Abstract

The paper investigates whether an increase in royalty tax rates reduces or eliminates under-reporting by firms in Tanzania’s mining sector. It uses a theoretical approach to dynamic optimisation techniques. The findings suggest that an increase in the royalty tax rate does not necessarily lower the possibility of under-reporting. Our approach is to look at the royalty tax that is levied based on the gross value. Its impact on the firm’s extraction behaviour depends mostly on the prices of minerals. More importantly, the price movements counteract the impact of a given royalty tax. We also suggest that when a country wishes to reduce or eliminate under-reporting practices, it should strengthen the regulatory body that oversees the operations of firms in the sector.