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From the executive summary:
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 organizations 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, and (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.
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$68 million, US$359 million, and US$30 million a year respectively. In Malawi and Sierra Leone, tax breaks granted in mining contracts have cost or will cost treasuries up to US$16.8 million and US$8 million 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.