Mining companies routinely deprive African countries of huge amounts of tax revenue that could be used to combat poverty, a new report reveals today.

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. These 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. Some governments, also anxious the contracts are not held up to public scrutiny – 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 used, the report alleges, to enable companies to artificially depress profits in countries where they operate to evade tax.

The report has been jointly published by ActionAid, Christian Aid, Third World Network Africa, Tax Justice Network Africa, and Southern Africa Resource Watch.

“One practical step to addressing poverty in Africa is to ensure that all multinational mining companies pay equitable amounts of tax,” said Brian Kagoro, ActionAid’s Pan African Policy Manager.

“If they did, governments could fund social welfare programmes with revenue generated from taxes rather than seeking to borrow money externally.

“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,” he added.

The report warns that although some attempts at reform are now being made in countries like Tanzania and Zambia, they could founder because of the recent crash in international mineral prices.

Governments across Africa are finding their negotiating capacity vis-à-vis mining companies suddenly diminished.

Those who have already started reforming their old mining tax regimes or renegotiating mining contracts are now facing enormous pressure from companies to reverse these tax reforms in response to falling international prices.

Report editor Kato Lambrechts, from Christian Aid’s Africa policy unit, said:  “The record amounts various minerals fetched until the bubble burst last year meant little or nothing to ordinary Africans.

“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.”

The laws, policies, and institutions that govern the financial payments made by mining corporations to governments need comprehensive reform.

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. 

ENDS

COUNTRY SNAP SHOTS:

The report looks at mining taxation and transparency in seven African countries: Ghana, Tanzania, Sierra Leone, Zambia, Malawi, South Africa and DRC.  The picture that emerges is one in which African governments are 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 – ten 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 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 mines 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 recently 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 even with its 15 per cent stake, the government will forego revenues of up to US$124.5m in the mine’s anticipated eleven year life span.

In Sierra Leone, an internal government review estimates that revenue losses from tax concessions granted to Sierra Rutile, the second largest mineral exporter in the country (rutile – or titanium oxide when finely powdered is a brilliant white pigment used in paints, plastics, papers and foods) will amount to US$98m between 2004 and 2016.

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