New Report slams mine taxation rules for penalising African statesPublished by MAC on 2009-03-30
In a new report on the inequities and injustices of mining taxation,regimes in Africa, a group of African and international NGOs has called for two major changes. First, that the process of creating tax regimes and mechanisms of tax payment become transparent. Second, that the rules themselves be reformed.
Says the group: In some countries this would require an increase in the rates of royalties and other taxes; in others this would require a stop to the practice of negotiating tax breaks for individual companies in secret contracts."
Below are the Contents, Executive Summary and selected sections of the report
Breaking the curse: How transparent taxation and fair taxes can turn Africa's mineral wealth into development
Open Society Institute of Southern Africa, Johannesburg,
Third World Network Africa, Accra,
Tax Justice Network Africa, Nairobi,
Action Aid International, Johannesburg,
Christian Aid, London.
You can access the entire 68 page report at:
Executive Summary vii
How tax subsidies and tax avoidance are driving down revenues from mining viii
Tracing the legacy of World Bank-driven mining tax regimes ix
How to increase the revenue collected from mining activity x
A Short History of Mining Tax Regimes in Africa 5
Phase One: High Prices and High Revenue 5
Phase Two: Low Prices and Low Taxes 6
Phase Three: Commodity Boom and Low Government Revenue 11
Why Are Taxes Important? 15
Revenue is the Key Development Benefit of Mining 15
African Governments Fail to Collect a Fair Share of Mining Rent 16
Revenue Foregone through Tax Concessions and Tax Avoidance 19
Government Subsidies to Mining Companies 19
Tax Avoidance by Mining Companies 36
Breaking the Curse: How to Increase Revenue and Transparency 45
Reviewing Mining Laws and Contracts to Raise Revenue 45
Transparent Tax and Budgeting Systems 48
Transparent Company Reporting 52
Do Donors Help or Hinder Revenue Collection and Transparency? 54
Companies Reaction to Mining Tax Reforms 58
December 2008 saw a 'perfect storm' hit international metals prices, bringing the five-year international metal price boom to an abrupt end.
The combined collapse in demand for metals and sharp drop in the demand of institutional investors for commodity-based assets have slashed copper prices by up to two thirds, and gold prices by up to a third from their peaks in July 2008. The metals price bust has dealt a blow to the mining tax reforms undertaken in a few mineral-rich African countries in the past two years.
Emboldened by the metals price boom, governments in Zambia, Tanzania, South Africa and the Democratic Republic of Congo have amended their mining tax legislation or contracts with mining companies to increase the revenue they collect from mining rents. They did so partly under public pressure - African citizens have been all too aware that while the 'good times were rolling' for the global mining industry, they saw no increase in mining tax revenue to governments or spending on their basic development needs.
The poor balance sheet of mining tax revenue in times of record high metals and minerals prices has motivated African and international non-governmental organisations to collaborate in commissioning a study on mining taxation and transparency in seven African countries. The countries are Ghana, Tanzania, Sierra Leone, Zambia, Malawi, South Africa, and the Democratic Republic of Congo (DRC). Each country study examined past and present mining tax laws, tax rates, and the forces driving tax changes, and compared the tax terms of mining contracts with national tax laws.
The central argument made by the report is that African governments have not been able to optimize the mining tax revenue due to them before the
2003 to 2008 price boom; neither have they been able to capture the anticipated windfalls during the price boom. This argument is grounded on two main reasons:
* (i) Mining companies operating in Africa are granted too many
tax subsidies and concessions
* (ii) There is high incidence of tax avoidance by mining
companies conditioned by such measures as secret mining contracts, corporate mergers and acquisitions, and various 'creative' accounting mechanisms.
These two factors coupled with inadequate institutional capacity to ensure tax compliance contribute in a large measure to diminish the tax revenue due to African governments. In turn, they diminish the contribution of mineral resource rents to national development.
This explains the high preponderance of income poverty indicators in mineral endowed African countries and communities in mining areas. To reverse this trend and ensure the maximization of mining tax revenue for national development the report recommends reforms of policies, laws, and institutions that govern the financial payments made by mining corporations to national governments. Mining companies claim that they need to be compensated for the unique risks they face, such as price booms and busts, through special tax exemptions and concessions. But these tax subsidies, together with tax avoidance and alleged tax evasion practices by mining companies, have robbed African treasuries of millions of dollars of foregone tax revenue from the mining industry.
Fuelling these losses has been a lack of transparency and oversight of the financial remittances from mining companies to government institutions, coupled with the inability of government institutions to audit the complicated accounts of multinational mining companies.
How tax subsidies and tax avoidance are driving down revenues from mining
This report argues that African governments have failed to collect the additional rents generated by mining companies before and during the price boom because
* (i) they have given tax subsidies to the industry and
* (ii) mining companies have been pushing for tax breaks in secret
mining contracts, amounting to an aggressive tax avoidance strategy.
As a result, the citizens of mineral-rich countries continue to live in poverty, and are in some cases subject to violent conflict fuelled by the wealth generated from mineral resources as is the case today in the eastern DRC. To break this 'resource curse' and turn mineral wealth into revenue for development, the laws, policies, and institutions that govern the financial payments made by mining corporations to national governments need to be reformed.
In the report, estimates are given of the revenue foregone by the governments of Malawi, South Africa, DRC, Tanzania, Sierra Leone, Ghana and Zambia as a result of special tax breaks given to companies in secret contracts or in the mining tax laws promulgated in these countries since the 1990s. In Ghana, South Africa, and Tanzania, the report estimates that lower royalty rates have cost or will cost treasuries up to US$68m, US$359m, and US$30m a year respectively. In Malawi and Sierra Leone, tax breaks granted in mining contracts have cost or will cost treasuries up to US$16.8m and US$8m a year respectively. In the DRC, the tax exemptions in a single mining contract have cost the treasury US$360,000 a year.
African mining tax regimes are a mix of secret and discretionary tax deals, as well as tax laws enacted through parliament. Most mining tax laws dating from the 1990s have lowered taxes considerably to attract new foreign direct investment into the sector. This shift to lower taxes has been promoted by the World Bank in all its client countries in Africa, as a means to revitalize the mining sector. Many of these laws allow ministers to negotiate tax deals with individual mining companies at their discretion, often leading to lower royalties, corporate taxes, fuel levies, windfall or other taxes than those stipulated in the law.
At their worst, contracts may completely exempt companies from any taxes or royalties, as was the case in a number of the mining contracts signed between private companies and state-owned enterprises in the DRC between
1997 and 2003.
Tracing the legacy of World Bank-driven mining tax regimes
This report traces the history of mining tax regimes in Africa since independence, throughout the booms and busts in international metals prices. It pays particular attention to the drive of the World Bank to open up Africa's mining sector to foreign private investors since the 1990s, which has shaped subsequent mining tax regimes in all its client countries. Next, the report argues that revenue is the key development benefit from mining, which explains why an equitable and transparent mining tax regime is of paramount importance if mining wealth is to translate into future development.
The core of the report investigates the tax subsidies given to mining companies in mining tax laws and contracts, and gives estimates of some of the costs of these exemptions. These subsidies take the form of lower tax rates and higher and faster tax deductible capital allowances. It then investigates the tax avoidance strategies used by mining companies, focusing primarily on the negotiation of tax breaks in secret mining contracts. This tax avoidance strategy is in contravention of the OECD Guidelines on Multinational Enterprises, to which many of these companies claim to ascribe. Some mining companies have also been accused of illegally evading taxes - in Tanzania a government-commissioned auditor has alleged that the country's four main gold mining companies have over declared their losses by millions of dollars.
How to increase the revenue collected from mining activity
To reverse the 'paradox of plenty' characteristic of many mineral-rich societies in Africa - whereby countries with the most natural resources are often the poorest and worst governed, two major changes are needed.
First, the process of creating tax regimes and mechanisms of tax payment need to become transparent. This transparency requires equal opportunities for citizens to monitor payments, receipts and utilization of mineral tax revenues. To contribute to such transparency, a new international accounting standard, which requires all multinational companies to report on their remittances to governments, and their profits and expenditures in each of the countries where they operate, needs to be established.
The International Accounting Standards Board is presently discussing whether or not to introduce such a standard for the extractives sector.
This would be an important systemic reform, which would enable governments and citizens to track where companies pay tax, and how much.
This would make it more difficult to shift profits between subsidiaries of different companies.
Second, African mining tax regimes need to be reformed to ensure that African governments are able to collect a fair share of mining rents to fund their national development plans. In some countries this would require an increase in the rates of royalties and other taxes; in others this would require a stop to the practice of negotiating tax breaks for individual companies in secret contracts.
There is a real danger that the crash in international mineral commodity prices, coupled with the reduction in international finance available for new mining investment, could set back the mining tax reforms underway or recently enacted in countries like Tanzania, and Zambia. In Zambia, the minister of finance announced in his budget speech at the end of January 2009 that he will reverse a tax amendment passed in parliament less than a year ago, introducing a new windfall tax. In Tanzania, the minister of finance has failed to implement any of the tax increases recommended by a presidential commission tasked to review the country's mining tax regime in his June 2008 budget speech, although he did introduce a turnover tax on companies declaring losses three or more years in a row, directly aimed at mining companies.
Too many African governments are still unwilling to open up their tax deals and tax receipts from mining companies to public and parliamentary scrutiny; and too many mining companies are still pushing for tax exemptions and fail to report what they earn and what they remit to government in each jurisdiction where they operate. Transnational mining companies have also been pushing for tax exemptions and fail to report what they earn and what they remit to government in each jurisdiction where they operate. The credit crunch and its impact of a reduction in finance available for mining investment are set to motivate governments to continue such secret deals. The crunch will also give mining companies the moral instrument to demand more exemptions. These are systemic and political complications that threaten the reform agenda.
The report argues however, that both systemic and political solutions are needed to increase mining revenue and transparency. At the systemic level, a new international financial reporting standard is needed, which all companies registered on stock exchanges will need to implement. It should require them to report on their financial operations and remittances to government and other structures on a country-by-country basis. This will allow citizens and parliaments to monitor the financial flows between parent companies and subsidiaries, and detect tax avoidance practices.
African governments also need to revise their company acts to require the subsidiaries of multinational mining companies incorporated in their jurisdictions to publish the financial information required by the Extractive Industry Transparency Initiative (EITI). This will ensure that privately or state-owned mining companies such as the growing number of Chinese state-owned or financed mining companies are required by national law to publish their profits and losses, and remittances to government and other structures.
To African governments
1. Collaborate with the United Nations Economic Commission for
Africa (UNECA) to develop and publish an easy to use guide on mining taxation. The guide should cite best practice and detail the purpose, costs in foregone revenue and benefit of each type of tax instrument and tax concession
2. Review their company and financial laws to require all
extractive industry companies to use the EITI template in their annual financial reports by law
3. Stop the practice of granting tax exemptions to mining companies
in mining contracts. All mining tax rates and terms should be legislated in the substantive law and merely confirmed in mining development agreements.
To African parliaments
1. Pass laws that require mining development agreements to be
ratified by parliaments, as is the case in Ghana and Sierra Leone, and made public
2. Push for a new international accounting standard that would
force companies to report on their profits, expenditures, and taxes, fees and community grants paid in each financial year on a country-by country basis
To the International Accounting Standards Board
Adopt a new international accounting standard for extractive industries, which require them to report on their profits, expenditures, and taxes, fees and community grants paid in each financial year on a country-by-country basis
To bilateral and multilateral donors
Scale up their financial assistance to African governments to improve their capacity to monitor and audit the accounts of mining companies, and to review their mining tax regimes. African governments should be free to use this finance to purchase legal and other technical assistance from any service provider of their choice.
In Ghana, the Minerals and Mining Act of 2006 charges royalties on a sliding scale from 3% to 6% of gross sales value. This law replaced the Minerals and Mining Act of 1986, which used a sliding scale of 3 to 12 %. According to the EITI Aggregator report, however, no company has ever paid more than 3% in royalties, partly because of high capital allowances, and partly because Ghana's tax collection authorities do not know how to use the formulae. Gold accounts for 90% or more of Ghana's mineral exports. According to our calculations, between 1990 and 2007, the government had foregone revenue of between US$387.74m (if royalties were to be paid at 6%) and US$1.163bn (if royalties were to be paid at 12%). In 2005, for example, the government would have collected more than half of the country's debt repayment if additional royalties were paid at the rate of 12%. In each year, additional royalties would have exceeded HIPC debt relief payments.
In South Africa, the government has been drafting a new royalties Bill since March 2003. Parliament is expected to pass this Bill in May 2009.
The mining industry and South Africa's competition commission have argued strongly for royalties to be profit-based rather than value-based. The original draft proposed a royalty on company turnover of 8% for diamonds, and 2.25% for gold. This rate has been reduced to a profit-based royalty of 3.7% on diamonds and 2.1% on gold by the fourth draft in June 2008. If we use the royalty rates proposed in the third draft of the Bill, which range from 2.98% to 4.63%, the South African government would forego an estimated US$359m to US$499m a year in revenue from unrefined minerals - based on earnings for unrefined and refined metals in 2006, by lowering royalties to the lower rates proposed in the fourth draft of the bill.51
In Tanzania, no mining company, other than AngloGold Ashanti, had paid corporate income tax by the end of 2008 - 10 years after industrial mining companies started operating in the country.52 AngloGold Ashanti paid US$1m in 2007 (see section below). Therefore, royalty payments have been the main avenue for revenue collection. Between 2002 and 2006, mining companies exported around US$2.9bn of gold. During the time, the government earned around US$17.4m a year in royalties, charged at 3% of the net back value (market value minus cost of transport and
transactions) of gold exports.
If these royalties were to be increased to 5% as recommended by the presidential commission in charge of reviewing all mining agreements,53 government revenue would have increased to US$29m a year or an extra US$145m over the five years. Tanzania is one of the ten poorest countries in the world - this funding could have swelled government coffers to pay for essential health, education and other basic services to Tanzanians. For example, the government's budget for 2007/8 envisages spending US$48 per person on education, health, infrastructure and
water.54 US$145m could have paid for over 3 million people to be provided with these services.
Tax Avoidance by Mining Companies
i) Negotiating tax breaks in secret contracts
The OECD Guidelines for Multinational Enterprises state that 'enterprises should refrain from seeking or accepting exemptions related to . taxation not contemplated in the statutory or regulatory framework'. Despite this global standard, multinational mining companies seeking to invest or expand their investment in Africa continue to enter into confidential agreements with governments to acquire special tax rates and concessions that are outside the statutory framework. These tax concessions are normally included in a mining development agreement, which sets out the detailed responsibilities of each party. These agreements are legal commercial contracts, and override national law.
Where they include tax rates, these override the national tax regime.
Confidential mining development agreements have been a key instrument used by companies to avoid paying mining taxes set out in the national law. They have been able to obtain these exemptions in countries desperate to attract foreign private investment into their mining sector since the 1990s after the World Bank told them that their existing mining tax regimes, as set out in mining and income tax laws, were not conducive to private investment. Instead of revising their tax laws through parliament, high-level politicians started making secret tax deals with individual mining companies - giving the latter ample opportunity to push for as small a tax burden as possible.
This section will outline how these tax deals have been made in Zambia, Tanzania, Malawi, Sierra Leone, Ghana and the DRC, and to what extent they differ from the taxes stipulated in national tax laws. It will also provide estimations in Zambia, Malawi, and Sierra Leone of the amount of revenue foregone as a result of the tax exemptions negotiated.
In Zambia, the mining development agreements negotiated with private investors who took over the copper mines after the privatisation of Zambia Consolidated Copper Mines in 1998 offer huge tax exemptions to mining companies. The mining law allows the minister in charge to enter into private agreements with companies. According to Lennard Nkhata, acting permanent secretary in the Zambian Department of Minerals and Mining, 'the private sector wanted concessions so that when they take over these assets they would be able to recapitalise them and at the end of the day, make these mines profitable.
The companies wanted to drive certain taxes down . So the whole package is very, very attractive'.61 Companies obtained enormous tax concessions in their agreements with the government - which was paying Clifford Chance, a London-based international legal firm, for this advice. The two largest mining companies, Konkola Copper Mines (KCM), owned by Vedanta Plc in 2004, and Mopani Copper Mine, owned by First Quantum, managed to negotiate deals whereby they would pay only one fifth of the royalty stipulated in the mining law. At 0.6%, these royalty rates were the lowest in Africa.
A further concession allows them to defer royalty payments if their cash-operating margin falls below zero. Together, these tax breaks have drained government coffers from much-needed revenue for development spending. Vedanta Plc bought KCM from Anglo American in 2004 at a knock down price of US$50m. At the time copper prices were low, the mine required huge new investment, and Anglo American did not believe it was an economically viable proposition. However, as the commodity boom took off, KCM declared an increase in operating profits from US$52m in 2005 to US$206.3m in 2006.
First Quantum, meanwhile, reported increased net earnings from US$4.6m in 2003 to US$152.8m in 2005. While 'the good times were rolling' for these companies, 62 Zambia's minister of finance in his 2006 budget speech estimated that the country would earn less than US$11m from copper mining royalties in the next financial year.63 Historical comparison puts this foregone revenue in perspective. In 1992, international copper prices averaged around US$2, 280 a tonne and Zambian copper mines produced around 400,000 tonnes of copper. Budget revenue earned from copper mining taxes and other remittances was US$200m. In 2004, copper prices averaged US$2.868 a tonne, and after some rehabilitation of the copper sector, the country again produced 400,000 tonnes of copper.
However, this time around, it earned only around US$8m in budget revenue from the copper mining industry.64 Companies also pushed for a reduction in corporate income tax rates, from the 30% stipulated in the law, to 25%, as well as an exemption from the 10% withholding taxes stipulated in the law. Between 2002 and 2004, the government collected only US$3m in royalties. We calculated that if companies had paid the 3% royalties on gross sales, as stipulated by the Mining and Minerals Act, the government would have earned an additional US$63m, revenue that could have been used to finance its national development strategy.65
These tax breaks are fixed for a period of up to 20 years. The mining development agreements all stipulate that mining companies can take the government to an international arbitration court if these tax exemptions are withdrawn. This is exactly what First Quantum has threatened to do after the Zambian parliament passed amendments to the income tax law in April 2008, overriding the tax exemptions in the mining development agreements.
In Tanzania, large industrial miners have signed six mining development agreements with the government over the past 10 years. None of the gold mining companies sought exemptions from royalties or corporate income tax rates in any of the contracts. However, they did seek significant exemptions from local government taxes, withholding taxes, and fuel levies. According to the Commissioner for Minerals, Dr Peter Kafumu, negotiating with the mining companies was an intimidating experience, much like being faced with a traditional weapon:
'The companies are holding a panga by the handle and we are getting the sharp end.'
In the substantive law, local government taxes are charged at 0.3% of the value of company turnover, whereas the mining agreements stipulate that companies will not pay local government tax in excess of US$200,000 a year. Apart from the fact that these amounts are far lower than 0.3% of company turnover, local governments have not been collecting even the stipulated US$200,000 from mining companies.
Given the huge pressure companies put on infrastructure and communities in the areas where they operate, these taxes are crucial if local governments are to provide the social and other services needed for them to continue operating. The agreements exempt companies from paying withholding taxes on interest to related parties such as parent companies or associates, although the 1998 law stipulates that they do need to pay withholding tax on these loans.
Companies have also pushed for exemptions from fuel levies. The Bomani Commission, appointed by the president to review the mining development agreements, estimates that the government has foregone Tsh39.8bn in
2006/7 and Tsh59bn in 2007/8 in revenue as a result of fuel levy exemptions to six large mining companies. If they are only exempt from the fuel they need for generators used in production, as suggested by the Bomani Commission, the government will be able to reduce these
losses.66 Mining contracts have also set stamp duties at 0.3%, about a tenth of the rate of 4% stipulated in the law.67
In Malawi, the main legal framework for mining is the Mines and Minerals Act, which dates back to 1981. The new uranium project at Kayalekere in the north of the country, operated by Paladin Africa Ltd, is the first large scale mining project to be undertaken in Malawi. The project has been mired in controversy as civil society organisations have taken the government to court for violations of Malawi's constitutional and environmental law. They accused the government of negotiating a mining development agreement with the company without conducting a proper environmental impact study, for keeping the agreement secret, and for allowing the project to go ahead in the absence of laws regulating uranium mining.
So far, the government is confident that the tax exemptions it has given Paladin in the mining development agreement will not leave public coffers empty as happened in Zambia, and to some extent Tanzania.
According to Ellason Kasonga, director in the department of mines, 'we knew the uranium deposits were there, but it was better to leave it there rather than get a raw deal. We saw how our neighbouring countries had blundered and we decided to learn from them'.68 In our analysis, the government has not learned any lessons. The government decided to acquire a 15% share in the company in return for a number of tax breaks in its mining contract. Paladin will enjoy a 2.5% reduction in corporate income tax, a reduction in royalty rates from the 10% stipulated for unrefined minerals in the law, to 1.5% for the first three years, and 3% thereafter.
We have calculated the revenue the government has foregone as a result of this deal. The best estimate of revenue foregone can be made on royalties, given that they are relatively easy to calculate on the basis of gross estimated sales. It is more difficult to calculate foregone revenue from the reduction in corporate income tax rates, given that companies can delay the declaration of taxable income for many years due to the huge capital and operational expenditures involved in mining.
The latest estimates are, for example, that company capital expenditures are running into US$200m against original projections of US$187m.69 The company is unlikely to declare any profits until it recoups these expenses from sales income, which may take several years. Given that the company's own bankable feasibility study shows a reduction in expected revenue from US$195 a year, to US$70m a year in the last four years of operation, the main budget revenue will be collected from royalty payments.70
Based on the company's own bankable feasibility study, it will sell about US$197m of uranium in the first seven years of operation. In our calculation, this should earn the Malawian treasury about US$19.7m a year, at a royalty rate of 10%, and when sales fall in the last four years of the mining operations to US$70m a year, the government should still earn about US$7m a year. However, the huge royalty discounts given in the tax deal, mean that the government will earn only about US$2.9m a year for the first three years of operations, and US$5.8m for the next four years. After that, royalty income will fall back to US$2.1m.71
The government will therefore forego US$16.8m a year for the first three years of operation, and a further US$13.9m a year in the next four years. In the last four years, it will forego about US$5m a year. In total, this amounts to US$124.5m over the 11 years of the project. Even if the government lowered royalties by half, to 5%, charged by the Namibian government, where Paladin operates another uranium mine, this will still result in US$62.25m foregone over the 11-year duration of the project. The US$10m promised by the company for development and water projects in the Kayalekera community, which is tax deductible, pales in comparison to the lost revenue.
In Sierra Leone, mining forms the backbone of the government's development strategy. Before the 10-year civil war from 1991 to 2001, mining generated around 20% of the country's fiscal revenues. Today, however, revenues from mining are miniscule. Most government income is collected in the form of export taxes on diamonds. In 2006, total government revenue from all minerals amounted to between US$9m and US$10m, about 5% of diamond sales totaling US$179m.
Studies suggest that with significant institutional and capacity reform, Sierra Leonean companies could sell US$1.2bn of minerals a year by 2020
- a sevenfold increase over current levels. With the right government tax framework and budget spending, the income earned from these exports could create the conditions for up to a million people to step out of
Sierra Rutile, the second largest mineral exporter in Sierra Leone, has acquired extraordinary tax exemptions through three agreements signed with the government. In 2001, the government and Sierra Rutile signed an agreement, which was enacted in parliament in 2002.73 The Sierra Rutile Agreement Act of 2002 sets royalty rates at 3.5% of total sales, and income tax at 3.5% of turnover, or 37.5% of profits, depending on whichever is higher. The law also contains a stability clause, which allows Sierra Rutile to continue paying the taxes specified in the Act for the duration of the mining lease, which is 25ment signed a memorandum of understanding with Sierra Rutile, which overturned some of the provisions of the Act. First, it reduced the royalty rate to a miniscule 0.5% until 2014, after which it would revert to 3.5%. It also reduced the turnover tax to 0.5% until 2014, and scrapped entirely the payment of corporate income tax on profits until 2014. It further reduced the fuel import duty from 12% stipulated in the law, to 1% until 2014.
A World Bank review of Sierra Leone's mining industry in 2005 noted that this fiscal package was 'largely driven by the mining company' who argued that it needed to embark on a large refurbishment programme and that it had previously lost tens of millions of dollars worth of equipment during the civil war. According to senior tax officials, the government was in 'desperate circumstances' and wanted to attract further investments at all costs. In February 2004, the government reached an agreement with the company, following the 2003 MOU, confirming that it would forego pay-as-you-earn taxes of up to US$37m in return for a 30% share in the company, accrued at a rate of 3% a year.
An internal Sierra Leone government review estimates that revenue losses from the tax concessions granted to Sierra Rutile would amount to US$98m between 2004 and 2016 - or around US$8m a year. Other estimates, using recent company revenue projections, have put the losses at US$68m, or US$5.6m a year. Sierra Leone is the poorest country in the world - this additional income would enable the government to plan for greater expenditure on health, education and infrastructure services based on its national development plan.
In the DRC, the recent history of mining is mired by allegations of corrupt politicians awarding illegal tax exemptions to mining companies in return for private benefits. These allegations have been well
documented.74 The World Bank has funded a number of studies and audits into the financial terms of the mining contracts signed since 1996.
Amongst these, a 2004 audit by Ernst and Young found that Gécamines did not receive any share from the profits made by its joint ventures with private mining companies, due to the terms of the mining contracts it had negotiated with private mining companies.
The president and senior officials in the ministry of mining were responsible for signing these contracts.75 In 2005, the Lutundula Commission, a parliamentary team appointed by the government to investigate the country's mining contracts signed between 1996 and 2003, denounced the interference of high-level politicians in these deals. It found that most contracts were 'disproportionately advantageous to mining companies'. In response to these findings, an Inter-ministerial Commission was tasked in April 2007 to review all the mining contracts signed between the government and mining companies - most of them junior
- between 1996 and 2006.
The report found that none of the mining contracts complied with the law. It recommended that out of 61 contracts examined, 39 be renegotiated and 22 cancelled as they were too far out of line with the Mining Code. The taskforce appointed to take forward these recommendations have decided that 14 contracts could go ahead with the submission of new feasibility studies, but 25 have to be modified by 2010. At the worst end of the spectrum of contracts, companies were entitled to complete exemption from any income tax and royalty payments.
Many companies received much reduced tax rates or deferral of tax payments for at least five years. We examine only one contract, classified as a category C contract that is due to be cancelled.
In 2005, Oryx Natural Resources, incorporated in the Cayman Islands, signed an agreement with MIBA, the government- owned diamond company, to purchase an 80% share in Sengamines, a US$2bn diamond concessions south of Mbuji-Mayi. First African Diamonds, a South African company, bought the Oryx share in 2006.76 The contract stipulates that the company is exempt from paying income tax, royalties and most of the other taxes specified in DRC tax law.
The only taxes it would pay were a professional contribution tax -- but only six years after production started; internal turnover tax (tax on national transactions) - but only due six years after the start of production; expatriate salary tax - only due seven years after the start of production; and withholding tax on dividends - only due five years after the start of production.
According to Belgian-based International Peace Information Service
(IPIS),77 Sengamines exported an average of 80,000 carats of diamonds a month between 2001 and 2003, as reported by its Antwerp dealers, at a very low price of US$15 a carat, amounting to US$14.4m a year. If the company had paid the very low 2.5% royalty on gross value stipulated in the law, the government would have earned a minimum of US$360,000 a year from royalties alone. The figure would double if the government charged the 5% royalty paid by companies in most other diamond-rich African countries.
This figure, however, is only a very small fraction of the massive revenue foregone by the DRC government due to companies seeking tax exemptions in their mining contracts. This is illustrated by the miniscule income earned by the DRC from mining. According to World Bank figures, budget revenue from mining taxes amounted to only US$16.4m in 2003, US$15.7m in 2004, US$26.7m in 2005, US$11.7m in 2006, and US$13m in 2007.78
According to a 2007 World Bank document, "fraudulent practices by companies and government agencies have created a gap [between] what should be paid versus what is actually recorded as having been received in terms of royalties and surface rents alone. The gap is larger if total mining taxes are considered: about US$200 million per year should be generated by the sector'.79 The government claimed to receive only US$13m in taxes from mining in 2007, just over 5% of what it should have earned.
To put this amount in perspective, in Sierra Leone, where only two industrial mining companies are currently operating, mining taxes earned the government about US$10m in 2006. This culture of secrecy and individually negotiated tax deals in contracts is systematic across all African countries and embedded in mining companies' way of doing business. It undermines all efforts to bring greater transparency to the tax payments of companies and to hold governments to account for the spending of this money.