Profit taxation and royalties: evidence from gold mines in Sub-Saharan Africa

In this paper, we analyze theoretically and empirically the effects of tax changes on firms’ profits
in extractive industries. In the theoretical part, we assume a country that levies a profit tax and a royalty on the profits of extractive firms to maximize its tax revenues. The mining companies
may reduce their taxable income by cost manipulation. By analyzing the optimal choice of the government and of the firms, we first establish the optimal tax policy and then we investigate the impact of the optimal fiscal policy on firms’ profits.
In the empirical part of the paper, we estimate the effect of the profit tax and royalty on the
extracting firms’ profit in African countries during the period spanning from 2007 to 2018. We use
the Mining Intelligence database to constitute a panel of annual individual data from a database
of 363 gold mines located in 21 Sub-Saharan countries. We obtain an inverse relationship between the tax rate change of the two tax instruments and the profit of the firms.