Extracting A Fair Share Kato Lambrechts Missing Millions


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Extracting A Fair Share Kato Lambrechts Missing Millions

  1. 1. How transparent taxation and fair taxes can turn Africa’s mineral wealth into development Breaking the Curse
  2. 2. Why this report? <ul><li>A number of organisations working on mining in mineral-rich countries across Africa realised that governments have not benefited from the 2003-2008 boom in international mineral prices </li></ul><ul><li>We decided to bring together existing research and commission new research that document and analyse the mining tax regimes in Zambia, Tanzania, Malawi, Ghana, DRC, Sierra Leone and South Africa, to make recommendations for changes to African governments </li></ul>
  3. 3. Key argument <ul><li>International mineral prices rose almost 3-fold between 2002 and July 2008, when they crashed </li></ul><ul><li>During this time, governments have failed to collect revenue in the form of taxes and royalties on the extra profit earned by mining companies </li></ul><ul><li>There are two main reasons for this: </li></ul><ul><li>1. Governments are at present giving excessive tax subsidies or concessions to mining companies </li></ul><ul><li>2. Mining companies are pursuing aggressive tax avoidance (and sometimes evasion) strategies </li></ul><ul><li>How can we resolve this problem? </li></ul><ul><li>1. African governments need to revise their mining tax regimes in a way that would </li></ul><ul><li>enable them to collect fairer royalties on mineral sales and tax on mining profits </li></ul><ul><li>2. International and national accounting standards should require multinational </li></ul><ul><li>mining companies to publish their financial payments in each country where they </li></ul><ul><li>operate to allow tax officials to trace profit-shifting practices of mining companies </li></ul>
  4. 4. A short history of mining tax regimes in Africa <ul><li>Phase One (1960s/70s): </li></ul><ul><li>Mineral prices were high, minerals were extracted and sold by SOEs, and governments were collecting high revenue </li></ul><ul><li>Phase Two (1980s/90s): </li></ul><ul><li>Lower minerals prices, debt crises, World Bank enters Africa and starts rewriting mining tax laws. They key </li></ul><ul><li>strategy was to attract private FDI in the minerals industry through a shift to lower taxes and more tax concessions. </li></ul><ul><li>New investment in mining sector, especially Canadian and other ‘juniors’ </li></ul><ul><li>Phase three (2002-2008 ) </li></ul><ul><li>Boom in commodity prices, more risk-prone investors get finance and enter industry, looking for quick profits. African </li></ul><ul><li>governments start reviewing mining tax laws to enable them to collect more royalties and taxes on higher sales and </li></ul><ul><li>profits, against the wishes of mining companies </li></ul><ul><li>Phase four (2009-) </li></ul><ul><li>Reversal of tax regime changes made during the boom, or putting on hold suggested new tax reforms, </li></ul><ul><li>mostly under pressure from mining companies, who argue that they cannot operate unless tax </li></ul><ul><li>concessions continue or are re-introduced. Mineral prices are mostly back at 2000-2002 levels – and slightly rising </li></ul><ul><li>since mid-2009 </li></ul>
  5. 5. Why are mining taxes important? <ul><li>Mineral extraction is an enclave economic activity, with very few forward and backward linkages into the economy, creating relatively few jobs. Therefore tax revenue spent through the budget/other mechanisms is the key benefit of mining to mineral-rich societies and economies </li></ul><ul><li>Mining companies cannot provide communities with the basic services to which they are entitled in an efficient or equitable way. They are not elected by communities, therefore have no legal accountability for how money is being spent. Their voluntary CSR contributions are a very small % of profits </li></ul><ul><li>Communities and ecosystems around mining activity face enormous risks – mining is always a cost to the environment and surrounding communities. Mining tax regimes are structured to safeguard mining comapnies from ‘commerical’ or political risk. The tax regime, instead, should assist the government to help compensate and safeguard communities and the environment around mining areas </li></ul><ul><li>Mining rents collected as taxes can be monitored by civil society and parliaments, and need to go through transparent budgetary processes </li></ul>
  6. 6. Revenue foregone through tax subsidies and tax avoidance <ul><li>Government subsidies to mining companies </li></ul><ul><li>‘ There is nothing more sad in this business than a very poor country </li></ul><ul><li>ready to allow any foreign investor to pay little or not taxes in the hope </li></ul><ul><li>of attracting more FDI. The incentives generate almost no additional </li></ul><ul><li>foreign direct investment and are mostly a dead loss to the treasury’ </li></ul><ul><li>Government revenue from mining is determined by the rate at which </li></ul><ul><li>mining activity is taxed, as well as the tax base that the rate is applied </li></ul><ul><li>to. Mining companies receive tax subsidies by: </li></ul><ul><li>Paying lower rates than other companies </li></ul><ul><li>Reductions in their tax base through special allowances </li></ul><ul><li>Exemptions from paying certain types of taxes that other businesses have to pay </li></ul>
  7. 7. 1. Subsidies to mining companies <ul><li>Why mining companies want tax subsidies: </li></ul><ul><li>1. Their business is riskier than others (price volatility, geological uncertainty and political instability) </li></ul><ul><li>2. Massive initial capital outlays are required, unless these are immediately tax deductible, they won’t get finance (loans or equity) for their investment, and will face operational cash flow losses </li></ul>
  8. 8. 1. Subsidies to mining companies <ul><li>1.1 Lower tax rates </li></ul><ul><li>Roughly similar trends in all countries: </li></ul><ul><li>No VAT </li></ul><ul><li>No import or export taxes (except SL) </li></ul><ul><li>CIT rates down from 40% during 70s/80s to 30% or lower </li></ul><ul><li>Extremely low withholding taxes (between 10 and 15%) on dividends, loan interest and consultant fees compared to other mining economies (20-35%). These are easy to collect taxes and particularly when dividends become higher, important source of revenue to government </li></ul><ul><li>No windfall or additional profit taxes (Zambia tried to introduce, but changed the law a year later). Mining companies see windfall profits as compensation for their commercial risks </li></ul><ul><li>Very low royalties : given the huge capital allowances to mining companies, they often do not declare profits until 5-10 years into operation. Value-based royalties (or sales tax) is the only significant income governments earn from mining during the first years of operation. Royalty payments are easier to monitor and collect than CIT, which is very important given low tax administration in most countries (with the exception of SA). Mining companies do not want value-based royalties, but profit-based. They have successfully lobbied to change the content of the SA Royalty Bill to charge very low profit-based royalties. The South African government would forego up to $500m a year as a result. </li></ul>
  9. 9. 1. Subsidies to mining companies <ul><li>1.2 Manipulating tax base allowances </li></ul><ul><li>Mining companies have a right, like all other companies, to tax relief on the </li></ul><ul><li>costs they incur. However, they want to be able to deduct these costs(loan </li></ul><ul><li>interest, depreciation) immediately and in full from their tax bill. </li></ul><ul><li>In doing so, they defer their CIT (accounting profits) for up to 10 years. In </li></ul><ul><li>Tanzania, for example, AGA has announced that it will not declare taxable </li></ul><ul><li>profits until 2011, a full 10 years after starting operations – yet it has made </li></ul><ul><li>gross profits of $93m between 2002 and 2007. In Sierra Leone, SR will only </li></ul><ul><li>start declaring a taxable income in 2014, a full 10 years after starting </li></ul><ul><li>operations in 2004. </li></ul><ul><li>In Tanzania, mining companies are allowed to add a 15% allowance to any </li></ul><ul><li>capital expenditure that they were not able to offset against profits at the </li></ul><ul><li>beginning of each year. This ‘gift’ has cost the government $132 in lose revenues </li></ul><ul><li>between 1998 and 2003 </li></ul>
  10. 10. 2. Tax avoidance (and evasion) <ul><li>Negotiating tax breaks in secret contracts </li></ul><ul><li>OECD Guidelines: ‘ enterprises should refrain from seeking or accepting </li></ul><ul><li>exemptions related to...taxation not contemplated in the statutory or </li></ul><ul><li>regulatory framework’ </li></ul><ul><li>Despite these guidelines, mining companies continue to enter into confidential agreements with </li></ul><ul><li>governments to acquire special tax rates and concessions outside of the statutory framework. These </li></ul><ul><li>are normally included in a mining development agreement, which overrides national law. This has </li></ul><ul><li>been a key instrument used by mining companies to avoid paying mining taxes set out in the national </li></ul><ul><li>law. This culture of secrecy and individually negotiated tax breaks is systematic across almost all </li></ul><ul><li>African countries and undermines efforts to bring greater transparency to the tax payments of </li></ul><ul><li>companies. </li></ul><ul><li>In Zambia , 0.6% royalties negotiated in MDAs (a sixth of 3% stipulated </li></ul><ul><li>in law), partly explained why the government was earning only $8m in 2004 , </li></ul><ul><li>compared to $200m in 1992 , at similar prices and production levels. These tax breaks </li></ul><ul><li>are frozen for 20 years, which means companies can take legal action if the law changes </li></ul><ul><li>(as First Quantum and other companies have been threatening) </li></ul>
  11. 11. 2. Tax avoidance (and evasion) <ul><li>In Malawi, tax breaks in the uranium mining contract with Paladin will cost the </li></ul><ul><li>government an estimated $124m over 11 years . In Sierra Leone, the government has </li></ul><ul><li>estimated that it will forego $98m as a result of tax exemptions granted to Sierra Rutile. </li></ul><ul><li>In the DRC , the government has foregone a conservative estimate of $360 000 a year </li></ul><ul><li>from the tax exemptions in the contract with Sengamines; it has signed dozens of similar </li></ul><ul><li>agreements with even bigger companies </li></ul><ul><li>2.2 Trade mispricing and tax evasion </li></ul><ul><li>Trade mispricing occurs when companies under declare the value of their exports over </li></ul><ul><li>declare the value of their imports. In both instances, they reduce the profits they declare </li></ul><ul><li>in a particular jurisdiction. This is a common and illegal practice. There are no estimates </li></ul><ul><li>yet as to the prevalence in the minerals trade in Africa. New Economic Foundation, </li></ul><ul><li>however, has calculated that South African mining companies were under declaring </li></ul><ul><li>$620m in profits between 2002 and 2005, as a result of mispricing of trade between SA </li></ul><ul><li>and the US </li></ul>
  12. 12. 3. Tax avoidance (and evasion) <ul><li>In Tanzania , government-appointed auditors alleged that </li></ul><ul><li>the country’s four major gold mining companies had been </li></ul><ul><li>claiming capital expenditures without invoices or other </li></ul><ul><li>evidence to substantiate these claims, and thousands of </li></ul><ul><li>documents are missing preventing the auditor from </li></ul><ul><li>confirming royalty payments. </li></ul><ul><li>According to the auditors, this amounts to illegal tax </li></ul><ul><li>evasion, as their failure to keep Financial records in </li></ul><ul><li>Tanzania meant that they are in default of the law. The </li></ul><ul><li>government has foregone $132m as a result. </li></ul>
  13. 13. How to increase revenue and tax transparency? <ul><li>Governments need to ‘plug the leaks’ in their </li></ul><ul><li>tax systems that allow mining profits to leave </li></ul><ul><li>the country untaxed by: </li></ul><ul><li>Increasing tax and royalty rates charged on sales value and mining profits where these are too low </li></ul><ul><li>Reduce unnecessary tax allowances shrinking the tax base of mining companies </li></ul><ul><li>Eliminating the use of the secret mining contracts to grant companies special tax exemptions </li></ul>
  14. 14. How to increase revenue and tax transparency? <ul><li>Governments in Tanzania, Sierra Leone, Zambia, South Africa and the </li></ul><ul><li>DRC are reviewing their mining tax regimes; some have already or are </li></ul><ul><li>proposing increased tax rates, but none of these reforms propose to </li></ul><ul><li>stop the granting of tax exemptions in mining development </li></ul><ul><li>agreements </li></ul><ul><li>In Zambia, no oversight over the new Mineral Tax Account (more than </li></ul><ul><li>USD1bn in taxes and royalties) – will these be used to fill the </li></ul><ul><li>government’s current budget deficit of Kwacha 1.6bn? </li></ul><ul><li>To ensure that that the correct amount of revenue is collected from </li></ul><ul><li>mining sales and profits, and that this is spent equitably according to </li></ul><ul><li>countries’ agreed national development strategies, civil society and </li></ul><ul><li>parliamentarians need to be able to monitor the revenue collected </li></ul><ul><li>from mining companies, and how this is being spent. </li></ul>
  15. 15. How to increase revenue and tax transparency? <ul><li>At present it is impossible for citizens to monitor mining revenue collected </li></ul><ul><li>because </li></ul><ul><li>Confidentiality clauses in mining agreements prevent them from being made public </li></ul><ul><li>Mining contracts are not ratified or supervised by parliament </li></ul><ul><li>Freedom of information laws do not exist </li></ul><ul><li>Laws guaranteeing taxpayer confidentiality prevent public from scrutinising mining tax returns of companies </li></ul><ul><li>Mining multinationals are not required by international accounting standards to report publicly on their financial transactions and tax and fee payments in each country where they operate, so they can hide profit shifting between different subsidiaries </li></ul><ul><li>Tax breaks in mining contracts are frozen for the duration of the contract (10-25 years), which means changes in the substantive tax law can be challenged by the mining company </li></ul>
  16. 16. How to increase revenue and tax transparency? <ul><li>The development impact of mining is ultimately determined </li></ul><ul><li>by how mining royalties and other taxes are decided, </li></ul><ul><li>collected and redistributed </li></ul><ul><li>Yet, few African governments want to open up </li></ul><ul><li>mining tax deals, or stop the practice of negotiating </li></ul><ul><li>special tax deals, at the discretion of politicians, </li></ul><ul><li>with companies investing huge sums. Only in Ghana and </li></ul><ul><li>Sierra Leone do parliaments have a formal oversight role </li></ul><ul><li>(which they do not always fulfil) over mining contracts. </li></ul>
  17. 17. How to increase revenue and tax transparency? <ul><li>EITI: </li></ul><ul><li>This process is useful to push governments </li></ul><ul><li>and extractives companies to open up their </li></ul><ul><li>accounting and reporting of revenues. But it </li></ul><ul><li>is voluntary, and companies are still able to </li></ul><ul><li>shift profits to other subsidiaries. National </li></ul><ul><li>financial reporting laws need to require mining </li></ul><ul><li>MNC subsidiaries to publish full financial reports </li></ul><ul><li>according to the EITI template </li></ul>
  18. 18. How to increase revenue and tax transparency? <ul><li>A new international financial reporting standard (IFRS6): </li></ul><ul><li>PWYP is advocating for a new IAS requiring all extractive companies to report for each </li></ul><ul><li>country where they operate: </li></ul><ul><li>Total company turn over </li></ul><ul><li>Third party turnover </li></ul><ul><li>Third party costs </li></ul><ul><li>Interest paid on loans </li></ul><ul><li>Profit before tax </li></ul><ul><li>Tax charged on profits (current and deferred) </li></ul><ul><li>Other taxes and fees </li></ul><ul><li>Actual payments made to government and agencies for tax and charges in a given period </li></ul><ul><li>Deferred tax liabilities for the country </li></ul><ul><li>Gross and net assets </li></ul><ul><li>Number of employees, gross renumeration, related costs </li></ul><ul><li>Names of all subsidiaries working in the territory </li></ul><ul><li>The IASB has incorporated these recommendations in its new discussion paper on a new extractives </li></ul><ul><li>industry financial reporting standard – how do we make this happen? </li></ul>
  19. 19. Recommendations <ul><li>To African governments: </li></ul><ul><li>Collaborate with UNECA to develop and implement a best practice guide on mining taxation </li></ul><ul><li>Review company and financial laws to require all EI companies to use EITI template to file their annual financial reports </li></ul><ul><li>Stop granting tax exemptions to mining companies in secret agreements. Legislate all tax rates and terms in substantive law, and merely confirm in mining development agreements </li></ul>
  20. 20. Recommendations <ul><li>To African parliaments: </li></ul><ul><li>Pass laws that require MDAs to be ratified by parliament as is the case in Ghana and Sierra Leone </li></ul><ul><li>Push for a new IAS that require mining MNCs to report their profits, expenditures, costs, fees and tax in each country where they operate </li></ul><ul><li>To donors: </li></ul><ul><li>Scale up support to help African governments improve </li></ul><ul><li>their capacity to monitor and audit the accounts of mining </li></ul><ul><li>companies, and to review their mining tax regimes </li></ul><ul><li>African governments should be free to use this finance to purchase legal and other technical assistance from any service provider of their choice </li></ul>