts the overall economic returns particularly in the low profitability scenarios.

The appendices and summaries of jurisdictional tax systems and the changes that have occurred since the Two Ducks Report in 2008 are clear, succinct and accurate. The presence of this material provides an extra level of confidence in the models and empirical results as well as a valuable resource for any future analysis.

Presentation of results for various tax components in reference to the median value of the distribution is useful in considering the broader competitive nature of the mining sector. A significant number of jurisdictions is shown to fall within 10% of the median value for most tax components. Thus, the distribution can be described with respect to a few outliers at either end bracketing more comparable values for most of the jurisdictions. Although not specifically requested in the RFP, the analysis of this distribution could easily be enhanced to provide additional metrics such as quartiles and standard deviation.

The use of average effective tax rates to illustrate the proportion of underlying value captured by government and industry is a good tool for assessing the fair return on mine development. Fair returns must balance the need for government to collect taxes and royalties and the incentive required for companies to assume the risks associated with capital-intensive mining projects. The authors correctly decline to specifically define what constitutes a fair return but show that the NWT collects less tax than two-thirds of competing jurisdictions under most scenarios evaluated under Phase 1 and Phase 2. They emphasize that it is essential for the NWT to remain competitive to sustain the economic contribution of mining which at 22% of gross domestic product (GDP) is higher than all but one of the other 20 jurisdictions in the study.

The conclusions reached are logical and supported by the findings presented in the study. Most comparative jurisdictions have made changes to their income or mining tax systems since the time of the Two Ducks Report. However, with respect to overall tax burden and most specific tax components, the NWT remains firmly in the large middle grouping of comparative jurisdictions. For Phase 1 and Phase 2 results, the NWT is usually within the bottom third to bottom half of the distribution with respect to taxes collected.

The report gets to the heart of the competitive challenges faced by the mining sector in the NWT in Phase 3 of the study. Increased capital and operating costs associated with remote conditions in the NWT result in lower returns for both government and companies and/or the necessity for higher quality deposits. The authors rightly conclude that these underlying locational and infrastructure challenges cannot be overcome solely by altering mining tax policy.