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How mining companies deprive Africa of millions in lost taxes

The extent to which mining companies routinely deprive African countries of huge amounts of tax revenue that could be used to combat poverty is revealed today in two new reports.

Breaking the Curse: How Transparent Taxation and Fair Taxes can Turn Africa’s Mineral Wealth into Development highlights the methods mining companies use to pay as little tax as possible.

The second report, Sierra Leone at the crossroads: Seizing the chance to benefit from mining, details how one of the poorest countries in the world recently earned only US$9-10m in a year from mineral exports of US$179m.

Breaking the Curse, commissioned and published jointly by Christian Aid, ActionAid International, Third World Network Africa, Tax Justice Network Africa and Southern Africa Resource Watch, lists the measures that mining companies use to reduce their tax bills. These can include:

  • Forcing governments to grant tax subsidies and concessions by threatening to go elsewhere if they are not forthcoming

  • Insisting mining contracts signed with governments remain secret. Governments are themselves often keen to keep the contracts from public scrutiny, and are happy 
    to oblige.

  • Using the secrecy surrounding contracts to pursue aggressive tax avoidance strategies.

  • In at least one country, the Democratic Republic of Congo,  (DRC), there have been allegations of corrupt politicians  awarding illegal tax exemptions to mining companies in return for private gain.

  • False accounting is also used, the report alleges, to enable companies to artificially depress profits in countries where they operate to evade tax. According to one 
    set of calculations,  US$620m in untaxed export earnings in minerals were lost to South Africa in trade with the US between 2002 and 2005 inclusive1.  

Report editor Kato Lambrechts, from Christian Aid’s Africa policy unit, said: ‘The record prices various minerals fetched until the bubble burst last year meant little or nothing to ordinary Africans.  The methods outlined in the report meant that African countries were unable to take advantage of the boom in international metal prices. 

‘Mining companies have long ensured that they pay as little tax as possible to the countries that own such resources.  As a result, the citizens of mineral-rich countries continue to live in poverty.

‘The losses are fuelled by a lack of transparency concerning the financial remittances mining companies make to government institutions, coupled with the inability of revenue departments in poorer countries to audit the complicated accounts of multinational mining companies.’

Brian Kagoro, ActionAid’s Pan African Policy Manager, said: ‘Mining contracts and payments to governments need to be subjected to rigorous parliamentary scrutiny to improve accountability in this sector.

‘And we need to strengthen the capacity of national regulatory tax authorities as well as rationalise international accounting standards to ensure compliance.’

Among the report’s recommendations is a call for a new international accounting standard that would require multinational extractive companies to report on their profits, expenditures,  taxes, fees and community grants paid in each financial year in each country where they operate. That way, abuses can be quickly spotted. 

The second report, Sierra Leone at the Crossroads, is published by the country’s National Advocacy Coalition on Extractives2, which includes Christian Aid, ActionAid Sierra Leone, Catholic Relief Services and World Vision International. 

It reveals how a 2003 agreement with Sierra Rutile, one of the country’s two largest foreign investors, reduced the company’s royalty rate to 0.5 per cent until 2014 and scrapped entirely the payment of corporate income tax on profits until 2014. Rutile is processed into titanium oxide which, finely powdered, is a brilliant white pigment used in paints, plastics, papers and foods.

An internal government review estimates that revenue losses from tax concessions granted to the company will amount to US$98m between 2004 and 2016.

Of mining in the country generally the report says: ‘There is an extreme lack of transparency, with a lack of information at all levels, creating mistrust and ignorance about the financial position and intentions of government and companies.

‘Some companies provide no public financial information on their activities while the government does not publish a figure showing how much it earns from mining overall...

‘Many laws and policies need to change if ordinary Sierra Leoneans are to benefit significantly from mining.’

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For more information please contact Andrew Hogg on 0207 523 2058 or 07872 350534

COUNTRY SNAP SHOTS:

Breaking the Curse: How Transparent Taxation and Fair Taxes can Turn Africa’s Mineral Wealth into Development looked at mining taxation and transparency in seven African countries: Ghana, Tanzania, Sierra Leone, Zambia, Malawi, South Africa and DRC.  The picture that emerged was one in which African governments were deprived of many millions of dollars, partly as a result of royalty rates that were set too low in tax laws, or exemptions from royalties negotiated  by mining companies in secret mining contracts.

In Ghana, where gold accounts for 90 per cent of exports, the Minerals and Mining Act of 2006 charges royalties on a sliding scale of 3-6 per cent of gross sales value, replacing a 1986 Act which set a top royalty rate of 12 per cent. In reality, no company has ever paid more than 3 per cent in royalties because of tax allowances and lack of expertise in the revenue collection authority. Between 1990 and 2007, this cost the country US$1.163bn (if royalties had been paid at 12 per cent) and US$387.74m (if royalties were paid at 6 per cent).

In South Africa, the government has been drafting a new Royalties Bill for the past five years. The original draft proposed a royalty on company turnover of 8 per cent for diamonds, and 2.25 per cent for gold. The Bill, which has now reached the fourth draft, after pressure from mining companies, proposes royalty rates of 3.7 per cent and 2.1 per cent respectively, meaning the government will forego up to an estimated US$499m a year in lost revenue.

In Tanzania, no mining company, other than AngloGold Ashanti, had paid corporate income tax by the end of 2008 – 10 years after industrial mining began in the country. AngloGold Ashanti paid US$1m in 2007. Between 2002 and 2006, mining companies exported around US$2.9bn of gold. During that time, the government earned around US$17.4m in royalties, charged at 3 per cent of the market value minus transport and transaction costs.  If royalties were charged at 5 per cent as has now been recommended by a presidential commission, the government revenue would have increased by US$145m over five years.

In Zambia, the two largest mining companies managed to negotiate royalty rates of 0.6%, the lowest in Africa after copper contracts were negotiated in the late 1990’s.   Historical comparison puts the foregone revenue into perspective. In 1992, international copper prices averaged around US$2,280 a tonne and Zambian copper mines produced around 400,000 tonnes of copper.  Revenue earned from taxes and other remittances was US$200m. In 2004, copper prices averaged US$2,868 a tonne, and the country again produced 400,000 tonnes. However, this time around, Zambia earned only around US$8m from the copper mining industry.  

In Malawi, the government has acquired a 15 per cent share in Paladin Africa Ltd, which is to open the country’s first large scale industrial mine, a uranium project. In return for the stake, it gave Paladin a 2.5 per cent reduction in corporate income tax, and reduced royalty rates from the 10 per cent stipulated in law to 1.5 per cent for the first three years, and 3 per cent thereafter. The report estimates that the government will forego revenues of up to US$124.5m in the mine’s anticipated 11 year life span.

In Sierra Leone, an internal government review estimates that revenue losses from tax concessions granted to Sierra Rutile (see above) will amount to US$98m between 2004 and 2016.

In DRC, a 2007 World Bank document said: ‘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$200m per year should be generated by the sector.’ That year, 2007, the government claimed to receive only US$13m in taxes from mining.

Notes to editors:

1. South Africa – US mineral trade figures were calculated by the London-based New Economics Foundation, based on figures provided by Professor Simon Pak, president of the Tax Research Institute, Inc. who has advised US Congress on this issue.

2. Members of the National Advocacy Coalition on Extractives in Sierra Leone (NACE) are: Network Movement for Justice and Development, Talking Drum Studios, ActionAid Sierra Leone, World Vision International, National Forum for Human Rights, Anti-Corruption Commission, Sierra Leone Indigenous Miners Movement (SLIMM), Green Scenery, Global Rights Partners for Justice, Ministry of Local Government and Community Development, Ministry of Mineral Resources, Campaign for Good Governance, United Miners Union (UMU), Department of Geology, University of Sierra Leone (Furah Bay College), Christian Aid, Catholic Relief Services.