breaking the curse: how transparent taxation and fair...

Breaking the Curse: How Transparent Taxation and Fair Taxes can Turn Africa’sMineral Wealth into Development is published by:Open Society Institute of Southern Africa, JohannesburgThird World Network Africa, AccraTax Justice Network Africa, NairobiAction Aid International, JohannesburgChristian Aid, London

© March 2009

This report may be freely quoted and reproduced with acknowledgement to thepublishers.

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Contents

Glossary ivAcknowledgements vExecutive Summary vii

How tax subsidies and tax avoidance are driving down revenues from mining viiiTracing the legacy of World Bank-driven mining tax regimes ixHow to increase the revenue collected from mining activity xRecommendations xi

Introduction 1

A Short History of Mining Tax Regimes in Africa 5Phase One: High Prices and High Revenue 5 Phase Two: Low Prices and Low Taxes 6Phase Three: Commodity Boom and Low Government Revenue 11

Why Are Taxes Important? 15Revenue is the Key Development Benefit of Mining 15African Governments Fail to Collect a Fair Share of Mining Rent 16

Revenue Foregone through Tax Concessions and Tax Avoidance 19Government Subsidies to Mining Companies 19Tax Avoidance by Mining Companies 36

Breaking the Curse: How to Increase Revenue and Transparency 45Reviewing Mining Laws and Contracts to Raise Revenue 45Transparent Tax and Budgeting Systems 48Transparent Company Reporting 52Do Donors Help or Hinder Revenue Collection and Transparency? 54Companies Reaction to Mining Tax Reforms 58Recommendations 59

Endnotes 61

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NEPAD New Economic Partnership for African Development UNECA United Nations Economic Commission for Africa (UNECA)AMP African Mining Partnership (AMP)EITI Extractive Industries Transparency InitiativeIMF International Monetary FundIDA International Development AssociationDfID Department for International Development GDP Growth Domestic ProductUNDP United Nations Development ProgrammeUNCTAD United Nations Conference on Trade and DevelopmentOECD Organisation for Economic Cooperation and DevelopmentUN United NationsECOWAS Economic Community of West AfricaSADC Southern Africa Development CommunitiesCDS Community Development SpendingFDI Foreign Direct InvestmentVAT Value Added TaxCIT Corporate Income TaxAGA AngloGold Ashanti’s KCM Konkola Copper Mines MoU Memorandum of UnderstandingIPIS International Peace Information Service IASB International Accounting Standards Board IFRS International Financial Reporting Standards

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Glossary

Acknowledgements:

This report was edited by Kato Lambrechts, with contributions from AbdulaiDarimani, Claude Kabemba and Wole Olaleye. The core findings of the report arebased on research conducted by Mark Curtis, Tundu Lissu, Thomas Akabzaa, JohnLungu, Alastair Fraser, Laurent Okitonemba, Dona Kampata, and PatrickKamweba. Alex Cobham, Rachel Moussie, Paul Valentin, and Richard Murphy haveprovided comments.

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December 2008 saw a ‘perfect storm’hit international metals prices, bringingthe five-year international metal priceboom to an abrupt end. The combinedcollapse in demand for metals and sharpdrop in the demand of institutionalinvestors for commodity-based assetshave slashed copper prices by up to twothirds, and gold prices by up to a thirdfrom their peaks in July 2008.

The metals price bust has dealt a blowto the mining tax reforms undertaken ina few mineral-rich African countries inthe past two years. Emboldened by themetals price boom, governments inZambia, Tanzania, South Africa and theDemocratic Republic of Congo haveamended their mining tax legislation orcontracts with mining companies toincrease the revenue they collect frommining rents. They did so partly underpublic pressure – African citizens havebeen all too aware that while the ‘good

times were rolling’ for the global miningindustry, they saw no increase in miningtax revenue to governments or spendingon their basic development needs.

The poor balance sheet of mining taxrevenue in times of record high metalsand minerals prices has motivatedAfrican and international non-govern-mental organisations to collaborate incommissioning a study on mining taxa-tion and transparency in seven Africancountries. The countries are Ghana,Tanzania, Sierra Leone, Zambia,Malawi, South Africa, and theDemocratic Republic of Congo (DRC).Each country study examined past andpresent mining tax laws, tax rates, andthe forces driving tax changes, and com-pared the tax terms of mining contractswith national tax laws.

The central argument made by thereport is that African governments

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Executive Summary

have not been able to optimize themining tax revenue due to them beforethe 2003 to 2008 price boom; neitherhave they been able to capture theanticipated windfalls during the priceboom. This argument is grounded ontwo main reasons: (i) Mining compa-nies operating in Africa are grantedtoo many tax subsidies and conces-sions (ii) There is high incidence of taxavoidance by mining companies condi-tioned by such measures as secret min-ing contracts, corporate mergers andacquisitions, and various ‘creative’accounting mechanisms. These twofactors coupled with inadequate insti-tutional capacity to ensure tax compli-ance contribute in a large measure todiminish the tax revenue due toAfrican governments. In turn, theydiminish the contribution of mineralresource rents to national develop-ment. This explains the high prepon-derance of income poverty indicatorsin mineral endowed African countriesand communities in mining areas. Toreverse this trend and ensure the max-imization of mining tax revenue fornational development the report rec-ommends reforms of policies, laws,and institutions that govern the finan-cial payments made by mining corpo-rations to national governments.

Mining companies claim that they needto be compensated for the unique risksthey face, such as price booms andbusts, through special tax exemptions

and concessions. But these tax subsi-dies, together with tax avoidance andalleged tax evasion practices by miningcompanies, have robbed African treas-uries of millions of dollars of foregonetax revenue from the mining industry.Fuelling these losses has been a lack oftransparency and oversight of the finan-cial remittances from mining companiesto government institutions, coupledwith the inability of government institu-tions to audit the complicated accountsof multinational mining companies.

How tax subsidies and tax avoidance are driving down revenues from miningThis report argues that African govern-ments have failed to collect the addi-tional rents generated by mining compa-nies before and during the price boombecause (i) they have given tax subsidiesto the industry and (ii) mining compa-nies have been pushing for tax breaks insecret mining contracts, amounting toan aggressive tax avoidance strategy. Asa result, the citizens of mineral-richcountries continue to live in poverty,and are in some cases subject to violentconflict fuelled by the wealth generatedfrom mineral resources as is the casetoday in the eastern DRC. To break this‘resource curse’ and turn mineral wealthinto revenue for development, the laws,policies, and institutions that govern thefinancial payments made by mining cor-porations to national governments needto be reformed.

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In the report, estimates are given of therevenue foregone by the governmentsof Malawi, South Africa, DRC,Tanzania, Sierra Leone, Ghana andZambia as a result of special tax breaksgiven to companies in secret contractsor in the mining tax laws promulgated inthese countries since the 1990s. InGhana, South Africa, and Tanzania, thereport estimates that lower royalty rateshave cost or will cost treasuries up toUS$68m, US$359m, and US$30m a yearrespectively. In Malawi and SierraLeone, tax breaks granted in miningcontracts have cost or will cost treasur-ies up to US$16.8m and US$8m a yearrespectively. In the DRC, the tax exemp-tions in a single mining contract havecost the treasury US$360,000 a year.

African mining tax regimes are a mix ofsecret and discretionary tax deals, as wellas tax laws enacted through parliament.Most mining tax laws dating from the1990s have lowered taxes considerably toattract new foreign direct investment intothe sector. This shift to lower taxes hasbeen promoted by the World Bank in allits client countries in Africa, as a meansto revitalize the mining sector. Many ofthese laws allow ministers to negotiatetax deals with individual mining compa-nies at their discretion, often leading tolower royalties, corporate taxes, fuellevies, windfall or other taxes than thosestipulated in the law. At their worst, con-tracts may completely exempt companiesfrom any taxes or royalties, as was the

case in a number of the mining contractssigned between private companies andstate-owned enterprises in the DRCbetween 1997 and 2003.

Tracing the legacy of World Bank-driven mining tax regimesThis report traces the history of miningtax regimes in Africa since independence,throughout the booms and busts in inter-national metals prices. It pays particularattention to the drive of the World Bankto open up Africa’s mining sector to for-eign private investors since the 1990s,which has shaped subsequent mining taxregimes in all its client countries. Next,the report argues that revenue is the keydevelopment benefit from mining, whichexplains why an equitable and transpar-ent mining tax regime is of paramountimportance if mining wealth is to trans-late into future development.

The core of the report investigates thetax subsidies given to mining companiesin mining tax laws and contracts, andgives estimates of some of the costs ofthese exemptions. These subsidies takethe form of lower tax rates and higherand faster tax deductible capitalallowances. It then investigates the taxavoidance strategies used by miningcompanies, focusing primarily on thenegotiation of tax breaks in secret min-ing contracts. This tax avoidance strate-gy is in contravention of the OECDGuidelines on MultinationalEnterprises, to which many of these

Executive Summary

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companies claim to ascribe. Some min-ing companies have also been accusedof illegally evading taxes – in Tanzania agovernment-commissioned auditor hasalleged that the country’s four main goldmining companies have over declaredtheir losses by millions of dollars.

How to increase the revenue collected from mining activityTo reverse the ‘paradox of plenty’ char-acteristic of many mineral-rich societiesin Africa – whereby countries with themost natural resources are often thepoorest and worst governed, two majorchanges are needed. First, the process ofcreating tax regimes and mechanisms oftax payment need to become transparent.This transparency requires equal oppor-tunities for citizens to monitor payments,receipts and utilization of mineral taxrevenues. To contribute to such trans-parency, a new international accountingstandard, which requires all multinationalcompanies to report on their remittancesto governments, and their profits andexpenditures in each of the countrieswhere they operate, needs to be estab-lished. The International AccountingStandards Board is presently discussingwhether or not to introduce such a stan-dard for the extractives sector. Thiswould be an important systemic reform,which would enable governments andcitizens to track where companies paytax, and how much. This would make itmore difficult to shift profits betweensubsidiaries of different companies.

Second, African mining tax regimesneed to be reformed to ensure thatAfrican governments are able to collecta fair share of mining rents to fund theirnational development plans. In somecountries this would require an increasein the rates of royalties and other taxes;in others this would require a stop to thepractice of negotiating tax breaks forindividual companies in secret contracts.

There is a real danger that the crash ininternational mineral commodityprices, coupled with the reduction ininternational finance available for newmining investment, could set back themining tax reforms underway orrecently enacted in countries likeTanzania, and Zambia. In Zambia, theminister of finance announced in hisbudget speech at the end of January2009 that he will reverse a tax amend-ment passed in parliament less than ayear ago, introducing a new windfalltax. In Tanzania, the minister offinance has failed to implement any ofthe tax increases recommended by apresidential commission tasked toreview the country’s mining tax regimein his June 2008 budget speech,although he did introduce a turnovertax on companies declaring losses threeor more years in a row, directly aimedat mining companies.

Too many African governments are stillunwilling to open up their tax deals andtax receipts from mining companies to

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public and parliamentary scrutiny; andtoo many mining companies are stillpushing for tax exemptions and fail toreport what they earn and what theyremit to government in each jurisdictionwhere they operate. Transnational min-ing companies have also been pushingfor tax exemptions and fail to reportwhat they earn and what they remit togovernment in each jurisdiction wherethey operate. The credit crunch and itsimpact of a reduction in finance avail-able for mining investment are set tomotivate governments to continue suchsecret deals. The crunch will also givemining companies the moral instrumentto demand more exemptions. These aresystemic and political complicationsthat threaten the reform agenda.

The report argues however, that bothsystemic and political solutions are need-ed to increase mining revenue and trans-parency. At the systemic level, a newinternational financial reporting standardis needed, which all companies registeredon stock exchanges will need to imple-ment. It should require them to reporton their financial operations and remit-tances to government and other struc-tures on a country-by-country basis. Thiswill allow citizens and parliaments tomonitor the financial flows between par-ent companies and subsidiaries, anddetect tax avoidance practices.

African governments also need to revisetheir company acts to require the sub-

sidiaries of multinational mining com-panies incorporated in their jurisdic-tions to publish the financial informa-tion required by the Extractive IndustryTransparency Initiative (EITI). This willensure that privately or state-ownedmining companies such as the growingnumber of Chinese state-owned orfinanced mining companies are requiredby national law to publish their profitsand losses, and remittances to govern-ment and other structures.

RecommendationsTo African governments1. Collaborate with the United Nations

Economic Commission for Africa (UNECA) to develop and publish aneasy to use guide on mining taxation.The guide should cite best practice and detail the purpose, costs inforegone revenue and benefit of

each type of tax instrument and taxconcession

2. Review their company and financial laws to require all extractive industrycompanies to use the EITI templatein their annual financial reports by law

3. Stop the practice of granting tax exemptions to mining companies inmining contracts. All mining tax rates and terms should be legislated in the substantive law and merely confirmed in mining development agreements

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To African parliaments1. 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, feesand community grants paid in each financial year on a country-by-country basis

To the International Accounting Standards Board Adopt a new international accountingstandard for extractive industries, which

require them to report on their profits,expenditures, and taxes, fees and com-munity grants paid in each financial yearon a country-by-country basis

To bilateral and multilateral donorsScale up their financial assistance toAfrican governments to improve theircapacity to monitor and audit theaccounts of mining companies, and toreview their mining tax regimes. Africangovernments should be free to use thisfinance to purchase legal and othertechnical assistance from any serviceprovider of their choice

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This report has been compiled by agroup of African and international civilsociety organisations concerned aboutthe lack of transparency in mining con-tracts, as well as the revenue that nation-al budgets forego because of excessivemining tax concessions as well as multi-national mining companies avoiding andevading tax.

Our analysis, drawn from research con-ducted in Ghana, Zambia, Tanzania,Sierra Leone, Malawi, DRC and SouthAfrica, shows that African governmentsare foregoing millions of dollars in taxrevenue from the mining industry. Thisis largely because of overly generous taxconcessions, usually granted discre-tionarily in secret mining contracts, aswell as tax avoidance and illegal tax eva-sion practices by multinational miningcompanies. Fuelling these losses is alack of transparency and oversight ofthe financial remittances from mining

companies to government institutions,coupled with the inability of govern-ment institutions to audit the complicat-ed accounts of multinational miningcompanies.

This report will argue that transparentand balanced mining tax regimes, asopposed to secret tax deals with individ-ual companies, are the best way to avoidcorruption and assure citizens andinvestors that the rents from mining arebeing shared fairly. It will also argue thatstates should stop subsidising industrialmining activity through lowering taxes,unless such subsidies are part of a care-fully considered industrial plan and out-weigh the costs of mining to communi-ties and the environment.

Four decades after independence, manyAfricans continue to harbour greatexpectations of economic and socialdevelopment based on the continent’s

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Introduction

rich mineral deposits. The AfricanUnion’s development blueprint, theNew Economic Partnership for AfricanDevelopment (NEPAD), believes thatmining activity, if well managed, cantransform the continent’s economies.This belief led NEPAD to establish anAfrican Mining Partnership (AMP) withcorporate mining companies in 2002.

Furthermore, the UN EconomicCommission for Africa (UNECA) isspearheading the development of aMining Vision for Africa and is leadingthe development of best practice guide-lines for African governments to ensurethat their mining laws protect the envi-ronment and communities while max-imising the remittances from miningcompanies to government budgets in atransparent and accountable way.

Finally, many African governments havebeen reviewing their mining contractsand tax laws since the 2003 price boom,1

to put in place more transparent andbeneficial mining tax systems.

These new initiatives are in part aresponse to the fact that neither thenationalisation, nor the subsequent lib-eralisation of mining activity in mineral-rich African countries has brought last-ing transformation to their economiesand societies. Instead, mineral wealthhas fuelled and prolonged violent con-flict in countries such as Angola, theDemocratic Republic of Congo and

Sierra Leone, stalled economic diversifi-cation in countries such as Botswanaand Zambia, and failed to contribute tothe development of communities andeconomies of mineral-rich countries.Although African leaders have acknowl-edged this,2 they have missed the ‘win-dow of opportunity’ offered by the2003 to 2008 boom to increase thedevelopment benefits from mining.

A view prevailing in the internationalcommunity3 is that natural resourcerents are almost certain to be a destabil-ising force in mineral-rich states that areeither predatory (Zaire under MobutuSese Seko) or besieged by violent inter-nal conflict (Angola and Sierra Leone).In the past, the non-existence of defacto states or recognised authorities tocarry out state functions in these territo-ries has meant that there were no legiti-mate institutions capable of enacting orenforcing democratically and transpar-ently agreed rules and laws to governthe operation and taxation of miningactivities.

As a result, companies often ended updoing business with individuals, ratherthan public institutions. For example,the secret mining contracts signed dur-ing the 1998-2003 war in the DRC orduring the 1991-2001 conflict in SierraLeone were largely driven by patronagerelations between mining companiesand political elites – the former seekingspecial tax deals in return for personal

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benefits to political elites.4 Like in otherconflict-prone countries with mineraldeposits close to the surface, artisanalmining by opposition forces or theirsupporters have prolonged their inter-nal conflicts.

But natural resource deposits need notbe a ‘curse’ on development. Citizens –who are the ultimate beneficiaries ofnatural resources in most African con-stitutions – are increasingly puttingpolitical elites on the continent underpressure to tax resource rents transpar-ently and distribute the revenue equi-tably based on the development goalsshared by society. Ultimately, it is thequality of national legislative and policyprocesses, state institutions and individ-ual political leadership that will deter-mine whether potential wealth goestowards financing national developmentor lining the pockets of political andbusiness elites. This view is shared byUNECA, which states that it is ‘thequality of institutions that determinesthe development gains from mining’and that ‘weak governance institutionshave been at the root of Africa’s‘resource curse’, and not mining activityitself ’.5 The Botswana Director ofMines holds a similar view. He attributesthe fact that the government collects 75per cent of net profits declared by dia-mond companies in taxes and dividendsto stable policies, good political leader-ship, a skilled tax bureaucracy and goodgovernance.6

This report will focus on the laws, poli-cies, and institutions that govern thefinancial payments made by mining cor-porations to national governments inthe form of taxes, royalties and fees. Itwill argue that African budget revenueincreases did not correspond to increas-es in company profits during the 2003to 2008 mineral commodity price boombecause (i) governments granted taxsubsidies to the industry and (ii) miningcompanies were pushing for tax breaksin secret mining contracts, amounting toan aggressive tax avoidance strategy. Tooptimise tax revenue for development,African governments need to • stop subsidising foreign mining

companies through tax concessions.• put in place mining tax schemes that

are consistent with an overall industrial strategy

• outlaw the use of confidential contracts to negotiate tax breaks,which help companies to avoid making tax payments and reduce therevenue for development generated by mining companies

• improve the institutional oversight of the mining tax regime

At present, African mining tax regimescomprise a mix of secret discretionarytax deals and tax laws enacted throughparliament. Secret and discretionary taxdeals must cease to be a part of miningtax regimes; instead, government andparliaments should aim to develop andenact comprehensive tax laws, which

Introduction

3

weak governance institutions

have been at the root of

Africa’s ‘resource curse’, and

not mining activity itself.

citizens, companies, elected parliamen-tarians and investors can monitorthrough the budget process. In addi-tion, the report will argue for a newinternational accounting standard thatwould compel multinational miningcompanies to report publicly on alltheir financial operations, including alltheir remittances to governments andother structures in each country wherethey operate.

This report will set out the case forthese demands as follows: First, it willoutline the history of mining taxregimes in Africa in the context of min-ing booms and busts as well as theinvolvement of the World Bank.Second, it will explain why the Africanand international development commu-nity needs to pay particular attention tomining taxation. Third, it will outlinehow mining companies are avoidingpaying taxes in African jurisdictions.Finally, it will outline the two majorchanges needed to reverse the outflowof mining rents that could be used tofinance development in mineral-richAfrican countries: One, tax regimes andpayments need to become transparentso that citizens can monitor the revenueremitted by companies. Two, mining taxregimes should be reformed to ensurethat African states collect a fair share of

mining rents to fund their nationaldevelopment plans.

The country-specific research inform-ing this report has been commissionedand supported by Third World NetworkAfrica, Tax Justice Network Africa,Southern African Resource Watch,Action Aid International, and ChristianAid. We have worked with miningexperts in Ghana, Malawi, DemocraticRepublic of Congo, Sierra Leone,Tanzania, Zambia and South Africa toinvestigate in detail the evolution ofnational mining tax regimes, the drivingforces behind these regimes, as well as aselect number of mining contracts ineach country.7

In each of these countries, national civilsociety organisations are actively moni-toring the impact of mining on theenvironment and communities, as wellas campaigning for changes in mininglegislations and company behaviour.Many of these organisations are mem-bers of the African Initiative on Miningand the Environment and Society(Aimes), a network of African andinternational civil society organisationsactively campaigning for more responsi-ble and transparent mining in Africa.The network is coordinated by ThirdWorld Network Africa, based in Ghana.

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Since independence, African mining taxregimes have been very closely correlat-ed to international price and demandtrends for metals. The United NationsConference on Trade and Developmentdistinguishes between three phases inthe international metals economy – the1960s and 1970s, a decade of high met-als demand, high international mineralprices and high production; the 1980sand 1990s, an era of decreasing metalsdemand from industrial countries, rawmineral oversupply, and lower prices;and the current phase starting around2002, marked by a record boom in inter-national mineral commodity prices,fuelled by metals demand in newlyindustrialising countries such as Chinaand India.8 This boom cycle has beenshort-lived – in January 2009, interna-tional commodity prices were again atlevels seen in the early 2000s. Africangovernments have responded to each ofthese phases with a very different

approach to sharing the rent from min-ing activity.

Phase One: High Prices and High Revenue During the 1960s and 1970s, the newlyindependent governments of mineral-rich African countries all expressedhopes to develop, diversify and industri-alise their economies based on the min-ing industry. In most countries, miningbecame a state-directed activity. Bynationalising the industry, governmentshoped to capture more benefits frommining through local employment cre-ation, direct spending on social servicesfor mining communities, and higherbudget revenue from having a directstake in the business.

During this period, mineral prices weresurging as a result of the rapid growthin international demand for raw miner-als, stimulated by metals-based growth

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Chapter One

A Short History of Mining Tax Regimes in Africa

in both industrial and newly industrialis-ing countries. In Africa, most mineralexploration and extraction operationswere run by state-owned enterprises –many of them were previously private-ly-owned before being nationalised.Given state ownership of the rentsearned from mining activity, mining rev-enues formed a large share of govern-ment revenue, and were used in moredevelopmentally oriented states tofinance national development plans.

Backed by high international commodi-ty prices, Zambia’s gross domestic prod-uct in 1969 exceeded that of SouthKorea and Brazil. In the early 1970s,revenue from all copper mining opera-tions, run by the state-owned ZambiaConsolidated Copper Mines Company,provided two-thirds of governmentrevenue, funding the provision ofhealth and education services for all, aswell as investment in development ofthe agricultural and other sectors. In1989, income from mineral extractioncontributed 35% of government rev-enue in the former Zaire and 58% inBotswana – largely through state equityin mining operations. By then, however,mineral taxes were contributing only16% of government revenue in Zambia,reflecting the dire state of the industry.

However, despite the high hopes andmany African governments’ politicaldeclarations to this effect, mining failedto stimulate the industrialisation of the

continent’s economies, with the possibleexception of the apartheid regime inSouth Africa. Nevertheless, in countriessuch as Botswana and Zambia, copperand diamond mining activities did bringsignificant income and local economicdevelopment benefits to the areas wheremining took place.

Phase Two: Low Prices and Low TaxesDuring the 1980s and 1990s, slowerinternational metals-driven growth,together with oversupply, led to a slumpin international prices – with the excep-tion of the period between 1990 and1997, when prices rose. Many Africanmineral-rich countries were suddenlyfaced with a sovereign debt crisis as theyno longer earned sufficient foreignexchange from their mineral exports tofund the repayments of loans they tookduring the boom years. The WorldBank, through the InternationalDevelopment Association, became alender of last resort, and used this posi-tion to rewrite the mining laws and taxregimes across Africa (see Box 1.1).

These tax reforms, coupled with taxincentives offered by some of the majormining economies such as Austrialia,Canada and the US to their miningmultinationals for overseas exploration,have led to an upsurge in ‘junior’ explo-ration companies obtaining mininglicences and trading their concessions,or attempting to make quick short-term

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Box 1.1World Bank mining strategy in Africa

Before the 1980s, the World Bank group’s maininvolvement in mining development was tofinance mining projects undertaken by thepublic or private sector in developing coun-tries. At the time, it was the only source offinance available to these operators. However,since the mid-1980s, it shifted its focus to sup-port for the reform of mining developmentprogrammes in developing countries. It startedproviding financial support and technicaladvice to its client countries to help them stim-ulate greater private sector participation in themining industry through ‘competitive’ taxregimes. From the mid-1990s onwards, itplayed a key role in the formulation of newlegal mining frameworks in a number of Africanclient countries with ‘less institutional capaci-ties’, including Tanzania, Ghana, Zambia, SierraLeone, and the DRC.9

In 1992, the World Bank published its ‘Strategyfor African Mining’. This was part of a WorldBank process across the globe to define what itsaw as its role in enhancing the role of miningin development. At the time, commercial scalemining was taking place in 20 countries inAfrica.

The main purpose of the World Bank’s strategyfor mining in Africa and in other developingcountries was to attract ‘high risk capital’ toinvest in exploration for new mineral depositsand to take over Africa’s stagnating state-owned and operated mines. The Africa strategystates explicitly that ‘the overall drive of theBank and donors should be directed at reduc-ing ‘country risk’ for the investor’.

The World Bank’s advice centered on the prem-ise that foreign direct investment in the mining

sector was essential to revitalise the industry,which was partly ravaged by bad managementand corruption dating from the era of state-owned enterprises, and needed capital andtechnology, which was not available in Africancountries.

This drive to reform African mining regimes toattract foreign investment was part of an over-all strategy to reduce the role of the state indevelopment. It was also linked to the need forAfrican governments to earn foreign currencywith which to pay back expensive loans takenout during the earlier boom times. The WorldBank used aid conditions and other means tocajole unwilling African governments into pri-vatising their mining industries, and attract for-eign investment into the sector, often at thecost of foregone revenue that could be spenton development.

The justification for a shift to lower tax ratesand other tax concessions offered to foreignmining companies was that capital for miningwas scarce, given low international prices;therefore African countries had to competewith one another and with other miningeconomies to attract high risk capital by devel-oping ‘competitive’ tax regimes. According tothe strategy, ‘investors require competitiveterms and conditions and iron clad assurancesthat the investment environment will be stableand that the rules of the game will not change’.

In no African country, however, did these taxregimes form part of a broader industrial strat-egy. The latter would have gone against thedominant international view – called theWashington Consensus – that the private sec-tor, and not states, should drive development.

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Neither did the World Bank’s mining strategyattempt in any way to bring transparency tothe payment and collection of taxes and othergovernment remittances from mining activity.This has changed in recent years – the WorldBank is now a major support-er of the Extractive IndustriesTransparency Initiative (seeBox 4), and actively encour-ages resource-rich client gov-ernments to endorse the EITI.It even helps to finance theirability to implement the ini-tiative. In the DRC, for exam-ple, the World Bank has spo-ken out against the secrecy of mining contractsand funded a technical review of the con-tracts.10 However, a recent review by GlobalWitness and the Bank Information Centre ofhow the IMF and World Bank use their leverageto promote extractive industry transparencyfound that the World Bank engagement withtransparency is neither consistent nor compre-hensive across resource-rich countries.11

The World Bank strategy argued that major pri-vate investment in exploration and miningwould follow if African governments wouldreduce the risks to especially medium andsmaller investors – called ‘juniors’, many ofthem based in Canada and Australia.Accordingly, ‘by structuring the tax system toreduce the risk of taxation or royalties con-tributing to operating losses, governmentsshould secure more investment and higher tax-ation [revenue] over the life of the mine’. Giventhat most African countries fall in the medium-to-high-risk category, they would have to pro-vide ‘highly competitive tax packages andincentives to attract new high risk explorationand investment funds from international com-panies’. The World Bank argued on behalf ofmining companies that ‘competitive’ taxregimes would help them to ‘control costs’.

On government revenue, the strategy arguedthat tax policy should look at maximising gov-ernment revenue over the full length of themining operation – between 10 and 20 years.This would require policies that promote

investment in new mines.Given that new mininginvestors had to manage theircash flow in the context ofwide fluctuations in prof-itability given cyclical priceflows, the World Bank arguedthat the tax system shouldemphasise profit-relatedtaxes.

Given this view, the Bank strategy actively dis-couraged African governments from chargingroyalties that are based on sales value, ratherthan on the company’s declared profits. The Bankargued that because value-based royalties arecharged equally to profit and loss-making com-panies, they a) increase the risk of operating loss-es and b) discourage companies from miningmore expensive, low-grade underground ores,thus reducing the lifespan of the mine. Wisely,none of the World Bank’s client countries fol-lowed its advice to abolish royalties altogether.Instead, they lowered the value-based royaltiescharged to companies. Chapter Three will showhow royalties are often the only major source ofrevenue governments earn during the first yearsof new industrial mining operations, due to thetax concessions offered to mining companies.

While emphasising the risks of mining to com-panies, the Bank’s strategy said nothing aboutthe significant risks faced by communities liv-ing close to mining activities, which include theloss of livelihoods, homes, health, and naturalresources. Today, ironically, the World Bank is atthe forefront of advocating strong environ-mental policies as one of the pillars of a mod-ern legal mining framework.

Box 1.1 continued

“royalties are often the only majorsource of revenue

governments earn during the firstyears of new industrial

mining operations, due to the taxconcessions offered to

mining companies”.


9

The mining tax regimes of most of the coun-tries investigated for this report were influ-enced by the World Bank. In Tanzania, theWorld Bank funded the Mineral SectorDevelopment Technical Assistance Project,intended to promote fiscal reforms to attractprivate capital into the mineral sector. This proj-ect led to the development of the govern-ment’s 1997 Mineral Sector Policy, whichemphasised the primary role of companies asmining operators, and the government as reg-ulator. Also in 1997, two new laws were passedcovering investment, financial laws and cus-toms duties. These laws reduced tax rates andcustoms duties on certain imports andlegalised the repatriation of profits. The newMining Act, which followed in 1998, was thedirect outcome of the five-year World Bank-financed sectoral reform project.12

In Ghana, the World Bank’s involvement hadalready started in the 1980s. In the early 1980s,the International Development Associationloaned Ghana about USD$50m, as part of itssupport for the Economic RecoveryProgramme, to promulgate Ghana’s 1986 min-ing law and rehabilitate three gold mines runby the state. In 1988, IDA loaned the govern-ment money for ‘Export Sector Rehabilitation’.This loan was tailored exclusively to the miningsector, and aimed to (i) rehabilitate economi-cally viable mines, (ii) help attract privateinvestment in mining, (iii) strengthen thecapacity of government agencies dealing withthe mining sector, and (iv) increase the benefitsof small-scale mining to the country. A thirdloan, for the Mining Sector Development andEnvironmental Project, sought to enhance thecapacity of government institutions to carryout their functions of administering mineralrights, providing reliable and modern geologi-cal information and encouraging and regulat-ing investment in an environmentally soundmanner.

In Sierra Leone, the World Bank is funding aUS$6m technical assistance project that seeksto ‘accelerate sustainable development ofextractive industries through strengtheningthe policy, fiscal and regulatory framework andthereafter to attract investment in large-scalemining to continue sector growth’. The WorldBank expects that this project will lead to‘increased payments received from the extrac-tive industries by the government’ by ‘strength-ening the assessment and collection of royaltypayments… and enforcement of paymentsfrom small and large-scale mining’.

The Bank has also used ‘triggers’ for release ofHighly Indebted Poor Countries debt relief andaid to push for a mining tax reform that wouldattract private investment into Sierra Leone.This has become the government’s key objec-tive in its 2003 Core Mineral Policy. One of the10 current triggers for the government toreceive a US$10m World Bank loan is changesto the mining tax regime ‘in line with recom-mendations from the IMF’. Some of these rec-ommendations, made in 2004, will helpincrease mining tax revenue and transparencyin the mining sector. However, the Bank alsorecommends that the government implementsthe terms of a secret Memorandum ofUnderstanding with Sierra Rutile, which givesthe company huge tax exemptions’.13

In the DRC, the World Bank has been supervis-ing the country’s mining policy since 2001,after 10 years of absence. Its main strategy wasto spur economic growth through private sec-tor activity, mainly by trying to attract foreigninvestors into the mining sector. At the sametime, it was promoting the further privatisationof the country’s mining parastatals, a processstarted by the government, under premierKengo Wa Dondo in 1995, before the war brokeout. The Bank promoted three key structuralreforms as part of its Transitional Support

Box 1.1 continued

profits. For example, Canadian compa-nies now account for more than 60 percent of all new investors in African min-ing exploration. Five out of every six ofthe 1,220 companies registered on theToronto Stock Exchange are juniors.18

This is significant, as these companiesare seen as very risky by institutionalinvestors, and are more likely to ask for

special tax deals from governments tohelp sway potential financial backers.We argue that the upsurge in these typesof investors has compromised the qual-ity of foreign direct investment inAfrica’s newly privatised mining sector.‘Junior’ companies require huge tax sub-sidies to help them finance their opera-tions, they need to turn profits faster as

Breaking the Curse

10

Strategy: the restructuring of key mining paras-tatals; the promulgation of a new Mining Codein July 2002, and the preparation of a newMining Registry.14 The Bank’s 2004 TransitionalSupport Strategy aims to achieve countrywideimplementation of the Mining Code ‘with aview to improving transparency … in the man-agement of revenues generated in [the miningsector]’.15

As part of this strategy, the World Bank hasfunded a number of studies and audits, toassist the government in restructuringGécamines, a state-owned cobalt and coppermining enterprise. None of these has beenmade available to the public. The first study,undertaken by UK firm International MiningConsultants (IMC) in 2003, found that all thejoint ventures negotiated between Gécamines,state-owned copper and cobalt enterprise,contain numerous anomalies, all to the [finan-cial] detriment of Gécamines. It recommendedthat joint ventures with private partners needto be re-examined with the objective of opti-mising state revenue by re-establishing a moreequitable relationship between the state andinvestors. To further assist Gécamines in imple-menting the many IMC recommendations, theWorld Bank funded two further audits in 2005,including a financial audit of six joint venturemining operations signed with Gécamines

between 1997 and 2004, to be undertaken byErnst and Young. The auditors reported that a)the companies provided them with insufficientdata to make a fair assessment of their financialoperations and b) the terms of the contractsprevented Gécamines from deriving any finan-cial benefit from the joint mining ventures.They recommended a fundamental revision inthe terms of the six mining contracts and moretransparent company reporting.16

Despite these recommendations, the govern-ment continued to sign joint venture miningcontracts, contravening the 2002 Mining Code.The World Bank mining specialist, CraigAndrews, stated in a confidential World Bankmemo in 2005 that none of the mining con-tracts has been negotiated in a transparent way,and that their terms were depriving Gécaminesof its fair share of the profits generated from themining operations.17 This acknowledgementvindicated the criticisms of Congolese andinternational civil society organisations sincethe start of the Bank’s involvement in the DRCmining sector that it has neglected the lack ofinstitutional capacity in the country to regulateprivate mining companies and that it has beendownplaying the bad governance and corrup-tion that have stood in the way of increasinggovernment revenue collection through atransparent tax system.

Box 1.1 continued


11

they are not in the business for the long-term, and they are less sensitive to theneed for corporate social responsibility.

The Canadian government, as part ofits own industrial strategy, has been giv-ing heavy tax subsidies to Canadianmining firms to encourage them toexplore and mine overseas.19 These taxsubsidies include:• deductions for debt and interest

accrued abroad,• tax exemptions for profits

repatriated to Canada,• deductions of up to 100 per cent for

investments in exploration and development projects undertaken bycompanies themselves,

• opportunities for companies with several projects abroad (exploration and exploitation) to deposit their respective finances in a single account when calculating taxes due in Canada, enabling larger profits accrued in more profitable venturesto be combined with less profitable exploration projects, thus reducing the overall tax paid,

• deductions for depreciation and accelerated depreciation,

• three-year tax holidays on dividendsearned by shareholders in mining companies.

This phase saw the introduction of taxlaws that deprived governments of col-lecting of a fair share of the economicrent generated by mining activity.

Instead, the tax system was used toencourage new investment in the sectorby giving huge tax concessions to com-panies, in so doing subsidising what is avery risky enterprise. In practice, thismeant that most of the mining rent wascollected by shareholders, financiers andowners of mining corporations – espe-cially between 1990 and 1997, whenprices rose significantly from their pre-viously low levels.

Phase Three: Commodity Boom and Low Government RevenueBetween January 2002 and April 2008,international metals prices rose on aver-age by 269 per cent.20 This price surgewas driven by a rise in demand for met-als in emerging economies such asChina and India, combined with the lowglobal supply of minerals due to thelack of investment in the 1980s and1990s. Coupled with reformed foreigninvestment regimes in Africa, this pricesurge has led to huge increases in capi-tal invested in exploration and produc-tion of minerals across the continent.

The sharp price increases seen since2003 have been aided by a surge ininvestors with high savings hunting for‘yields’ among riskier and relatively fewassets, given the low returns on ‘safe’assets since the start of the financial cri-sis. This has enabled risky mining proj-ects to obtain large private and officialfinancial backing. For example, EquinoxMinerals, listed on the Canadian and

Australian stock exchanges, managed toobtain a loan of US$584m to developLumwana, Africa’s largest open pit cop-per mine, in Zambia. This loan wasmade by a syndicate of internationalfinanciers backed by official exportcredit agencies.21

This combination of factors saw arecord surge in the prices of gold, cop-per and platinum since 2003, peaking inJuly 2008. Copper fetched a record highof an average of US$9000 per tonne, orUS$4.10 per pound, whereas goldpeaked at US$1,000 an ounce. To putthis in perspective, copper prices hov-ered around US$2000 per tonne in2004, and gold fetched only aroundUS$300 an ounce in 2000.

Merill Lynch predicted that this wouldbe a commodity ‘supercycle’, which maylast up to 50 years, driven by the indus-trialisation of emerging economies.PriceWaterhouseCoopers published areport in 2006 entitled ‘Let the GoodTimes Roll’, detailing the surge in min-ing share prices and shareholder profitsfrom mining.

We describe below how in Zambia,South Africa, Tanzania and the DRC,government-appointed commissionshave been reviewing mining tax lawsafter realising that national treasurieshave lost out from the price boom dueto the huge tax concessions enjoyed bymining companies, as well as their abili-

ty to avoid paying taxes by loweringtheir declared profits in a number ofways (see Chapter 3).

Senior African tax administratorsacknowledged these tax leaks in anAugust 2008 communiqué, stating that‘more effective tax systems can mobilisethe domestic tax base as a key mechanismto escape aid or single resource depend-ency; promote economic growth, andreduce inequalities’.22 Given that between1991 and 2004, the equivalent of 7.6 percent of its total GDP has left the conti-nent in capital flight, African govern-ments are becoming more aware of thetransnational companies’ practices ofevading and avoiding tax, and how theseundermine their tax base.

Furthermore, high international com-modity prices have spurred on donorssuch as the European Union, the WorldBank, and United Kingdom’sDepartment for InternationalDevelopment (DfID) to assist Africangovernments in increasing their tax takefrom mining rents. In Zambia, DfIDhas funded the legal team helping thegovernment to rewrite its tax laws, andthe UNDP is piloting a project to devel-op the capacity of African governmentsto collect and manage revenue from theextractives industries, starting withSierra Leone and Mozambique.23

Since July 2008, however, internationalmetal prices have been in free-fall. In

Breaking the Curse

12

January 2009, most base metals fetchedonly about two thirds of their peak pricesin July, whereas futures contracts werebeing exchanged at or below the margin-al cost of production for these metals.24

Many companies are suspending opera-tions, especially in the copper and cobaltbelt of the DRC and Zambia, given thehuge drop in international prices. Forexample, First Quantum, which minescopper and cobalt, has suspended copperproduction at Bwana Mkubwa mine inZambia. The company’s stock price hasdropped by almost 84 per cent from itspeak (although still a third higher than atits lowest) and its market value hasdropped from US$5.6bn to US$900m.Katanga Mining, the DRC’s largest cop-per miner, saw a 98.5 per cent reductionin stock price (although still a third high-er from its lowest average price), and itsmarket value has declined from US$3.1bnto US$36m.25

Some mining analysts26 believe that thecurrent collapse in international metalprices is only a temporary dip – a sec-ondary effect of the international creditcrisis. Because of the international cred-it crisis, banks are showing a higherdegree of risk aversion, but while somebanks have withdrawn finance for min-ing projects, the withdrawal is notwholesale. Many companies, especially‘juniors’ are suspending their miningactivities – with large numbers of jobsbeing lost – in places such as the DRCuntil prices pick up again.27

Subsequently, governments across Africaare finding their negotiating capacity vis-à-vis mining companies suddenly dimin-ished. Those who have already startedreforming their old mining tax regimes orrenegotiating mining contracts, are nowfacing enormous pressure from compa-nies to reverse these tax reforms inresponse to falling international prices. InZambia, First Quantum is openly chal-lenging the new tax laws enacted in April2008, and in Tanzania, Canadian BarrickGold, with the support of the Canadiangovernment, is challenging the tax pro-posals of a government-appointed com-mission reviewing the country’s miningregime (see chapter 4 for details.)

Arguably, this is the time when it will becheapest for governments to reformtheir mining tax laws. A ‘perfect storm’combination of factors has driven com-modity prices down. These include• a collapse in demand, from the US

to China, for both consumer goods and capital projects (construction,but also shipping and aviation ) thatdrive the need for most commodities;

• a sharp drop in institutional investordemand for commodity-based assets– in part because of investor concerns over volatility, and in part because long positions in commodities had retained their valueand could therefore be liquidated toget cash by financial institutions under pressure, such as hedge funds.


13

Prices may continue to fall in the nextyear or two, but these factors are almostcertain to reverse themselves over thenext five years, so that commodityprices are likely to rise eventually. Theyare unlikely to reach the record peaks ofJuly 2008 again, at least not for a longtime, since financial markets will be able

to provide such high volumes of credit,at least not in the foreseeable future.

Governments, therefore, ought to acceptlower output from mines today, if that isthe impact of equitable taxation, as priceswill rise again in future, and they will beable to capture a fairer share of the rent.

Breaking the Curse

14

Revenue is the Key Development Benefit of Mining Mineral extraction is an ‘enclave’ eco-nomic activity. In African mineral-richcountries, foreign mining companiesimport most of their mining equip-ment, as well as the technical, financialand managerial services needed to runthe mines. At present, very few Africanfirms, mostly based in South Africa,can provide these equipment and serv-ices. Once extracted, raw ore is export-ed for further refinement or processingelsewhere. This means that industrialmining companies create very little for-ward or backward linkages into thelocal or national economy that wouldstimulate more private sector develop-ment and job creation. Furthermore,given the capital intensive nature ofindustrial mining, these companies cre-ate very few jobs relative to the abun-dant labour supply in mineral-richAfrican countries.28

This is why there is a consensus amongUNCTAD, UNECA and the IMF thatthe paramount development benefit ofmining in Africa is the potential to gen-erate public revenue through a transpar-ent tax and budget system. UNCTADstates: ‘the potentially most importantcontribution from mineral extraction isthe rise in host-country income’.29 TheWorld Bank has challenged this view,and maintains that if multinational min-ing companies can commit to sustain-able development as part of its bottomline, then the transfer of skills, technol-ogy, and capital from mining can ‘revo-lutionise’ the impact of mining on eco-nomic and social development.30

However, in our view this commitmentis still lacking in especially junior playersin the mining industry (see Box 2.1).Coupled with legal mining frameworksthat are intentionally or unintentionallysilent on linking mining to local com-munity and wider economic develop-

15

the potentially most

important contribution from

mineral extraction is the rise

in host-country income.

Chapter Two

Why Are Taxes Important?

ment, the revenue collected through thebudget remains the key instrumentthrough which governments can makemining work for development in theforeseeable future.

In addition, more transparent tax struc-tures help to build state-citizen account-ability. In resource rich states that areprone to being predatory or are conflictridden this could go a long way instrengthening participatory and demo-cratic development.

African Governments Fail to Collect a Fair Share of Mining Rent Our research has found that Africangovernments are foregoing millions ofdollars in revenue through mining taxsubsidies and company tax avoidancestrategies (see Chapter 3). If govern-ment revenue collected and distributedthrough the budget is the key develop-ment benefit of mining activity inAfrican countries, then it is fair to con-clude that at present, the main benefici-

aries of the mining boom in Africa are ahandful African political elites, theshareholders of mining companies, theengineering, construction and manage-ment consultant firms servicing theglobal mining industry, and the financialinstitutions backing these ventures.

The income from mining jobs may cre-ate demand for local small and microenterprises servicing the mineworkercommunity, and has in the past been animportant source of remittances tocountries such as Lesotho,Mozambique, and Malawi – all labourreserves serving South Africa’s miningconglomerates. But this is negligible inview of the massive economic transfor-mation required to kick-start sustainabledevelopment in the least developedcountries. More seriously, industrialmining poses serious risks to the envi-ronment and livelihoods of communi-ties living near mining areas, whichoften leads mining activity to causerather than reduce poverty.

Breaking the Curse

16

Why Are Taxes Important?

17

Box 2.1Social and environmental risks of mining to communities

Local communities living around mining areascontinue to fall victim to the social and environ-mental fall-out from large-scale mining, withvery little protection from their governments tostem the erosion of their livelihoods, healthand natural resource base.

The organisations writing this report haveworked with communities affected by miningin many countries across Africa and havedetailed the costs of mining to communitiesand households. These include the loss of landfor farming, soil and water contamination, airpollution, deforestation, forced removals, phys-ical damage to dwellings and an unsafe livingenvironment.31

These community impacts constitute an addi-tional cost to society. So far, African mining taxregimes have failed to encourage mining com-panies to improve their social and environmen-tal practices, and national laws have failed toadequately protect communities and the natu-ral resources on which they depend. Comparedto the enormous energy devoted to costingand mitigating the commercial risks of miningto companies, very little energy has beendevoted to costing and mitigating the socialand environmental risks of mining to commu-nities.

While some reputable corporations, such asAnglo American, are now willing to considerways in which to mitigate the social and envi-ronmental impact of their mining operations,thanks to many years of pressure from civil soci-ety organisations and affected communities,their practices vary considerably from onecountry to another. This is partly determined by

the country’s political leadership and thestrength of local laws and their enforcement. Anumber of international voluntary standardsand UN declarations encourage multinationalcompanies to be socially responsible, torespect human rights and to report how theymitigate their social and environmental impact,especially in countries with weak legal systems.These standards include the OECD Guidelinesfor Multinational Enterprises, the UN GlobalCompact, the Equator Principles, and theGlobal Reporting Initiative. Although theprocess of developing these standards has ledmany reputable multinational companies toimprove their social and environmental impact,they cannot substitute for (a) a national politi-cal leadership interested in protecting thelivelihoods and natural resources of communi-ties living in mining areas, and (b) comprehen-sive national environmental, labour and mininglegislation that can be enforced to protectcommunities. The UNECA model legislation,and the mining codes of the EconomicCommunity Of West African States (ECOWAS)and the Southern African DevelopmentCommunity (SADC) mining codes show wel-come signs that African governments are inter-ested in reforming legal mining frameworks toprotect the rights of communities affected bymining.32

It still remains the primary responsibility ofgovernments to ensure that citizens receiveeducation, healthcare, water, sanitation, andother basic human needs. Mining companiesoften start operations in remote and economi-cally depressed areas – in many instances areasthat governments have been neglecting.Hence, local communities look up to mining

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companies as newly-arrived ‘patrons’ that couldprovide them with the basic services theyshould demand instead from their govern-ments. Companies cannot be expected to pro-vide such services efficiently and equitably;neither are there any accountability mecha-nisms between them and communities. That iswhy their tax payments to the governmentbudget are more important than the directservices they provide to communities, giventhat these are entirely voluntary, will vary from

year to year, are not distributed equitably, andcomprise a very small share of the company’soverall profits. Country citizens living in miningareas should be able to monitor the collectionof company revenues by central and local gov-ernments, and have a say in its allocation andexpenditure. To support this argument, the fol-lowing table shows that highly profitable min-ing companies are spending less than 1 percent of profits on community social develop-ment in South Africa.

Table 2.1Community development spending of five selected companies, 200733 (US$m)

Community development Profits CDS as % of profits spending (CDS)

Anglo Platinum 15.9 1.600 0.99 AngloGold Ashanti 3.2 (*) 657 0.49 Impala Platinum 5.7 (**) 2.200 0.26 Lonmin 2.8 408 0.68

Box 2.1 continued

Government Subsidies to Mining CompaniesThere is nothing more sad in this business thana very poor country, with almost nothing thatwill attract FDI beyond a few rent-generatingniches, ready to allow any foreign investor topay little or no taxes in the hope of attractingmore FDI. The result in this situation is thatalmost all the investment that does come, comesto the rent-generating niches for which investorswould not have been deterred by a reasonabletax burden. The incentives generate almost noadditional foreign direct investment and aremostly a dead loss to the treasury.34

Taxation serves four main functions insociety: It allows governments to collectrevenue through the budget to spend onagreed national and local developmentplans. It allows governments to redis-tribute this revenue through the budgetto achieve more equitable development.It allows governments to re-price goodsand services to achieve social and envi-

ronmental goals or influence the behav-iour of companies and individuals, andover the longer term, it is associatedwith stronger channels of political rep-resentation, as it encourages tax payingcitizens to demand more accountabilityfrom their governments.35

Since the 1990s, mining taxation inAfrican countries has been used primari-ly to influence the behaviour of miningcompanies by encouraging them to investin exploration and extraction. Taxation ofmining activity has not been used suc-cessfully either to generate governmentrevenue (with the exception of SouthAfrica and Botswana), and redistributethis revenue through the budget; or toencourage downstream beneficiation andgood social and environmental practicesby mining companies.

African governments have failed to col-lect significant budget revenue from

19

Chapter Three

Revenue Foregone through Tax Concessions and Tax Avoidance

There is nothing more sad in

this business than a very

poor country, with almost

nothing that will attract

FDI beyond a few rent-

generating niches, ready to

allow any foreign investor to

pay little or no taxes in

the hope of attracting

more FDI.

mining, despite higher production andprices, for two main reasons: excessivetax concessions to mining companies,amounting to tax subsidies, and aggres-sive tax avoidance by mining companies,primarily by insisting on tax breaks insecret mining contracts. This sectionwill discuss how these practices haverobbed governments of revenue that

could have been spent on development.

In general, governments use the follow-ing types of taxes to raise revenue fromtaxpaying citizens and enterprises:import, export, value added, sales,income, local government, companypayroll, stamp duty, capital gains, andwithholding. They also levy taxes on

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Table 3.1 Mining taxes and policy objectives36

Tax type Objective

Unit-based royalty An ownership transfer payment, to provide stable and certain revenues

Ad-valorem based royalty An ownership transfer payment, to provide at least somerevenue

Property tax To provide stable revenue based on the value of the physical plant, often to local government

Withholding on remitted loan interest To provide revenue, to encourage greater equity, to encourage local financing

Withholding on imported services To provide revenue, to encourage the use of local services

Registration fees To provide operating revenues to administrative offices

Rent or usage fees To provide stable revenue, often to local government, forland use

Income tax To provide revenue based on ability to pay

Capital gains tax To capture profits on disposal of capital assets

Additional profits tax or windfalls tax To capture a part of exceptionally high profits

Withholding on remitted profits To provide revenue based on ability to pay; to encourage or dividends retention of capital within the country

vehicles (in the DRC), property, internalturnover, rental income from conces-sions, employee salaries and fuel. Inaddition to these taxes, mining compa-nies can be charged value or profit-based royalties and windfall or excessprofit taxes.

In all African countries – with theexception of South Africa (until 2009)and Zimbabwe – mining companieshave to pay royalties calculated as a per-centage of the value of production tothe treasury. Only the Zambian govern-ment levies windfall and variable profitstaxes. The Zambian parliament passedthis measure in an amendment to theincome tax Bill in April 2008, largely asa result of a public and civil society out-cry in Zambia over the low level of rev-enue generated by the newly revitalisedmining industry, which had been earn-ing record prices for copper between2004 and 2008. Mining companies alsohave to pay license fees for the miningconcession (a major source of incomefrom mining in Sierra Leone) and divi-dends to state-owned partners (theDRC still has a state-owned enterprise,Gecamines, which takes at least 25%equity in all new mining operations).

In all the countries we examined, withthe exception of Sierra Leone andSouth Africa, the main sources of gov-ernment revenue generated from min-ing activity are royalties and payrolltaxes. In Sierra Leone, the government

still earns most of its income frommining licences and export duties(which are calculated in the same wayas royalties), and in South Africa —which has a mature mining industryand efficient modern tax administra-tion — the government earns its min-ing revenue from corporate incometax, which at 28%, is the lowest corpo-rate income tax rate in Africa (with theexception of the five-year tax holidaygranted to mining companies by theMali government). Gold mines inSouth Africa pay a variable income taxrate – those declaring less than 5%profits as a percentage of revenue payno tax. This measure is intended tokeep in production gold mines extract-ing ores deep underground at very highcost. These mines employ a large num-ber of South Africa’s half a millionmineworkers.

The rate at which mining activity is tobe taxed as well as the tax base that therate is applied to will determine the rev-enue government earns. Mining compa-nies receive tax subsidies by 1. paying lower rates than other

companies;2. reducing their tax base through

special allowances;3. being exempt from paying certain

types of taxes.

Mining companies argue that they areentitled to these tax breaks for twomain reasons. First, mining carries far


21

higher risks – geological, financial andpolitical – than other commercial activ-ities. Due to geological uncertainty,companies can spend huge amounts ofmoney on exploration, without findingeconomically viable deposits.Financially, mining development andextraction require huge capital outlays,which are sunk costs, to pay for equip-ment and specialised services. Theseoutlays need to be raised from institu-tional lenders, banks and stockexchanges, often in complicated finan-cial packages. Volatile internationalprices or sudden increases in tax pay-ment could dry up the cash flow of amining operation, leaving their finan-cial backers out of pocket. Low andstable tax regimes would compensatethem for this volatility and make theirprojects more ‘bankable’. Finally, com-panies argue that they face a high‘political’ risk in territories where thestate is weak or absent, and rules andregulations are non-existent, notenforced or arbitrary. This is why theyseek to sign individual contracts withgovernments, providing for legal dis-pute arbitration in overseas jurisdic-tions, detailing their individual tax con-cessions, and stabilising these conces-sions for the life of the project.

Second, and related to financial risk,industrial mining requires huge initialcapital outlays in the form of expendi-tures on equipment and loans beforeproduction starts. Mining companies

argue that they should be allowed todefer paying tax on income earned untilthey have paid off these expenditures,or they would not be able to raisefinance in international markets andmay face operational cash flow losses.In accounting terms, this means reduc-ing their taxable income base by deduct-ing capital expenditure (including loanservices) on exploration and minedevelopment immediately from theirtaxable income, whereas most othercompanies do so over the life of theirbusiness or over a much longer definedperiod.

African governments, desperate toattract foreign investors into the miningsector during the 1990s, changed theirtax laws to give mining companies thetax breaks they were asking for, withencouragement from the World Bank.(see Box 1.1). However, the sectionbelow will show that states have taken ahuge developmental risk in foregoingtax revenue in the first years of the lifeof new mining operators, without earn-ing commensurate returns when theparent companies of mining sub-sidiaries across Africa were declaringhuge profits during the 2003 to 2008price boom.

Many tax breaks are tailored specifical-ly to cater to the financial risks faced bymarginal (very expensive mining fordeep-seated ores) or junior (new inex-perienced companies mainly interested

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23

Table 3.2Tax policy responses since the 1990s to the unique attributes of foreign mining investors37

Reason for special treatment Tax policy response

A lengthy and costly exploration Offset pre-production exploration expenses against programme will precede the start-up future income (carry forward losses and amortisation) of a mine. During this period there will be no income against which to offset these costs

Mine development is exceptionally – Provide various means to accelerate recovery of capital capital intensive and an operation costs once production starts will initially need to import large – Reduce or exempt from import duties quantities of equipment and services – Reduce or exempt from paying value added tax on

imported equipment and services

Mined product is destined for export – Reduce rates or exempt from export duties markets – Exempt exports from VAT

Mines produce raw materials that – Waive certain types of taxes, usually royalties, are prone to substantial price changes for projects experiencing financial duress on a periodic basis related to the – Allow losses to be carried forwardbusiness cycle

Many mining projects will have a long – Stabilise all or some of the taxes for at least part of the life-span and companies fear that mine lifeonce their captive investment is in – Stabilise taxes by law or in the form of an agreement place, government will change the tax law, negatively affecting the returns

A company may have special tax Apply ring-fencing principles, which stipulate that treatment for one operation but may accounts from the mine should not be mixed with have ongoing exploration that may accounts for activities outside the mine lead to other operations

Where the level of investment is Enter into a negotiated agreement with the company and particularly large, investment may be include special tax provisions that supplant the general possible only under a severely tax law modified tax system

in exploration) companies. This begsthe question whether African govern-ments should be courting investmentfor ‘marginal’ or exploration projectsby foregoing revenue for developmentwhen (a) the social and economic ben-efits of such projects are minimal and(b) they often cause harm to local com-munities (see Box 2.1 on social cost ofmining).

i) Lower tax rates and tax exemptions

For this report, we examined the officialmining tax framework – income tax andmining and minerals laws – governingmining taxation in seven African coun-tries. Our investigation showed roughlysimilar trends in all the countries. Thesefindings are underscored by similarcomparative studies.38 Mining compa-nies in all the countries under investiga-tion enjoy the following tax conces-sions:

No value added tax on imports or export sales. Mining export companies cannotreclaim the VAT they pay on goods andservices from the final beneficiaries ofthe mineral, and hence are entitled, likeother export companies to VAT exemp-tions or refunds. Nevertheless, miningcompanies in South Africa, Namibia,Burkina Faso and Mali do not enjoythese exemptions, without major obvi-ous impact on the economic viability ofnew or existing investors.

No customs duties on imports or exports Historically, most governments in theworld have used import and exportduties for mining and other imports toachieve a broad range of policy objec-tives, from protecting locally producedgoods to improving infrastructure.Since the 1990s, this has changed, part-ly in the context of the widespread tradeliberalisation undertaken by mostAfrican governments – which has comeat a huge fiscal cost. IMF research hasshown that low-income countries, evenfollowing the Fund’s advice to switch toVAT, were only able to replace around30% of the revenues lost to trade liber-alisation.39 Given that overall importduties have fallen dramatically since the1990s, it could be argued that a modestimport duty could replace the revenuelost through VAT refunds or exemp-tions, without deterring investment.Opponents of this idea argue that evenmodest levels of import duties canmake a marginal project economicallyunviable.

Sierra Leone charges export duties of3% on diamond exports from artisanalmines, 5% on the country’s only indus-trial miner, Koidu Holdings Ltd, and3% on diamond exports from licensedtraders. Given that no mining compa-nies have declared taxable income inSierra Leone, these duties are the mostimportant source of mining revenue tothe government.40

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24

Lower corporate income tax (CIT) rates Over the past two decades, there hasbeen a general lowering of corporateincome tax rates across all countries,including those for mining. Miningcompanies have to pay similar CIT ratesto other companies in most Africancountries. An exception is Sierra Leone,where they pay only 30% as opposed to37.5% charged to other companies. InMali, mining companies enjoy a five-year tax holiday and in South Africa,gold mining companies pay no tax iftheir declared profit falls below 5% ofrevenue. CIT rates vary between 30%and 35%, compared to rates of 40%and even 50% two decades ago.Exceptionally, the 2006 Ghanaian min-ing law only charges 25% CIT, downfrom 45% in 1986.

Only Namibia continues to charge highincome tax rates – 37.5% for non-dia-mond mines, and 55% for diamondmines. Whereas governments couldincrease their income by charging high-er corporate taxes, this would not beguaranteed unless the tax base increases(see Chapter 4). According to an IMFdocument making recommendationsfor mining tax reforms in Sierra Leone,‘there is no sound reason why [mining]companies should benefit from generalreductions in the corporate tax rates …it is quite common for mining compa-nies to pay a higher income tax rate thanother companies. The higher rate is oneway for the government to capture a

share of the resource rents’.41 A numberof authoritative studies have found thatgreater tax incentives do not necessarilylead to more foreign direct investment,especially in natural resource sectors,and that governments are unnecessarilyforegoing revenue by offering suchincentives.42 According to a report ofglobal consulting firm McKinsey, ‘pop-ular incentives, such as tax holidays …serve only to detract value from thoseinvestments that would likely be madein any case’.43 The IMF believes that taxincentives shrink the tax base of lowincome countries unnecessarily. It statesthat ‘tax incentives in sub-SaharanAfrica are now used more widely than inthe 1980s, with more than two-thirds ofthe countries in the region providing taxholidays to attract investment. Suchincentives not only shrink the tax basebut also complicate tax administrationand are a major source of revenue lossand leakage from the taxed economy.’44

Lower withholding tax rates: Withholding taxes are levied on theservices provided by non-taxpayers in agiven jurisdiction, paid directly by min-ing companies to tax authorities. This isboth an easy way to collect taxes forAfrican tax authorities with low capaci-ty and a way of countering tax evasionor avoidance by service providers andshareholders. The mining and tax lawsin all seven countries provide for with-holding tax on dividends paid to share-holders, loan interest, and fees paid to


25

greater tax incentives do not

necessarily lead to more

foreign direct investment,

especially in natural resource

sectors, and governments

are unnecessarily foregoing

revenue by offering such

incentives.

consultants of between 10% and 15%.South Africa and Burkina Faso eachlevy 12.5%45 and South Africa charges asecondary tax, which has the same func-tion as a withholding tax on dividends,on companies. This, however, com-pares to figures as high as 35% inMexico, Chile and Greenland, 30% inWestern Australia and Arizona, and20% in Poland and Zimbabwe (wherewithholding tax is credited againstincome tax).46 Over time, especiallywhen mining projects start declaringand paying out higher dividends, gov-ernments will forego significant rev-enues due to low withholding taxes.This is especially useful given that share-holders often shift their dividend profitsto tax havens, where they cannot be reg-ulated by double taxation treaties.

No windfall or additional profits taxesAt present, the only country in Africathat levies a windfall tax in its mininglegislation is Zambia, and that only sinceApril 2008. In Ghana, the 2006 Mineraland Mining Law has taken out the addi-tional profits tax that was levied in the1986 mining law. Windfall or additionalprofits taxes are a means for govern-ments to collect the extra rent generatedby mining companies during times ofwindfall profits. Multinational miningcorporations, and their subsidiaries inAfrica, were announcing huge profitincreases in the mid-2000s, resultingfrom the unexpected steep increases ininternational prices of gold, copper,

cobalt, platinum and other minerals.47

Copper prices, for example, were fourtimes higher in July 2008 than the pricesassumed in the business feasibility stud-ies of the companies investing inZambia’s copper mining.

Mining companies are generally againstwindfall taxes as they view windfallprofits as a compensation for the finan-cial risks of their operations.Nevertheless, and despite oppositionfrom mining companies, the Zambiangovernment, under public and donorpressure, introduced a windfall andadditional profits tax as part of amend-ments to its mining tax laws in April2008. According to the tax amend-ments, companies will need to pay anadditional 25% windfall tax when inter-national prices move beyond a stipulat-ed trigger price. Windfall and variableprofits taxes will not apply at the sametime. In April 2008, the Finance minis-ter expected the government to collectan additional US$415m in the 2008/9financial year as a result of the new taxregime. On this basis, the governmenthas planned for an increase in infra-structure investment such as electricityand roads, funded from Zambian, ratherthan donor resources.

However, some Zambian companies –notably Canadian First Quantum – havethreatened legal action against the gov-ernment for breach of their 25-year fis-cal stability agreements (see section

Breaking the Curse

26

Chapter 4). Many others pushed for thewindfall tax rate to be reduced to 12.5%and the variable profit tax of 15% to beabolished. Given the crash in copperprices since the peak of July 2008, thegovernment will not collect the fullincome it projected from windfall taxesthis financial year. More problematicthough, is the pressure from companiesto abolish the tax, which only kicks in atcopper prices above US$5, 512 amonth. This signals an unwillingness toshare, in a reasonable fashion, the rentsof mining activity with governmentswhile at the same time expecting taxsubsidies to compensate them for finan-cial risk.

Lower royalties Royalties are paid by commercial com-panies to the owners of a mineral inreturn for the right to extract a non-renewable resource. Given that mostAfrican constitutions stipulate that thestate is the mineral owner, royalties arepaid to the treasury. Only South Africaand Zimbabwe do not charge royalties.However, the South African govern-ment is planning to introduce a newroyalties Bill in 2009, given that the 2004Mineral and Petroleum ResourcesDevelopment Act vests mineral owner-ship in the state whereas previously pri-vate landowners also owned the miner-als underground.

Companies usually argue that royaltypayments should not be levied at all, and

if levied, they should be calculated onthe basis of their profits, and not thevalue of sales. This is because output-based royalties do not take into accountoperating costs, and could thereforereduce the financial viability of a proj-ect. For this reason, the World Bank, inits 1992 strategy, argued that Africangovernments should (a) lower their roy-alties and (b) use declared profits, ratherthan sales value as a basis to calculateroyalties. But mining tax experts havedismissed this argument, saying that ‘thedistorting effects of royalties can beexpected to much be less serious inpractice than in theory for all but themost marginal, grade-sensitive mines’.48

Some economists argue that value-based royalties are a regressive tax, asincome remains the same irrespective ofcompany profits. But tax regimes cancompensate for that through the collec-tion of corporate income tax and addi-tional profits or windfall taxes.

A further reason why African govern-ments should not consider further low-ering royalties or introducing profit-based royalties is that international com-panies can manipulate their tax base toreduce declared profits (see Chapter 4).Royalties are an easy tax to monitor andcollect given the present inability ofmany authorities in mineral-rich coun-tries to cross-check and audit thedeclared profits of multinational miningcompanies with very complex account-ing structures and the ability to hide


27

profits through transfer mis-pricing.This is provided that, of course, thelegal framework sets out clear ‘arms-length’ principles to guide calculation ofthe value of mineral sales from whichroyalties are computed. For example,the amendments in the ZambianIncome Tax Act, passed by parliamentin April 2008, stipulate that royalties areto be calculated based on the aveaglemonthly cash price on the LondonMetal Exchange, Metal Bulletin, or anyother metals exchange as agreed withthe government. In Ghana, the EITIAggregator report said that gold com-panies quoted different prices for goldsold on the same day, leading to differ-ent royalty payment calculations. Thisshows the importance of developing aclear framework to calculate mineral ref-erence prices.49 In Sierra Leone, theexport duty on alluvial diamonds is usedto fund the Gold and Diamond Officein the Ministry of Mineral and Mining,which calculates the price of diamondsfor export duty valuation.

Royalties are the main income govern-ments earn from new mining projects inthe first few years of operation, giventhat exploration and mining companiesare entitled to deduct all expenditure oncapital equipment and interest on loansfrom taxable income immediately orover a maximum of three or four years.All mining companies can carry overtheir tax losses – when capital expendi-ture is greater than taxable income –

indefinitely. In addition, they can deductimmediately, or over a few years, the fullestimated cost of wear and tear on newcapital equipment from taxable income.Normally, companies amortise thesedeductions over the life of the business.Together, these concessions mean thatmining companies investing huge sumsof money in exploration and new min-ing development will not pay incometax until they have recouped all theircapital costs – sometimes this can be afew years into production, sometimesmuch longer. These incentives amountto what UNCTAD calls ‘a hidden sub-sidy’ to transnational companies.50

So unless governments can charge royal-ties, they will earn very little budgetincome in the first few years of new min-ing projects. We have calculated the esti-mated revenue foregone in Ghana,Tanzania, Sierra Leone, and SouthAfrica, because of governments loweringthe royalty rates charged in their miningtax laws since the 1990s. They have doneso under pressure from the World Bank(see Box 1.1), and in South Africa, fromcompanies. We have calculated the loss-es by comparing revenue earned underthe current tax regime to what the gov-ernment could have earned if royaltieswere slightly higher. These calculationsare based on the declared royalty rate innational laws. The next section will calcu-late revenue foregone as a result of roy-alty discounts or exemptions negotiatedby companies in individual contracts.

Breaking the Curse

28

In Ghana, the Minerals and Mining Actof 2006 charges royalties on a slidingscale from 3% to 6% of gross salesvalue. This law replaced the Mineralsand Mining Act of 1986, which used asliding scale of 3 to 12 %. According tothe EITI Aggregator report, however,no company has ever paid more than3% in royalties, partly because of highcapital allowances, and partly becauseGhana’s tax collection authorities donot know how to use the formulae.Gold accounts for 90% or more ofGhana’s mineral exports. According toour calculations, between 1990 and2007, the government had foregonerevenue of between US$387.74m (ifroyalties were to be paid at 6%) andUS$1.163bn (if royalties were to be paidat 12%). In 2005, for example, the gov-ernment would have collected morethan half of the country’s debt repay-ment if additional royalties were paid atthe rate of 12%. In each year, addition-al royalties would have exceeded HIPCdebt relief payments.

In South Africa, the government hasbeen drafting a new royalties Bill sinceMarch 2003. Parliament is expected topass this Bill in May 2009. The miningindustry and South Africa’s competitioncommission have argued strongly forroyalties to be profit-based rather thanvalue-based. The original draft pro-posed a royalty on company turnover of8% for diamonds, and 2.25% for gold.This rate has been reduced to a profit-

based royalty of 3.7% on diamonds and2.1% on gold by the fourth draft in June2008. If we use the royalty rates pro-posed in the third draft of the Bill,which range from 2.98% to 4.63%, theSouth African government wouldforego an estimated US$359m toUS$499m a year in revenue from unre-fined minerals – based on earnings forunrefined and refined metals in 2006, bylowering royalties to the lower rates pro-posed in the fourth draft of the bill.51

In Tanzania, no mining company,other than AngloGold Ashanti, hadpaid corporate income tax by the end of2008 – 10 years after industrial miningcompanies started operating in thecountry.52 AngloGold Ashanti paidUS$1m in 2007 (see section below).Therefore, royalty payments have beenthe main avenue for revenue collection.Between 2002 and 2006, mining compa-nies exported around US$2.9bn ofgold. During the time, the governmentearned around US$17.4m a year in roy-alties, charged at 3% of the net backvalue (market value minus cost of trans-port and transactions) of gold exports.If these royalties were to be increased to5% as recommended by the presidentialcommission in charge of reviewing allmining agreements,53 government rev-enue would have increased to US$29m ayear or an extra US$145m over the fiveyears. Tanzania is one of the ten poor-est countries in the world – this fundingcould have swelled government coffers


29

to pay for essential health, educationand other basic services to Tanzanians.For example, the government’s budgetfor 2007/8 envisages spending US$48per person on education, health, infra-structure and water.54 US$145m couldhave paid for over 3 million people tobe provided with these services.

ii) Manipulating tax base allowances

There are serious problems with the wayin which mining companies in Africareceive tax relief for the expenditure theyincur on the cost of creating their miningoperations. For accounting purposes,these are usually written off over the peri-od during which the mine is expected tobe economically active. The tax treatmentis very different. In most cases, tax reliefis given when the cost of the expenditureis incurred. This has two consequences.The first is that the accounts can suggestthat these companies are making profitsbut no tax is due. This appears unreason-able to citizens who expect companies toprovide a return to the communities thatare giving them a licence to make thoseprofits. Secondly, this method of opera-tion can continue tax deferral for manyyears, thus massively reducing the poten-tial return to African governments on theuse of the natural resources that providemany of them with their greatest hope ofraising revenue.

In some countries, for example, miningcompanies are allowed to deduct the

capital expenditures for exploration anddevelopment of new concessions fromthe taxable income of an existing con-cession. This practice amounts to a gov-ernment tax subsidy, and encouragesmining companies to re-invest profits innew exploration. Governments, how-ever, need to calculate the costs in losttax revenue against the benefits of newexploration before granting such subsi-dies. The Zambian government, forexample, has decided that it will infuture prevent companies from doingthis by requiring them to ‘ring-fence’ thetax payments on their different conces-sions, and in Tanzania, the presidentialcommission reviewing the country’smining regime has recommended thatcompanies in future be required to‘ring-fence’ their concessions.

We do not challenge the right of thecompanies to have tax relief on the coststhey incur. The question is how much ofthe expenditure can be deducted andhow fast. Mining companies want to beable to immediately deduct all their loaninterest and expenditure on equipment,machinery and other capital costs fromtheir sales revenue. This seems a reason-able request, but given the massiveexpenditures needed for exploration andmine development, mining companiesinvesting in new projects will not declareprofits for a number of years while theypay off their creditors and suppliers. Thisis illustrated by our findings in Tanzaniaand Sierra Leone.

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30

The Geita gold mine is AngloGoldAshanti’s (AGA) only one in Tanzaniaand is one of Africa’s biggest open pitmines. According to the company’sannual reports it produced 308,000ounces of gold in 2006 and it has madegross profits of US$93m from Geitamines between 2002 and mid-2007.55

Yet, AGA has paid only US$1 million incorporate income tax so far, and hasannounced that it will pay further cor-porate income tax only in 2011, a whole11 years after starting operations.Similarly, Barrick Gold reported a netincome of US$97 between 2004 and thefirst half of 2007 but has not yet start-ed paying corporate income tax.56

In Sierra Leone, Sierra Rutile will onlystart declaring taxable income in 2014, afull 10 years after re-starting operationsin 2004. Koidu Diamonds, the coun-try’s largest diamond mine processingkimberlite ore, started mining opera-tions in 2004. By 2007, it was exportingUS$28.2m worth of diamonds. Duringthis time, it has remitted a total ofUS$9.97m to the government in royal-ties and fees, not corporate income tax.According to the company’s own finan-cial forecasting, it will only start declar-ing taxable income in 2011.57

In Tanzania, companies which signedmining development agreements withthe government before 2001 are eachyear allowed to add an extra 15% totheir pool of capital expenditure that

they have not yet been able to offsetagainst taxable profits. This is a relicfrom the country’s 1973 Income TaxAct, which was abolished for other pur-poses in the Income Tax Act of 2001but which was, under pressure from theWorld Bank and Canadian and SouthAfrican governments, retained for min-ing companies to claim this extraallowance if their contracts were signedbefore 2001. According to theTanzanian Commissioner for Minerals,Peter Kafumu, ‘this clause was put in …as an incentive to attract investorsthrough advice from the World Bank’.According to a senior official from theTanzanian Chamber of Mines, ‘weknew that the clause was really hurtingthe country’s economy by denying itmore taxes from the mining industry’.58

This measure allows Tanzanian compa-nies to add cumulatively, at the start ofeach financial year, an extra 15% to theamount of capital expenditure they didnot deduct from taxable income in theprevious financial year. This amounts toa government grant to mining compa-nies and reduces the probability thatthey will ever pay tax on their profits.

In 2003, an independent auditor con-tracted by the government to examinethe accounts of four major gold compa-nies alleged that the country’s twolargest mining companies, AngloGoldAshanti and Barrick Gold Mine bothover declared their losses, which in turnreduced their tax liabilities to the gov-


31

ernment. A government-commissionedaudit claimed that they have done sothrough ‘erroneously claiming’ or ‘earlycharging’ of the additional taxallowance. If these figures are correct,this has cost the government aroundUS$132m in lost revenues between1998 and 2003.59

Not all African mining tax regimes givesuch generous capital allowances. Undersome tax regimes, mining companieshave to ‘amortise’ their capital expendi-ture over a number of years, partly toallow the government to collect revenuefrom taxable income at an earlier stage.In Zambia, the government’s new taxlaw stipulates that companies can onlydeduct 25% of capital expenditure ineach year of mining production. This issimilar to the types of capital allowancesthat prevailed before the 1990s. Forexample, the 1975 tax regime in Ghanaonly provided for a 20% capitalallowance in the first year of expendi-ture, and 15% of the balance in eachsubsequent year over the life of themine. Today, Ghanaian mining compa-nies can only deduct 80% in the firstyear of operation, and the balancethereafter in equal shares.

Accelerated capital depreciation allowsmining companies to deduct all or mostof the estimated wear and tear costs oftheir machinery and equipment immedi-ately or in the first few years of the proj-ect. Most other companies do so over

the life of the business. This incentiveunnecessarily delays the period beforecompanies declare taxable income. InMalawi, the government expresslyrefused to give such an incentive toPaladin Ltd, the country’s first industrialminer.

Such tax incentives are said to be a nec-essary measure to attract new investorsto exploit mineral-rich resources incountries with very little infrastructureto support a mining industry, given theadditional infrastructure costs theseinvestors have to incur. So, instead ofimproving the electricity and transportnetwork, fundamental to the operationof mining companies in remote areas,governments give them tax breaksinstead, hoping that this would compen-sate for the additional costs of opera-tions. But surely, tax subsidies shouldnot be used to compensate companiesfor operational costs, unless they formpart of a well-designed industrial min-ing strategy that aims to link miningactivity to the transformation of the restof the economy.

Good infrastructure, a mining strategy,and skilled tax authorities make a cleardifference in how much revenue gov-ernments can collect from mining. In2007, gold mining companies in SouthAfrica, which have the most expensiveoperational costs in the world due togold ores being deep underground, col-lectively declared taxable profits of

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32

Good infrastructure, a

mining strategy, and skilled

tax authorities make a clear

difference in how much

revenue governments can

collect from mining.


33

Table 3.3Comparing mining taxes in existing mining tax legislation (not contracts) across select mineral-rich African countries60

Value-based CIT VAT Import/ Fuel levy Withholding royalties export taxes taxes

Burkina Faso 7% precious 35% Yes 11% on mining n/a 12.5% on stones equipment for dividends4% base metals production3% industrial/precious metals

Angola 5% precious 35% Angola does Exempt n/a 15% onstones 10% tax on not charge dividends3% metallic income from VATminerals financial(can be set on investments a mine by mine basis)

Namibia 10% precious 37.5% non- 0-15%, no No concessions n/a 5-15% onstones diamond concessions for mining dividends5% other companies for mining companies On interest to minerals 55% diamond companies be introduced

companies in 2009

Zimbabwe None 35% 0% 5% on mining n/a 20% (credited equipment, against income refunded if tax)minerals are exported

Mali 6% gross sales 0% for first No VAT for 0% during n/a 10% onrevenue less five years the first five exploration and dividendsrefinery costs (tax holiday) years. After first 3 years of

35%, reduced that, 18%, production, if profits some after that 7.5-22%invested in recoverableMali

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34


Mozambique Production tax 32% Exempt Exempt for all n/a 10% onon value of Until 2010, mining dividendsminerals sold companies equipmentRate to be investing determined by more than Council of US$0.5m, payMinisters 25% less tax10-12% in first 5 yearsdiamonds of production3-8% other minerals

Malawi 10% for 30% 0% Exempt Exempt n/aunprocessed minerals5% for others

Tanzania 3% gold Can 30% Zero-rated 0% capital None Nonebe deferred if equipment forcash operating mining margin is 5% spare partsbelow 0 on exploration

equipment for first year, then 0% after that

South Africa Profit-based 28% in 2008 14% % Export taxes n/a To be levied inroyalties to be Variable rate on raw 2009, replacingintroduced in to gold mine, diamonds the current 10%2009 depending on STC on3.7% diamonds ratio of profit dividends2.1% gold to revenue, declared

up to 37.5%

Table 3.3 continued


35


Sierra Leone 5% precious 30% (non- n/a Only equipment Not 10% non-stones mining prospecting/ exempt, resident4% precious companies exploration charged contractorsminerals pay 37.5%) equipment separately 5% resident3% industrial 3.5% turnover exempt contractorsminerals tax if income Sierra Rutile Act 15% interest3% artisanal below 7% limits import 10% dividendsminers turnover duties to 5% for

rutile mining only5% for diamond mine development equipment5.5% export tax on industrial mine6% export tax artisanal miners – 3% is a royalty3% export tax on traders

Zambia 3% copper 30% VAT refunds Exempt for all n/a 10% on interestmining and dividends equipment

Ghana 3-6% 25% VAT exempt Exempt for 500 10% on interestmining items and dividends

DRC 2% non- 30% DRC does not 2% before 3% 10% onferrous metals apply VAT mining starts import dividends2.5% precious 5% when mining tax None onmetals starts interest if4% precious 3% consumer company isstones goods paying third

No export duty party rates

Table 3.3 continued

US$672, and paid out US$127m to thegovernment. In Tanzania, where indus-trial mines have operated for only 10years, only one company has declared asmall taxable income.

For African countries that lack, for thetime being, good infrastructure, a clearmining strategy, and skilled tax authori-ties, royalties or export duties thereforeremain a very important means of col-lecting government revenue in the firstyears of mining.

Tax Avoidance by Mining Companiesi) Negotiating tax breaks

in secret contractsThe OECD Guidelines forMultinational Enterprises state that‘enterprises should refrain from seekingor accepting exemptions related to …taxation not contemplated in the statu-tory or regulatory framework’.

Despite this global standard, multina-tional mining companies seeking toinvest or expand their investment inAfrica continue to enter into confiden-tial agreements with governments toacquire special tax rates and concessionsthat are outside the statutory frame-work. These tax concessions are nor-mally included in a mining developmentagreement, which sets out the detailedresponsibilities of each party. Theseagreements are legal commercial con-tracts, and override national law. Where

they include tax rates, these override thenational tax regime.

Confidential mining developmentagreements have been a key instrumentused by companies to avoid paying min-ing taxes set out in the national law.They have been able to obtain theseexemptions in countries desperate toattract foreign private investment intotheir mining sector since the 1990s afterthe World Bank told them that theirexisting mining tax regimes, as set out inmining and income tax laws, were notconducive to private investment.Instead of revising their tax lawsthrough parliament, high-level politi-cians started making secret tax dealswith individual mining companies – giv-ing the latter ample opportunity to pushfor as small a tax burden as possible.

This section will outline how these taxdeals have been made in Zambia,Tanzania, Malawi, Sierra Leone, Ghanaand the DRC, and to what extent theydiffer from the taxes stipulated innational tax laws. It will also provideestimations in Zambia, Malawi, andSierra Leone of the amount of revenueforegone as a result of the tax exemp-tions negotiated.

In Zambia, the mining developmentagreements negotiated with privateinvestors who took over the coppermines after the privatisation of ZambiaConsolidated Copper Mines in 1998

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36

Confidential mining

development agreements have

been a key instrument used

by companies to avoid paying

mining taxes set out in the

national law.

offer huge tax exemptions to miningcompanies. The mining law allows theminister in charge to enter into privateagreements with companies. Accordingto Lennard Nkhata, acting permanentsecretary in the Zambian Departmentof Minerals and Mining, ‘the privatesector wanted concessions so that whenthey take over these assets they wouldbe able to recapitalise them and at theend of the day, make these mines prof-itable. The companies wanted to drivecertain taxes down … So the wholepackage is very, very attractive’.61

Companies obtained enormous tax con-cessions in their agreements with thegovernment – which was payingClifford Chance, a London-based inter-national legal firm, for this advice. Thetwo largest mining companies, KonkolaCopper Mines (KCM), owned byVedanta Plc in 2004, and MopaniCopper Mine, owned by First Quantum,managed to negotiate deals wherebythey would pay only one fifth of theroyalty stipulated in the mining law. At0.6%, these royalty rates were the lowestin Africa. A further concession allowsthem to defer royalty payments if theircash-operating margin falls below zero.Together, these tax breaks have drainedgovernment coffers from much-neededrevenue for development spending.Vedanta Plc bought KCM from AngloAmerican in 2004 at a knock down priceof US$50m. At the time copper priceswere low, the mine required huge new

investment, and Anglo American didnot believe it was an economically viableproposition. However, as the commod-ity boom took off, KCM declared anincrease in operating profits fromUS$52m in 2005 to US$206.3m in 2006.First Quantum, meanwhile, reportedincreased net earnings from US$4.6m in2003 to US$152.8m in 2005. While ‘thegood times were rolling’ for these com-panies,62 Zambia’s minister of finance inhis 2006 budget speech estimated thatthe country would earn less thanUS$11m from copper mining royaltiesin the next financial year.63

Historical comparison puts this fore-gone revenue in perspective. In 1992,international copper prices averagedaround US$2, 280 a tonne and Zambiancopper mines produced around 400,000tonnes of copper. Budget revenueearned from copper mining taxes andother remittances was US$200m. In2004, copper prices averaged US$2.868a tonne, and after some rehabilitation ofthe copper sector, the country againproduced 400,000 tonnes of copper.However, this time around, it earnedonly around US$8m in budget revenuefrom the copper mining industry.64

Companies also pushed for a reductionin corporate income tax rates, from the30% stipulated in the law, to 25%, aswell as an exemption from the 10%withholding taxes stipulated in the law.Between 2002 and 2004, the govern-


37

ment collected only US$3m in royalties.We calculated that if companies hadpaid the 3% royalties on gross sales, asstipulated by the Mining and MineralsAct, the government would have earnedan additional US$63m, revenue thatcould have been used to finance itsnational development strategy.65

These tax breaks are fixed for a periodof up to 20 years. The mining develop-ment agreements all stipulate that min-ing companies can take the governmentto an international arbitration court ifthese tax exemptions are withdrawn.This is exactly what First Quantum hasthreatened to do after the Zambian par-liament passed amendments to theincome tax law in April 2008, overridingthe tax exemptions in the mining devel-opment agreements.

In Tanzania, large industrial miners havesigned six mining development agree-ments with the government over the past10 years. None of the gold mining com-panies sought exemptions from royaltiesor corporate income tax rates in any ofthe contracts. However, they did seek sig-nificant exemptions from local govern-ment taxes, withholding taxes, and fuellevies. According to the Commissionerfor Minerals, Dr Peter Kafumu, negotiat-ing with the mining companies was anintimidating experience, much like beingfaced with a traditional weapon: ‘Thecompanies are holding a panga by thehandle and we are getting the sharp end.’

In the substantive law, local governmenttaxes are charged at 0.3% of the valueof company turnover, whereas the min-ing agreements stipulate that companieswill not pay local government tax inexcess of US$200,000 a year. Apartfrom the fact that these amounts are farlower than 0.3% of company turnover,local governments have not been col-lecting even the stipulated US$200,000from mining companies. Given thehuge pressure companies put on infra-structure and communities in the areaswhere they operate, these taxes are cru-cial if local governments are to providethe social and other services needed forthem to continue operating. The agree-ments exempt companies from payingwithholding taxes on interest to relatedparties such as parent companies orassociates, although the 1998 law stipu-lates that they do need to pay withhold-ing tax on these loans.

Companies have also pushed forexemptions from fuel levies. TheBomani Commission, appointed by thepresident to review the mining develop-ment agreements, estimates that thegovernment has foregone Tsh39.8bn in2006/7 and Tsh59bn in 2007/8 in rev-enue as a result of fuel levy exemptionsto six large mining companies. If theyare only exempt from the fuel they needfor generators used in production, assuggested by the Bomani Commission,the government will be able to reducethese losses.66 Mining contracts have

Breaking the Curse

38

also set stamp duties at 0.3%, about atenth of the rate of 4% stipulated in thelaw.67

In Malawi, the main legal frameworkfor mining is the Mines and MineralsAct, which dates back to 1981. Thenew uranium project at Kayalekere inthe north of the country, operated byPaladin Africa Ltd, is the first largescale mining project to be undertakenin Malawi. The project has been miredin controversy as civil society organisa-tions have taken the government tocourt for violations of Malawi’s consti-tutional and environmental law. Theyaccused the government of negotiatinga mining development agreement withthe company without conducting aproper environmental impact study, forkeeping the agreement secret, and forallowing the project to go ahead in theabsence of laws regulating uraniummining. So far, the government is con-fident that the tax exemptions it hasgiven Paladin in the mining develop-ment agreement will not leave publiccoffers empty as happened in Zambia,and to some extent Tanzania.According to Ellason Kasonga, direc-tor in the department of mines, ‘weknew the uranium deposits were there,but it was better to leave it there ratherthan get a raw deal. We saw how ourneighbouring countries had blunderedand we decided to learn from them’.68

In our analysis, the government has notlearned any lessons.

The government decided to acquire a15% share in the company in return fora number of tax breaks in its miningcontract. Paladin will enjoy a 2.5%reduction in corporate income tax, areduction in royalty rates from the 10%stipulated for unrefined minerals in thelaw, to 1.5% for the first three years, and3% thereafter.

We have calculated the revenue the gov-ernment has foregone as a result of thisdeal. The best estimate of revenue fore-gone can be made on royalties, given thatthey are relatively easy to calculate on thebasis of gross estimated sales. It is moredifficult to calculate foregone revenuefrom the reduction in corporate incometax rates, given that companies can delaythe declaration of taxable income formany years due to the huge capital andoperational expenditures involved in min-ing. The latest estimates are, for example,that company capital expenditures arerunning into US$200m against originalprojections of US$187m.69 The companyis unlikely to declare any profits until itrecoups these expenses from salesincome, which may take several years.Given that the company’s own bankablefeasibility study shows a reduction inexpected revenue from US$195 a year, toUS$70m a year in the last four years ofoperation, the main budget revenue willbe collected from royalty payments.70

Based on the company’s own bankablefeasibility study, it will sell about


39

US$197m of uranium in the first sevenyears of operation. In our calculation,this should earn the Malawian treasuryabout US$19.7m a year, at a royalty rateof 10%, and when sales fall in the lastfour years of the mining operations toUS$70m a year, the government shouldstill earn about US$7m a year. However,the huge royalty discounts given in thetax deal, mean that the government willearn only about US$2.9m a year for thefirst three years of operations, andUS$5.8m for the next four years. Afterthat, royalty income will fall back toUS$2.1m.71 The government will there-fore forego US$16.8m a year for thefirst three years of operation, and a fur-ther US$13.9m a year in the next fouryears. In the last four years, it will foregoabout US$5m a year. In total, thisamounts to US$124.5m over the 11years of the project. Even if the gov-ernment lowered royalties by half, to5%, charged by the Namibian govern-ment, where Paladin operates anotheruranium mine, this will still result inUS$62.25m foregone over the 11-yearduration of the project. The US$10mpromised by the company for develop-ment and water projects in theKayalekera community, which is taxdeductible, pales in comparison to thelost revenue.

In Sierra Leone, mining forms thebackbone of the government’s develop-ment strategy. Before the 10-year civilwar from 1991 to 2001, mining generat-

ed around 20% of the country’s fiscalrevenues. Today, however, revenuesfrom mining are miniscule. Most gov-ernment income is collected in the formof export taxes on diamonds. In 2006,total government revenue from all min-erals amounted to between US$9m andUS$10m, about 5% of diamond salestotaling US$179m.

Studies suggest that with significantinstitutional and capacity reform, SierraLeonean companies could sellUS$1.2bn of minerals a year by 2020 –a sevenfold increase over current levels.With the right government tax frame-work and budget spending, the incomeearned from these exports could createthe conditions for up to a million peo-ple to step out of poverty.72

Sierra Rutile, the second largest mineralexporter in Sierra Leone, has acquiredextraordinary tax exemptions throughthree agreements signed with the gov-ernment. In 2001, the government andSierra Rutile signed an agreement,which was enacted in parliament in2002.73 The Sierra Rutile Agreement Actof 2002 sets royalty rates at 3.5% oftotal sales, and income tax at 3.5% ofturnover, or 37.5% of profits, depend-ing on whichever is higher. The law alsocontains a stability clause, which allowsSierra Rutile to continue paying thetaxes specified in the Act for the dura-tion of the mining lease, which is 25years. Then, in July 2003, the govern-

Breaking the Curse

40

ment signed a memorandum of under-standing with Sierra Rutile, which over-turned some of the provisions of theAct. First, it reduced the royalty rate toa miniscule 0.5% until 2014, after whichit would revert to 3.5%. It also reducedthe turnover tax to 0.5% until 2014, andscrapped entirely the payment of corpo-rate income tax on profits until 2014. Itfurther reduced the fuel import dutyfrom 12% stipulated in the law, to 1%until 2014.

A World Bank review of Sierra Leone’smining industry in 2005 noted that thisfiscal package was ‘largely driven by themining company’ who argued that itneeded to embark on a large refurbish-ment programme and that it had previ-ously lost tens of millions of dollarsworth of equipment during the civilwar. According to senior tax officials,the government was in ‘desperate cir-cumstances’ and wanted to attract fur-ther investments at all costs. InFebruary 2004, the government reachedan agreement with the company, follow-ing the 2003 MOU, confirming that itwould forego pay-as-you-earn taxes ofup to US$37m in return for a 30% sharein the company, accrued at a rate of 3%a year.

An internal Sierra Leone governmentreview estimates that revenue lossesfrom the tax concessions granted toSierra Rutile would amount to US$98mbetween 2004 and 2016 – or around

US$8m a year. Other estimates, usingrecent company revenue projections,have put the losses at US$68m, orUS$5.6m a year. Sierra Leone is thepoorest country in the world – this addi-tional income would enable the govern-ment to plan for greater expenditure onhealth, education and infrastructureservices based on its national develop-ment plan.

In the DRC, the recent history of min-ing is mired by allegations of corruptpoliticians awarding illegal tax exemp-tions to mining companies in return forprivate benefits. These allegations havebeen well documented.74 The WorldBank has funded a number of studiesand audits into the financial terms ofthe mining contracts signed since 1996.Amongst these, a 2004 audit by Ernstand Young found that Gécamines didnot receive any share from the profitsmade by its joint ventures with privatemining companies, due to the terms ofthe mining contracts it had negotiatedwith private mining companies.

The president and senior officials in theministry of mining were responsible forsigning these contracts.75 In 2005, theLutundula Commission, a parliamentaryteam appointed by the government toinvestigate the country’s mining con-tracts signed between 1996 and 2003,denounced the interference of high-level politicians in these deals. It foundthat most contracts were ‘dispropor-


41

tionately advantageous to mining com-panies’. In response to these findings, anInter-ministerial Commission wastasked in April 2007 to review all themining contracts signed between thegovernment and mining companies –most of them junior – between 1996and 2006. The report found that noneof the mining contracts complied withthe law. It recommended that out of 61contracts examined, 39 be renegotiatedand 22 cancelled as they were too farout of line with the Mining Code. Thetaskforce appointed to take forwardthese recommendations have decidedthat 14 contracts could go ahead withthe submission of new feasibility stud-ies, but 25 have to be modified by 2010.

At the worst end of the spectrum ofcontracts, companies were entitled tocomplete exemption from any incometax and royalty payments. Many compa-nies received much reduced tax rates ordeferral of tax payments for at least fiveyears. We examine only one contract,classified as a category C contract that isdue to be cancelled.

In 2005, Oryx Natural Resources, incor-porated in the Cayman Islands, signedan agreement with MIBA, the govern-ment-owned diamond company, to pur-chase an 80% share in Sengamines, aUS$2bn diamond concessions south ofMbuji-Mayi. First African Diamonds, aSouth African company, bought theOryx share in 2006.76 The contract stip-

ulates that the company is exempt frompaying income tax, royalties and most ofthe other taxes specified in DRC tax law.The only taxes it would pay were a pro-fessional contribution tax –- but only sixyears after production started; internalturnover tax (tax on national transac-tions) – but only due six years after thestart of production; expatriate salary tax– only due seven years after the start ofproduction; and withholding tax on div-idends – only due five years after thestart of production.

According to Belgian-basedInternational Peace Information Service(IPIS),77 Sengamines exported an aver-age of 80,000 carats of diamonds amonth between 2001 and 2003, asreported by its Antwerp dealers, at avery low price of US$15 a carat,amounting to US$14.4m a year. If thecompany had paid the very low 2.5%royalty on gross value stipulated in thelaw, the government would have earneda minimum of US$360,000 a year fromroyalties alone. The figure would doubleif the government charged the 5% roy-alty paid by companies in most otherdiamond-rich African countries.

This figure, however, is only a very smallfraction of the massive revenue foregoneby the DRC government due to compa-nies seeking tax exemptions in their min-ing contracts. This is illustrated by theminiscule income earned by the DRCfrom mining. According to World Bank

Breaking the Curse

42

figures, budget revenue from miningtaxes amounted to only US$16.4m in2003, US$15.7m in 2004, US$26.7m in2005, US$11.7m in 2006, and US$13m in2007.78 According to a 2007 World Bankdocument, “fraudulent practices by com-panies and government agencies havecreated a gap [between] what should bepaid versus what is actually recorded ashaving been received in terms of royal-ties and surface rents alone. The gap islarger if total mining taxes are consid-ered: about US$200 million per yearshould be generated by the sector’.79 Thegovernment claimed to receive onlyUS$13m in taxes from mining in 2007,just over 5% of what it should haveearned. To put this amount in perspec-tive, in Sierra Leone, where only twoindustrial mining companies are current-ly operating, mining taxes earned thegovernment about US$10m in 2006.

This culture of secrecy and individuallynegotiated tax deals in contracts is sys-tematic across all African countries andembedded in mining companies’ way ofdoing business. It undermines all effortsto bring greater transparency to the taxpayments of companies and to holdgovernments to account for the spend-ing of this money.

ii) Mis-invoicing and tax evasionTrade mis-invoicing occurs when com-panies either under-declare the value oftheir exports or overstate the prices oftheir imports. This enables a company

to reduce the profits it declares in thecountry where it is registered as a tax-payer. Mis-invoicing is a common prac-tice, especially in the trade that takesplace among associates or betweenassociates and parents of large multina-tional corporations. This is also referredto as transfer mis-pricing. A recentreport by Global Financial Integrity, aproject of the US-based Centre forInternational Policy, estimates thatbetween 2002 and 2006, an average ofUS$10bn left Africa every year as aresult of trade mis-invoicing. This islikely to be a huge underestimation,given the lack of trade data in Africaand given that this figure does not counttrade invoices between subsidiaries ofthe same parent group of companies.80

Nevertheless, there is very little hardevidence to show the extent to whichthis practice has robbed African treasur-ies of revenue they could have earnedfrom income tax on mining profits.According to the calculations of theNew Economics Foundation, the fol-lowing export earnings were lostbecause of companies undervaluing orover-invoicing their minerals tradebetween South Africa and the US:US$412m in 2002, US$84m in 2003,US$86m in 2004, and US$38m in 2005,or a total of US$620m over four years.81

Most African mining tax authorities atpresent do not have the requisite skillsto audit the complex accounts of large


43

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.

multinational mining companies; henceif these practices exist they can goundetected and unpunished. In SierraLeone, a former senior civil servantpublicly acknowledged that ‘it is verydifficult to tell if [the mining compa-nies] are making profits because youhave to go by what the companies say.But it is easy to raise operating costs toa fictional level. You can also inflatelocal costs. What is lacking in SierraLeone is the ability to monitor and reg-ulate this. It is quite possible for the sys-tem to be abused’.82 According toTanzania’s Commissioner for Minerals,‘we have no capacity to look at theirbooks. [The companies] can write thebooks so that third world countries can-not regulate. Even the contracts are dif-ficult. I think the mining companiesexploit our weaknesses in law andcapacity’.

Multinational companies can avoid pay-ing tax in developing countries in manyways. Evidence suggests that they do somostly by transfer mis-pricing. There isno obligation on one country to reporta potential loss of revenue suffered byanother country because of this abusefrom which it has gained and the otherhas lost. There is no evidence that thishappens either, so if funds are movedfrom relatively highly taxed Africanstates to either tax havens or even lowertaxed states in the OECD, there is noincentive or obligation on the states thatknow they benefit unduly as a result to

tell the African authority that they arelosing revenue as a consequence.Therefore, African countries are left totheir own devices when seeking to tack-le this abuse and are critically short ofthe resources and expertise to do so.

African tax authorities do sometimesuncover tax irregularities. In 2003, audi-tors appointed by the Tanzanian gov-ernment alleged that the country’s fourmajor gold mining companies had beenclaiming capital expenditures withoutinvoices or other evidence to substanti-ate some of this spending. In addition,they alleged that ‘6,762 documents arestill missing, preventing the auditorfrom confirming if royalties … haveactually been paid for 939 past ship-ments’.83

The auditors also alleged that they werehindered in their work by ‘the persist-ent reluctance of the mining compa-nies to cooperate’. In their view, thecompanies’ failure to keep adequatefinancial records in Tanzania meantthat ‘these mining companies are indefault of the law (our emphasis), andtheir failure to cooperate could beinterpreted as a strong desire to hidefaulty declarations’.

However, despite these findings, noeffort has been made to determinewhether any of the estimated US$132mforegone by the treasury can be recov-ered from the companies.

Breaking the Curse

44

Reviewing Mining Laws and Contracts to Raise RevenueThe evidence in this report paints anoverwhelming picture of African taxsystems unable to retain a fair share ofthe profits generated by mineralresource extraction. To rectify this, gov-ernments need to plug the ‘leaks’ intheir tax systems that allow profits todrain away. This will require the follow-ing actions:• increase the tax and royalty rates

charged on mining and related profits.

• reduce unnecessary tax allowances that shrink the income tax base ofmining companies.

• eliminate the use of secret mining contracts to grant mining companiestax exemptions.

Over the past few years a number ofAfrican governments – some of themnewly elected – have been reviewing

their mining tax regimes. This has beenpartly in response to the mineral priceboom, and partly in response to pres-sure from the World Bank and IMF, aswell as African and international civilsociety to increase taxes collected frommining in a transparent way.

In Tanzania, newly elected PresidentKikwete promised in his inauguraladdress in December 2005 to review allmining contracts to ensure that ‘thenation is benefiting from the richestminerals available in most parts of thecountry.’84 Two years later, in November2007 he announced the formation of acommittee to investigate the nature ofthe mining laws and contacts.

There have been four such previouscommittees; none of their reports hasever been made public. The fourth,‘Review of Mining Development Agreementsand Fiscal Regime for the Mineral Sector’, was

45

Chapter Four

Breaking the Curse: How to Increase Revenue and Transparency

leaked. It recommended sweepingchanges to mining and fiscal laws andthe renegotiation of various mineraldevelopment agreements with the min-ing companies. Yet, apart from minorchanges to the Buzwagi Agreement withBarrick Gold, none of the recommen-dations have been implemented.

Following this review, the Presidenttasked a commission, headed by JudgeMark Bomani, to review the six miningcontracts signed with large mining com-panies, to analyse the mining tax system,identify and analyse the rights andresponsibilities of government andinvestors, as well as the tax provisions inmining contracts, and give recommenda-tions for reforms in the mining sector.

The Bomani Commission recommend-ed far-reaching reforms to the miningtax regime, including an increase in thegold royalty from 3% to 5% and theapplication of the rates outlined in thesubstantive law for stamp duties, with-holding taxes, local government taxes,import duties (mining-related importswill remain exempt) and fuel levies(except fuel used for electricity genera-tion on the mines). The Commissionalso recommends that no more specialtax exemptions be granted to miningcompanies in their contracts.

The Finance minister, in his June 2008budget speech, largely ignored these rec-ommendations. The only tax reform he

announced was a new turnover tax of0.3% on all companies declaring lossesfor three or more years in a row.85 Thismeasure is clearly aimed at collecting rev-enue from mining companies inTanzania, of whom only one, AngloGoldAshanti, has declared a small taxableincome since the start of its operations.

In Sierra Leone, both the previousgovernment and the new governmentunder President Ernest Bai Koroma,elected in September 2007, have statedthat the country is benefiting too littlefrom mining. According to formerFinance minister John Benjamin, ‘thereare certain generous tax and duty con-cessions embedded in bilateral agree-ments between government and privatesector entities that continue to under-mine revenue collection. The govern-ment negotiated and agreed to most ofthese agreements from a relatively weakposition, especially after the war wheneconomic conditions in the countrywere still precarious and fraught withuncertainties’.86

As far back as July 2004, the then govern-ment requested the law reform commis-sion to lead a consultation process toredraft the Minerals Act. It only present-ed its report to the government a fullthree years later, in 2007. The draftMinerals Act is now in its final draft stage.The draft law contains provisions thatcommit the Ministry of MineralResources to (a) develop a framework for

Breaking the Curse

46

there are certain generous

tax and duty concessions

embedded in bilateral

agreements between

government and private

sector entities that continue

to undermine revenue

collection (in Sierra Leone).

transparency in the reporting and disclo-sure of revenues from the extractives sec-tor, (b) publish its revenues from theextractives sector ‘at least annually’ and(c) ensure that ‘all payments due to thegovernment … are duly made’.87

Meanwhile, in early 2008, the Presidentappointed a Task Force to review threeindividual contracts signed with the com-panies mining rutile, diamonds and baux-ite. As a result, a consultative committeehas now been established to review allmining-related laws, review and assess allcurrent mining contracts, and in particu-lar the 2003 MOU with Sierra Rutile,which overturned the 2002 Sierra RutileLaw.

Together, these developments mayincrease the revenue collected by thegovernment, but only if the special taxexemptions granted to Sierra Rutile areoverturned, overgenerous tax allowancesare reduced in the Mining and IncomeTax Acts, and the corporate tax rate formining companies is levied at the samerate as that for other companies. So far,these tax changes have not been consid-ered in the new draft mining law.

In Zambia, the government of the latepresident Levy Mwanawasa agreed in2008 to review the fiscal terms of themining development agreements hisgovernment had negotiated since theprivatisation of the country’s coppermines. He was under political pressure

from the opposition, trade unions andcivil society. In April 2008, the Zambianparliament passed an Income TaxAmendment Bill, which introduced anew windfall tax and variable profit taxwhen copper and cobalt prices riseabove a certain level. It also reduced cap-ital allowances from 100% to 25% a yearfor mining companies, and introduced areference price for determining the val-ues for windfall tax.88 The Finance min-ister announced, in addition, that com-panies will henceforth be required to paythe 3% royalties and 30% corporate taxstipulated in the substantive law insteadof the reduced rates of 0.6% and 25%as negotiated in their mining develop-ment agreements. In his budget speech,the minister forecast that these newmeasures would earn the treasury anadditional US$415m in revenue.

In March 2009 the Zambian Minister ofFinance proposed that the Zambian par-liament should ‘relieve’ mining compa-nies from the newly introduced windfalltaxes and re-introduce 100% capitalallowances. He has done so under mount-ing pressure from copper mining compa-nies in Zambia, who are closing downproduction and laying off workers as aresult of the sharp fall in copper prices.Given that mines do not pay windfalltaxes when prices are low, this proposedtax break will mean that Zambians willagain fail to benefit when copper pricesrise. The return to 100% capitalallowances will shrink the profits declared


47

by new mining operations, which meansthat just as in the past, Zambians willhave to wait for many years before min-ing companies contribute to the budget.

In the DRC, the mining contract reviewprocess described here, will no doubt seean increase in government income frommining, albeit from a very low base.However, the little information availableon the fiscal terms of the new contractsbeing negotiated shows that the govern-ment is continuing the practice of nego-tiating special tax rates with mining com-panies that do not reflect the rates andterms stipulated in the mining code. Ithas been reported that the new contractbetween Gecamines and FreeportMcMoRan, joint owner of one of theworld’s largest unexplored copper andcobalt deposits in Tenke Fungurume,includes special rates that do not apply toother mining companies. Some of theseare in excess of the rates stipulated in themining code – the royalty rate is set at2.5%, instead of the 2% stipulated in thecode, and the company will pay a 1%export duty, instead of being exempt, likeother companies. Furthermore,Gecamines will increase its share in theTenge Fungurume Mining Companyfrom 17.5% to 45%.89 While the terms ofthe new contract are a vast improvementon the original contract, which exemptedthe company from all taxes, royalties andduties, it sets the precedent for the prac-tice of negotiating and stabilising individ-ual tax deals with companies outside the

legal framework, which makes monitor-ing of the revenue flows very difficult.

The terms of the 2002 Mining Code arenot under review as part of the contractrenegotiation process. This means thatthe very low 2.5% royalty on diamondexports will remain in place. The gov-ernment could, however, double its rev-enue from diamond exports if itincreases the rate to 5%, the ratecharged by most African governments.

Transparent Tax and Budgeting SystemsMost African mineral-rich countrieswhose economies depend heavily onextractive industries, have lower econom-ic growth and human development thanthose that are not so dependent on theseindustries.90 Botswana and South Africaare notable exceptions to this ‘paradox ofplenty’. In countries such as Angola, theDRC and Sierra Leone, civil conflict hasbeen prolonged by the presence of easi-ly looted resources, and in Angola, theDRC, Tanzania and Sierra Leone, manybelieve that revenues from extractiveindustries serve to heighten corruption.91

But there is nothing intrinsic to naturalresource wealth that condemns countriesto low growth, mineral dependency orcorruption.92 The development impact ofmining is ultimately determined by howmining royalties and other taxes are legis-lated, collected and redistributed. Theso-called resource curse afflicting miner-

Breaking the Curse

48

civil society organisations and

parliaments need to be able

to monitor and oversee the

collection, allocation,

and actual spending of

budget revenue (from

mining activity).

al-rich countries can be broken oncemining tax laws are transparent and equi-table, skilled tax authorities are able tocollect all the taxes due, and these are dis-tributed through a participatory andtransparent budget process.

To ensure that the correct amount of rev-enue is collected from mining activity, andthat this is spent equitably according tothe country’s agreed national develop-ment strategy, civil society organisationsand parliaments need to be able to moni-tor and oversee the collection, allocation,and actual spending of budget revenue.Unless there is a legal framework in placethat allows civil society organisations, par-liamentarians and citizens access to budg-et and revenue information, and unlessthere are laws that allow them to hold thegovernment to account for its fiscal man-agement and expenditure,93 there is noguarantee that income earned from min-ing would contribute to development andpoverty reduction.

At present, it is impossible for most cit-izens in mineral-rich African countriesto monitor mining revenue collectionand expenditure through the budget. Itis also very difficult for parliaments topass tax laws affecting mining compa-nies. This is because • confidentiality clauses in mining

agreements prevent them from being made public.

• mining contracts are not ratified or supervised by parliament.

• freedom of information laws do notexist, which means citizens cannot access information that is not already in the public domain.

• it is rare for any accounts to be available on public records.

• laws guaranteeing taxpayer confidentiality prevent the public from scrutinising mining tax returnsfiled with tax authorities.

• multinational companies and their subsidiaries in African countries are not required by international accounting standards to report where they make their profits and what they remit to government and other institutions in taxes and other payments on a country-by-country basis. most mining contacts include a clause stipulating that the tax deal agreed in the contract, or outlined inthe substantive law, will remain in place for the duration of the contract, usually between 10 and 25years, irrespective of changes in thesubstantive law legislated by parliament.

Many African governments want tokeep mining tax deals secret. Theyactively discourage parliamentary over-sight. Many African mining and tax lawsalso stipulate that governments cannegotiate special tax deals with compa-nies investing above a certain amount.These laws also expressly allow for thetax exemptions to be frozen for theduration of the contract and allow the


49

minister of mining excessive discretionto negotiate special tax deals with com-panies or defer their royalty payments.This is the case in Tanzania, Ghana,Sierra Leone, the DRC, and Zambia.94

In Tanzania, Zito Kabwe, an oppositionparliamentarian, was suspended fromparliament in August 2007 for introduc-ing a Private Member’s motion to inves-tigate the government after it signed anew mining agreement despite promis-ing not to do so until the mining reviewhad been completed.

None of the six contracts signedbetween the government and miningcompanies has been made public, andthe Commissioner for Minerals, PeterKafumu, has warned that possession ofthese contracts is ‘illegal’.95

In Malawi, the government has refusedrepeated requests from parliamentariansto publicise its uranium contract withPaladin Mining while negotiating thecontract. According to GoodallGondwe, Malawi’s Finance minister, itwould be ‘unethical’ to discuss the con-tract in public.96

In Zambia, the government has refusedto publish its contracts with coppermining companies, despite pressurefrom trade unions, civil society and par-liamentarians. Unlike in Sierra Leoneand in the DRC, the mining reviewprocess has been veiled in complete

secrecy. In the DRC, the Mining Codedoes not require the government topublish the contracts it signs with com-panies – but in March 2008 it publishedall the mining contracts under review onits website. However parts of the textwas left out. In Ghana and Sierra Leone,the law stipulates that parliament mustratify the contracts signed between thegovernment and mining companies. Inpractice, however, their oversight hasbeen minimal. In Ghana, only the selectcommittee on mining and minerals rati-fies the agreements. In Sierra Leone, amember of the parliamentary commit-tee on mines and minerals has said thathis committee never saw the agreementbetween the government and SierraRutile that was turned into an Act ofParliament in 2002.97

These practices exclude parliamentarians,citizens, and communities affected bymining from debating and shaping min-ing tax and royalty policy. The recentreviews of mining policies and contractsin Zambia, DRC, Tanzania and SierraLeone have demonstrated the concernsof citizens, including communities affect-ed by mining, about the developmentcosts of tax concessions and subsidies tomining companies. The evidence in thisreport suggests that African governmentsare using tax concessions merely as a toolto attract foreign mining investment –often of dubious quality – rather than asa component of a wider strategy forindustrial development. These tax con-

Breaking the Curse

50

parliamentarians, citizens,

and communities affected by

mining (are excluded) from

debating and shaping mining

tax and royalty policy.

cessions, together with the aggressive taxavoidance strategies employed by miningcompanies, have robbed them of revenuethat could have been used for develop-ment. Instead, mineral-rich governmentsremain as dependent as ever on overseastaxpayers for aid to fill the gaps in theirdevelopment budgets. According to ZitoKabwe, a Tanzanian parliamentarian andmember of the Bomani Commission, ‘ifall taxes were paid, if no gold was under-valued and if there were no over-declara-tion of total cost, this year we should getslightly more [revenue from mining] thanwhat the donors give us’.98

Once collected, mining revenues need tobe distributed by government in a trans-parent manner for agreed developmentexpenditures that can be easily moni-tored. With the exception of royalties,most mining taxes are paid directly to thetreasury to support general budgetexpenditure. Given that royalties are acompensation for extracting non-renew-able resources, and given that communi-ties living in mining areas are most affect-ed by mining activity, the practice in manycountries has been for a share of royaltiesto go directly to communities affected bymining, but also to pay for the costs ofmonitoring the mining sector.

The share of royalties paid to communi-ties directly has been very little. In SierraLeone, only 0.75% of the 3% royaltycharged on diamond exports99 goesdirectly to the areas affected by mining

through the Diamond Area CommunityDevelopment Fund (0.75%). The rest isdivided between the treasury (0.7%), therunning costs of the Gold and DiamondOffice (0.75%), valuation costs (0.4%),the environmental rehabilitation accountheld by the government (0.05%) and onpublic information and minerals moni-toring (0.1%). Mining companies alsohave to pay 0.1% of gross sales to theAgricultural Development Fund, todevelop agriculture in mining areas.

In Tanzania, the Bomani Commissionrecommended that only 3% of the royal-ty collected on gold be distributed to thevillages around the mines. The rest is togo to a mineral development fund (60%),a Tanzanian Mineral Authority mirroringGhana’s Mineral Commission, and theDistrict Council in charge of the miningarea (7%). In the DRC, most of the roy-alty goes to the central government(60%) and the rest is distributed to localgovernment structures to be used exclu-sively for community development andinfrastructure – the provincial administra-tion in charge of the mining area (25%)and the administrative territory wheremining takes place (15%).

However, not all governments earmarkroyalties for communities affected bymining. In South Africa, the governmenthas rejected proposals by civil societyorganisations and trade unions, and evensome mining companies to earmark roy-alty revenues to communities affected by


51

mining. In the new royalties Bill, all royal-ty revenues will be collected by the treas-ury. According to the Finance minister,‘not only is earmarking contrary to soundfiscal policy, but [it] would negate theunderlying principle of the Mineral andPetroleum Resources Development Actthat the minerals of our country belongto all South Africans’. Instead, the ‘gov-ernment is amenable to consider an on-budget spending programme targeted atmining and labour supplying communi-ties directed at human and/or local eco-nomic development’.100

The political context in each country,especially the degree of real devolutionof power to local authorities, will deter-mine which spending mechanism willbest allow local communities to shapeand monitor the spending of miningrevenue.

Transparent Company ReportingIn Africa, most mining investment isundertaken by the subsidiaries of multitransnational corporations incorporatedin South Africa, Canada, the US,Australia or Europe, and listed on oneor several international stock exchanges.The company laws and stock exchangeregulations in these countries requirethem to publish their financial data inannual reports, based on the interna-tional financial reporting standards setby the International AccountingStandards Board (IASB) or under USrequirements.

International Financial ReportingStandards do not require multinationalcompanies to report data on their profits,expenditure and taxes on a country-by-country basis. Instead, their reportsreflect their aggregate financial positionacross all their operations. It is, therefore,very difficult for governments and citi-zens in African countries to obtain localinformation on company profits, expen-ditures, and tax and other payments togovernments and other institutions. This,in turn, makes it impossible to monitorgovernment revenue collected from min-ing companies in a comprehensive way,particularly as many governments do notyet collate revenue figures from varioustypes of mining company payments any-where in a single format. They often donot require the local accounts of thecompanies in question to be filed onpublic record.

The Extractive Industries TransparencyInitiative (EITI) initiated by the UK gov-ernment in 2002 after campaigns by civilsociety organisations aims to partlyresolve both issues. First, governmentsthat elect to become EITI candidatecountries have to get their own account-ing in order and report publicly andaccessibly on all the revenues they receivefrom extractive industry companies ineach budget year. All mining (and otherextractive) companies, in turn, have tovolunteer to submit reports to the gov-ernment for public dissemination. Thereports must detail all their financial

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52

remittances to the government and relat-ed institutions, as well as profits andexpenditure in each financial year. Anaggregator is then tasked to compare therespective figures, point out differencesand explain them. No African countryhas been validated as EITI compliant yet,although a number have joined as candi-date countries – including Nigeria, SierraLeone, Ghana, and the DRC. TheTanzanian and Zambian governmentsboth announced their intention to jointhe initiative in 2008.

The EITI provides a useful push togovernments to improve their account-ing and reporting of revenues from theextractive industries sector. The initia-

tive has prompted a number of donors– notably the World Bank, DfID andNorway – to provide financial and tech-nical support to increase the capacity ofgovernments to monitor and collectmining revenue. So far, however, the ini-tiative has been less successful inprompting mining companies to publishtheir profits, expenditure and remit-tances to government. The EITI doesnot require multinational companies topublish their remittances on a country-by-country basis. Hence, it is very diffi-cult, if not impossible, for citizens, par-liamentarians and governments todetect tax avoidance strategies.Companies cannot be forced to publishnational reports using the EITI tem-


53

Box 4.1EITI company reporting template101

The EITI requires mining companies to report publicly the following information for each financialyear. The details of the information are to be negotiated with companies in each country, depend-ing on the national tax law and other considerations:I Revenue and profit for each concession or license

– Total production by value and quantity.– Total sales by value and quantity.

II Taxes and fees paid to the statea) Taxes paid: corporate income tax, VAT refunds deducted, Customs duties, Windfall taxes, Real

estate taxes, Excise taxes, Fuel levies, Vehicle taxes, Taxes on dividends paid, Taxes on interest paid, other

b) Royalties paidc) Fees paid: exploration, license, land rent, mineral resource use, otherc) Charges: stamp duties, otherd) Dividendse) Other: donations to government, community expenditureIII Sum of discounted taxes

Capital expenditure, staff development expenditure, exploration costs, environmental fund contributions

The EITI does not require

multinational companies to

publish their remittances on

a country-by-country basis.

Hence, it is very difficult, if

not impossible, for citizens,

parliamentarians and

governments to detect tax

avoidance strategies.

plate unless national laws regulatingfinancial reporting require them to doso – which is not the case at present.

In view of these shortcomings, the bestchance of obtaining the information nec-essary for governments, citizens andcommunities to track company remit-tances to national and local governmentdepartments, and to community develop-ment projects, is the introduction of aninternational accounting standard thatrequires national and multinational com-panies to report this information. Africangovernments are increasingly requiring allnational and foreign companies to com-ply with these reporting standards. It isalso, we argue, in the interest of firms topublish this information, which is whymany mining companies have alreadyindicated their willingness to participatein the EITI. First, clear information onprofits, expenditure, taxes, and otherremittances on a country-by-countrybasis gives their investors a clearer pictureof the real prospects and risks faced bythe company. Second, once communitieshave information on the revenue trans-mitted to government and other struc-tures meant to service them, they will beable to monitor these funds directly,instead of expecting companies to spendmore on community services directly.

The Publish What You Pay Coalitionhas been advocating for a new interna-tional accounting standard for theextractives industry that would require

multinational companies to report theinformation outlined in Box 4.2 on acountry-by-country basis. This informa-tion will not be too onerous on compa-nies, given that in many cases it is onlyan extension of information theyalready have to report on a country-by-country or regional basis for local taxa-tion purposes. Some best-practice com-panies are already choosing to make thistype of financial information availablein their annual reports.102 The extrac-tives activities research team at theInternational Accounting StandardsBoard will be publishing a discussionpaper in 2009, and based on the feed-back on this paper, may recommend theadoption of such a new financialreporting standard.

Do Donors Help or Hinder RevenueCollection and Transparency? Some donors – notably the IMF, WorldBank, DfID; members of the UN family– notably UNCTAD, UNDP andUNECA, as well as African political lead-ers themselves, through NEPAD’sAfrican Mining Partnership, are increas-ingly aware that Africa’s mineral richescould be turned into a force for develop-ment rather than a curse. They are, to dif-ferent degrees, supporting the efforts ofAfrican governments to integrate mininginto their development strategies and toincrease their tax take from mining.104

UNECA has been mandated by theAfrica Union to prepare an African

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55

Box 4.2An IFRS for multinational companies

The Publish What You Pay Coalition is advocating a review of the international accounting standard(IAS14 Segment Reporting) regulating how multinational companies report on the financial situa-tion of their different operations. To improve transparency, all multinational companies should berequired to report the following information for each of the countries where they operate:103

1. total company turnover.2. third party turnover.3. third party costs excluding employment costs.4. interest paid on loans.5. profit before tax.6. tax charged on profits split between current and deferred tax.7. other taxes or equivalent charges due to the government of the territory in respect of local

operations.8. the actual payments made to the government of the country and its agencies for tax and

equivalent charges in the period.9. the liabilities owing locally for tax and equivalent charges at the beginning and end of each

period as shown on the balance sheet at each such date.10. deferred taxation liabilities for the country at the start and close of the period.11. gross and net assets employed.12. the number of employees engaged, their gross remuneration and related costs.13. the names of all subsidiaries working within the territory.14. comparative data where appropriate in each case.

This additional reporting is not too onerous on multinational corporations as many of them alreadyreport most of this information. The International Accounting Standard (14) on segment reportingalready requires companies to report the number of employees they engage, their remunerationand related costs, the names of all subsidiaries working within the territory; interest paid by thesesubsidiaries; the gross and net assets employed; and deferred tax liabilities.

An IFRS for the extractives industry should, at the minimum, require country-by-country disclosureof the following payments and costs: • royalties and taxes paid in cash.• royalties and taxes paid in kind (measured in cash equivalents).• dividends.• bonuses.• license and concession fees.• production costs.• development costs.

Mining Vision, which sets out the keyobjectives, principles and values thatshould guide Africa’s mining develop-ment in future – these include maximis-ing the collection of revenue from min-ing in a transparent way. UNECA is also

leading a pan-African study that will col-lect information and analysis on the min-ing regimes of all African countries.These studies, undertaken by anInternational Study Group, will form thebasis of a set of mining policy guidelines

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Box 4.3IMF guidelines on resource revenue transparency

The IMF has, for a number of years, been a lonevoice in the donor community advocatingthese measures. In Sierra Leone, it advised thegovernment against offering huge fiscal incen-tives to foreign mining companies and reduc-ing their corporate tax rates. In Zambia, it sup-ported the government’s recent attempts toraise mining tax and royalty rates.105

Unfortunately, its tax advice to governmentsremains confidential, which undermines publicparticipation in mining tax debates.

In its Guide on Resource Revenue Transparency,the IMF advocates against mining tax subsidiesand for greater transparency in revenue collec-tion and distribution. To minimise tax subsidiesto mining companies, the Guide advises thatmining contracts and agreements should notform part of the mining taxation framework asthey do at present. Instead, the tax termsagreed in mining contracts should merelyrepeat or confirm the substantive law. If anyspecial tax agreements are reached in miningagreements, these should be incorporated intonational tax law, subject to parliamentary andpublic debate and scrutiny. The budget shouldclearly recognise the costs of incentives provid-ed through indirect tax exemptions due to thedifferent tax treatment given to the mining sec-tor. Any concessions from the tax regime appli-

cable to other industries, such as VAT refunds,import tax exemptions, corporate tax reduc-tions, fuel levy exemptions and so on should becounted as budget expenditures. This wouldhelp to calculate the overall subsidy to the min-ing industry.

To improve transparency, the IMF Guide advo-cates that national and international resourcecompanies comply with national and interna-tional accounting and auditing standards, thatthe government’s policy framework and legalbasis for taxation are presented to the publicclearly and comprehensively, and that nationallegislation include requirements for the full dis-closure of resource-related revenue.

The guidelines further recommend that allresource revenue-related transactions beidentified, described and reported in thenational budget process. Standardized tem-plates should be developed for mining devel-opment agreements that outline exploration,development and production terms. Thiswould reduce the discretion of high-levelpoliticians in mining agreement negotiations,and the potential for corruption. Finally, theguidelines recommend that all mining devel-opment agreements should be made publiclyavailable.

for African governments covering allaspects of mining including taxation, aswell as a model mining developmentagreement, based on best practice collect-ed around the continent.106

But many donor governments haveplayed a less constructive role, and havetried to stymie the development oftransparent, participatory policies andsovereign legislation that would con-tribute to the development benefits ofmining.107 We show below how the gov-ernments of Canada and the UnitedStates, both mining economies, haveinterfered in local political processes inTanzania and the DRC to secure theinterests of their mining companies.

In 1996, the Canadian HighCommissioner in Tanzania intervened onseveral occasions to influence revisions tomining legislation as a means of promot-ing Canadian business interests. He actedto counter the legal claims of local min-ers who were questioning the legitimacyof a Canadian mining company, SuttonResources, and its designs on theBulyanhulu deposits. In 2004, Canada’sambassador to the UN had criticised partof a report produced by the Panel ofExperts on the Illegal Exploitation ofNatural Resources in the DR Congo, inwhich nine Canadian companies wereaccused of violating OECD Guidelinesduring the country’s protracted war.108 InJune 2008, the staff of the CanadianHigh Commission in Tanzania tried to

influence parliamentarians to reject therecommendations of the BomaniCommission, a committee appointed bythe president to review the country’s min-ing contracts and legal framework.

A former Tanzania Finance minister haspublicly questioned the role of foreigndonors in Tanzania and their interfer-ence in national tax laws to safeguardthe interests of their mining companies.He stated that ‘during the preparations(for enacting the 2004 Act) several for-eign diplomats based in the countryformed a committee to examine theproposals for the (Income) Tax Bill,which is rather unusual. Being the thenFinance minister, I met twice with themto hear and respond to their objections– especially to the manner in whichmines were to be made to pay incometax as had then been proposed by anexpert from Oxford University inEngland. Eventually, the Cabinet decid-ed to postpone the incorporation intothe new law of the entire section of thatBill which dealt with minerals so that itwould be re-examined when the timewas right.’109 It is alleged that thesediplomats represented the UK, Norway,South Africa and Canada.

Canada and South Africa are the hostcountries of the major industrial minersin Tanzania: Barrick Gold andAngloGold Ashanti. Diplomats fromthese countries were trying to safeguardthe ability of these companies to con-


57

tinue benefiting from tax concessionsgranted in the 1973 Income Tax Act,which were at risk of being abolished inthe 2004 Act. These included their abil-ity to deduct 100% of expendituresmade before production starts fromincome tax liability and to continue ben-efiting from a government tax subsidyon capital expenditure.110

In a similar vein, the US governmenthas been undermining the efforts ofcivil society and donors to bring trans-parency to the DRC’s mining regime. In2005, the world’s largest publicly tradedcopper company, Freeport McMoRanCopper and Gold, bought a majorityshare in the Tenke Fungurume mine,the world’s largest open pit copper minein southern DRC. The company signeda contract for the development of theconcession at Tenke Fungurume behindclosed doors – the deal reduced the gov-ernment’s share in the project from 45%to just 17%. The World Bank’s chiefmining specialist, Craig Andrews, hascriticised ‘the complete lack of trans-parency with respect to the negotiationsand approval of these contracts’.111 Thisrenegotiation took place despite the rec-ommendation of the LutundulaCommission that there should be amoratorium on the negotiation of allnew contracts until a proper review hasbeen undertaken.

A US academic investigating the TenkeFungurume contract has criticised a

high-ranking US diplomat who wasinvolved in the negotiations. Accordingto him, she was ‘instrumental in con-vincing President Joseph Kabila to signoff on the deal’.112 She then took a jobwith Freeport less than a year later asvice president in charge of governmentrelations. According to DRC citizens,‘the United States pushed us to sign acontract when we shouldn’t have signedit. And then the lady who pushed [it]…is making money off that contract’.113

Companies’ Reaction to Mining Tax ReformsAs discussed in Chapter 3, mining com-panies believe they are entitled to specialtax exemptions, given the risky nature oftheir business. It is therefore not surpris-ing that they have largely opposed thechanges proposed or made to mining taxregimes. In Tanzania, Barrick Gold hasused the leverage of the Canadian gov-ernment to try to stall tax regime reforms.The company has also publiclydenounced the authors of a civil societyreport pushing for mining tax reforms.In Zambia, First Quantum immediatelythreatened the government with legalaction following the changes to the min-ing tax regime made in April 2008, andother companies have followed suit indemanding the abolition of the windfallstax and variable profits tax, as well as areduction of corporate income tax ratesto 25%. The Zambian presidentannounced in January 2009 that the gov-ernment might cut mining taxes in

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response to pressure from mining com-panies, some of which have been sus-pending operations due to low interna-tional copper prices. In his view, ‘we mustensure that we do not kill the goose thatlays the golden egg. There is little point intaking in a few million dollars in tax ifthousands of jobs are lost as a result.’114

The IMF representative to Zambia, how-ever has publicly urged the governmentnot to cut taxes, despite pressure from thecompanies.115 The current low copperprices, averaging US$3,000 per tonne, arestill higher than the prices assumed in thebusiness feasibility studies of companiesbuying the mines in the early 2000s,before the boom.

Mining companies cite crashing com-modity prices and the lack of availabilityof finance for new mining investmentdue to the international financial crisis asreasons why governments should contin-ue granting them tax concessions.According to Barrick Gold, respondingto the recommendations made for taxreforms in a civil society report – manyof which have been adopted by theBomani Commission, ‘such changeswould only aggravate an already desper-ate economic picture for new investmentin the sector and cast an even largercloud over the long-term future of thegold mining industry in Tanzania’. In theDRC and Zambia, a number of copperand cobalt mining operations havealready been suspended, while miningcompanies wait for prices to rise.116

RecommendationsAfrican governments, their donors, andmining companies face a number ofchallenges if mining is to start contribut-ing to economic and human develop-ment in mineral-rich countries. There isa real danger that the crash in interna-tional mineral commodity prices, cou-pled with the reduction in internationalfinance available for new mining invest-ment, could set back the mining taxreforms under way or recently enacted incountries like Sierra Leone, Tanzania andZambia. They may again fail to benefitfrom the next commodity price boom.Governments might also be persuadedby companies in their individual contractnegotiations that they need to continuegranting them special tax exemptions tocompensate for these risks.

Furthermore, too many African govern-ments are still unwilling to open up theirtax deals and tax receipts from miningcompanies to public and parliamentaryscrutiny. And too many mining compa-nies are still pushing for tax exemptionsand still fail to report what they earnand what they remit to government ineach jurisdiction where they operate.

To remove these obstacles blockingincreased revenue and transparency inAfrica’s mining industry, systemic andpolitical solutions are needed. At the sys-temic level, a new international financialreporting standard that all companiesregistered on stock exchanges will need


59

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 under

way or recently enacted in

countries like Sierra Leone,

Tanzania and Zambia.

to implement has to require them toreport on their financial operations andremittances to government and otherstructures on a country-by-country basis.This will allow citizens and parliamentsto monitor the financial flows betweenparent companies and subsidiaries, anddetect tax avoidance practices.

African governments also need to revisetheir company acts to require the sub-sidiaries of multinational mining compa-nies incorporated in their jurisdictions topublish the financial informationrequired by the EITI. This will ensurethat all mining companies, including thegrowing number of Chinese state-ownedor financed mining companies arerequired by national law to publish theirprofits and losses, and remittances togovernment and other structures.117

African governments1. Collaborate with the UNECA to

develop and publish an easy-to-use guide on mining taxation. The guideshould cite best or alternative practices 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 industrycompanies to use the EITI templatein their annual financial reports by law.

3. Stop the practice of granting tax exemptions to mining companies in

mining contracts. All mining tax ratesand terms should be legislated in the substantive law and merely confirmedin mining development agreements.

African parliaments1. Pass laws that require mining

development agreements to be ratified by parliaments, as is the casein Ghana and Sierra Leone, and made public.

2. Push for a new international accounting standard that would force companies to report their profits, expenditures, and taxes, feesand community grants paid in each financial year on a country-by-country basis.

International Accounting Standards BoardAdopt a new international accountingstandard for extractive industries, whichrequire them to report on their profits,expenditures, and taxes, fees and com-munity grants paid in each financial yearon a country-by-country basis.

Bilateral and multilateral donorsScale up their financial assistance toAfrican governments to improve theircapacity to monitor and audit theaccounts of mining companies, and toreview their mining tax regimes. Africangovernments should be free to use thisfinance to purchase legal and othertechnical assistance from any serviceprovider of their choice.

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1 IMF Commodity statistics show that the metals priceindex for copper, aluminium, iron ore, tin, nickel, zinc,lead and uranium rose from 40 in April 2002 to 200 inApril 2008. This equals an average rise of 269 per centin the price of minerals during this period.

2 In 2007, UN ECA and the African Development Bank organised a ‘Big Table’ meeting on ‘Managing Africa’s Natural Resources for Growth and Poverty Reduction’. Participants at this meeting acknowledgedthat African mineral wealth has not led to poverty reduction or growth in mineral-rich countries. They subsequently tasked UN ECA to lead a pan-African research process that would provide guidelines for African governments on how to turn their mineral wealth into development benefits. UN ECA has also published the following report as a guide Antonio M.A. Pedro, ‘Mainstreaming Mineral Wealth in Growth and Poverty Reduction Strategies’, UN ECAPolicy Paper No 1, no date available

3 Prominent academic studies fuelling this view includethat of the World Bank economist Paul Collier and Anneke Hoeffler, in ‘Resource Rents, Governance and Conflict’, Journal of Conflict Resolution, 2005, Volume 49(1). These views are shared in a number ofacademic studies, including Thad Dunning, ‘ResourceDependence, Economic Performance and Political Stability’, Journal of Conflict Resolution, 2005, Volume 49(4), and Lujala Paivi, Nils Peter Gleditsch and Elizabeth Gilmore: ‘A Diamond Curse? Civil War andLootable Resource’, Journal of Conflict Resolution, Volume 49(4), 2005

4 The UN Expert Panel Report on the Illegal Exploitation of Natural Resources and Other Formsof Wealth in the DRC has found that ‘by contributingto the revenues of the elite networks, directly or indirectly, companies and individuals fuel the ongoingconflict as well as human rights abuses’, and that ‘theconsequence of illegal exploitation has been ... the emergence of illegal net works headed by either top military officers or businessmen. These … elements form the basis of the link between the exploitation ofnatural resources and the continuation of the conflict.’ UN Expert Panel DRC Report, S/2001/357,April 2001

5 Antonio M.A. Pedro ‘Mainstreaming Mineral Wealth in Growth and Poverty Reduction Strategies’, ECA Policy Paper No 1, date unknown, United Nations Economic Commission for Africa

6 Jacob Thamage, Director of Mines, Ministry ofMinerals Energy and Water Resources, presentation atthe Geneva Trade and Development Forum, 10 March 2008, organised by the EC Working Group onturning mining revenues into development benefits,Brussels

7 This report draws from the following background studies and reports: Laurent Okitonemba and Dona Kampata ‘Dans quelle mésure le boom des matières premières peut-il augmenter l’assiette fiscale en Afrique? Etude du cas de La République Démocratique du Congo’, Southern Africa Resource Watch, OSISA, Kinshasa October 2008, unpublished;Thomas Akabzaa ‘Ghana’s Mining Tax Regime’,

61

Endnotes

Third World Network Africa, Accra, October 2008,Patrick S Kambewa, ‘Malawi’s Mining Tax Regime’,September 2008; Alastair Fraser and John Lungu, ‘ForWhom the Windfalls? Winners and Losers in the Privatisation of Zambia’s Copper Mines’, Zambia Civil Society Trade Network and Catholic Centre forJustice Development and Peace (CCJDP, now Caritas), 2006; Mark Curtis and Tundu Lissu, ‘A Golden Opportunity: How Tanzania is Failing to Benefit from Gold Mining’, published by the Christian Council of Tanzania, National Council ofMuslims in Tanzania, Tanzania Episcopal Conference,October 2008; Mark Curtis, ‘Sierra Leone at the Crossroads: Seizing the Chance to Benefit from Mining’, National Advocacy Coalition on Extractives(NACE), Freetown, March 2009 (forthcoming); MarkCurtis ‘African Mining and Tax Regimes: A Comparative Table’, mimeo, October 2008; and MarkCurtis, ‘Mining Briefing: How Can the Commodity Boom Grow Africa’s Tax Base – South African Case Study’, mimeo, October 2008, Patrick Kambewa,‘How Can the Commodity Boom Grow Africa’s Tax Base – Case Study from Malawi’, zero draft report,mimeo, October 2008.

8 World Investment Report 2007: Transnational Corporations, Extractive Industries and Development, UNCTAD 2007

9 For an overview of the World Bank’s role in mining reforms across developing countries, see Felix Remy,‘Mining Reform and the World Bank’, published by the World Bank Group’s Oil, Gas, Mining and Chemicals Department, www.ifc.org/ogmc

10 For a detailed overview the World Bank’s activity in the DRC, including on mining and transparency, until2006, see Nikki Reisch, Bank Information Centre,Michelle Medeiros, Friends of the Earth and Shannon Lawrence, Environmental Defense in ‘The World Bank in the DRC: March 2006 update’.

11 See Global Witness and Bank Information Centre ‘Assessment of International Monetary Fund and World Bank Group Extractive Industries Transparency Implementation’, October 2008

12 Cited in Mark Curtis and Tundu Lissu ‘AGolden Opportunity: How Tanzania is Failing to Benefit fromGold Mining’, published by the Christian Council ofTanzania, National Council of Muslims in Tanzania,Tanzania Episcopal Conference, October 2008

13 Thomas Akabzaa, ‘Ghana’s Mining Tax Regime’,unpublished background paper, Third World Network Africa, October 2008

14 For further analysis of the World Bank’s involvementin DRC see ‘The state vs the people: governance,mining and the transitional regime in the DemocraticRepublic of Congo’, Netherlands Institute for Southern Africa, International Peace Information Service (IPIS) and Fatal Transactions, 2006

15 Transitional Support Strategy Paper, World Bank, Report no 27751, January 2004

16 The six Ernst and Young reports can be found on thefollowing website: http://ratcliffephotos.free.fr. The Ernst and Young mission took place between March 30 and May 22, 2005

17 World Bank Office Memorandum, ‘Contracts Between Gecamines and Private Companies’,September 8, 2005. cited in Laurent Okitonemba andDona Kampata, ‘Dans quelle mesure le boom des matieres premieres peut-il augmenter l’assiette fiscaleen Afrique?’, October 2008, unpublished report commissioned by Southern Africa Resource Watch project of the Open Society Institute of Southern Africa

18 Denis Tougas, Canada in Africa: The Mining Superpower, Pambazuka News, November 20, 2008

19 Denis Tougas, Canada in Africa: The Mining Superpower, Pambazuka News, November 20, 2008

20 IMF commodity statistics show that the metals price index for copper, aluminium, iron ore, tin , nickel,zinc, lead and uranium rose from 40 in April 2002 to200 in April 2008

21 See ‘Into Africa: How the Resource Boom is MakingSub-Saharan Africa More Important to Australia’,Roger Donnelly, Benjamin Ford. Lowry Institute for International Policy’, New South Wales, 2008

22 See Pretoria Communiqué, issued by the South African Ministry of Finance, October 2008

23 Interview with HP M’Cleod, UNDP, Freetown, July 2008

24 Oxford Analytica, ‘Falling Metals Prices will Hit Africa Hard’, 5 January 2008, as reported in the Globeand Mail, www.theglobeandmail.com/, 5 January.Copper prices have been hit hardest – it traded for only US$3,000 a tonne at the LME in January 2009,down from its peak of US$9,000 a tonne in July, andless than half of the US$7,000/tonne in January 2009.Gold has done better according to World Gold Council statistics, with prices dropping to US$855 anounce in January 2005, down from its historic peak ofUS$1,000 an ounce in April 2008, but still much higher than the low of US$300 an ounce it traded at in January 2000. Cobalt prices have dropped from

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62

US$55 a pound in March 2008, to US$17 a pound inNovember 2008, mainly as a result of a ‘sudden steepdecline in demand from China’, see Barry Sargeant

25 Barry Sargeant, ‘The Mining Curtains are Falling in Katanga Province, DRC, as Ambitious Mid-tier Miners with Battered Balance Sheets Continue to HaltOperations, Mainly in Cobalt,’ Mineweb, 24 November 2008

26 Martin Creamer, editor of Mining Weekly, in an interview on South Africa’s ‘Second Take’ 12 December 2008, was confident that international metals prices would bounce back, given that the structural conditions for their initial rise since 2003 are still present: the continued metals-driven growth of China and other large industrialising countries, andcontinued global undersupply of the metals needed for this growth, especially given that many ‘junior’mines are shutting down operations due to low prices..

27 Quote Aimes28 UNCTAD estimates that the mining sector employs

just 0.2%of Tanzania’s workforce. According to government figures, one third of people between theages of 15 and 35 are unemployed and while 700,000graduates enter the job market every year, only 40,000find employment in the formal sector. Cited in MarkCurtis and Tundu Lissu, ‘Golden Opportunity: How Tanzania is Failing to Benefit from Gold Mining’,published by the Christian Council of Tanzania,National Council of Muslims in Tanzania, Tanzania Episcopal Conference, October 2008

29 World Investment Report 2007: Transnational Corporations,Extractive Industries and Development, UNCTAD, 2007

30 Felix Remy, ‘Mining Reform and the World Bank:Providing a Policy Framework for Development’, Oil,Gas, Mining and Chemicals Department, World Bankand IFC, 2003

31 Southern Africa Resource Watch, TWN Africa Aimesmembers, Christian Aid, and Action Aid have documented in recent reports how communities are affected by mining. These reports include ‘Undermining Development: Copper Mining in Zambia’, October 2007, and ‘Death and Taxes: The True Toll of Tax Dodging’, May 2008 (www.christian-aid.org.uk), ‘Precious Metal: The Impact of Anglo-Platinum on Poor Communities in Limpopo, South Africa’, March 2008; Gold Rush: The Impact of GoldMining on Poor People in Obuasi in Ghana, 2005 (www.actionaid.org.uk), ‘Sierra Leone at the Crossroads: Seizing the Chance to Benefit from

Mining’, National Advocacy Coalition on Extractives,Freetown, forthcoming March 2009

32 Some voluntary corporate social responsibility standards that apply to all multinational corporationsinclude the OECD Guidelines on Multinational Corporations, the UN Global Compact, the Equator Principles, which outline the standards for bankers who finance mining projects. The Christian Aid report ‘Behind the Mask: The Real Face of CorporateSocial Responsibility’ questions whether corporate social responsibility commitments are sufficient to hold companies to account for their impact on communities, 2004 (www.christian-aid.org.uk).

33 Figures provided by companies in Rands have been converted to US dollars at the rate of 1 Rand = $0.127(*) Includes spending in southern Africa region fromwhere a number of employees in South Africa are drawn.(**) Includes community development spending in Zimbabwe, to be consistent with the fact that profit levels also include Zimbabwe. Sources for these figures: Anglo Platinum, Sustainable Development Report2007, p.34; AngloGold Ashanti, Country Report South Africa: Vaal river, 2007, p.56; Impala Platinum, AnnualReport 2008, p.31; Harmony Gold, Sustainable Development 2007, p.42; Lonmin, ‘Lonmin Development Trust’, www.lonmin.com

34 Joel Bergsmann, ‘Advice on Taxation and Tax Incentives for Foreign Direct Investment’, May 1999,paper presented at World Bank Foreign Investment Advisory Service seminar in 2000, p. 7

35 Alex Cobham, ‘Tax Evasion, Tax Avoidance and Development Finance’, Working Paper No 129,Finance and Trade Policy Research Centre, Queen Elizabeth House, University of Oxford, September 2005

36 This table has been compiled by James Otto in JamesOtto et al, ‘Mining Royalties: A Global Study of theirImpact on Investors, Government and Civil Society,World Bank, 2006

37 Table reproduced from James Otto et al ‘ Mining Royalties: A Global Study of their Impact on Investors, Government and Civil Society’, page 17

38 The most comprehensive studies on mining taxation are James Otto, Craig Andrews, Fred Cawood et al,‘Mining Royalties: A Global Study of their Impact onInvestors, Government and Civil Society’, published by the World Bank in 2006, and James Otto, Maria Luisa Batarseh, John Cordes ‘Global Mining Taxation

Endnotes

63

Comparative Study’, Second Edition, Institute for Global Resources Policy and Management, ColoradoSchool of Mines, March 2000

39 Thomas Baunsgaard and Mick Keen, IMF working paper, 05/112, 2005

40 This is according to IMF budget revenue tables published in Emil M Sunley, Thomas Bannsgaard andPhilip Daniel, Sierra Leone: Fiscal Incentives and theFiscal Regime for the Minerals Sector, IMF Fiscal Affairs Department, April 2004

41 Fiscal incentives and the fiscal regime for the mineralssector, Emil Sunley et al, IMF, Fiscal Affairs Department, document ‘for official use only’

42 See L Wells, N Alleth, J Morriset and N Pirnia: ‘UsingTax Incentives to Compete for Foreign Investment:Are They Worth the Cost?’, FIAS/WB, IFC, 2001,

43 McKinsey Quarterly, 2004, Volume I44 Finance and Development, IMF, September 2008,

http://www.imf.org/external/pubs/ft/fandd/2008/ 09/gupta.htm

45 South Africa also levies a secondary tax on companies(STC), to be paid on 10% of dividends declared – thistax will be replaced with a withholding tax on dividends in 2009

46 Figures from James Otto et. al ‘Global Mining Taxation Comparative Study’, Second Edition,Colorado School of Mines

47 PriceWaterhouse Coopers: ‘Mine: Let the Good Times Roll: A Review of Global Trends in the MiningIndustry’, 2006

48 James Otto, Mining Royalties, World Bank, 200649 BOAS and Associates, Ghana EITI First Aggregated

Report, 200750 UNCTAD, ‘Economic Development in Africa:

Rethinking the Role of Foreign Direct Investment’,New York/Geneva, 2005, p 46

51 These calculations use figures provided by the government in National Treasury, Media Statement,June 3, 2008, Annexure 1, p.3, at: http://www.treasury.gov.za/legislation/bills/2008/royalty/2008060301.pdf.

52 The only exception is AngloGold Ashanti, who reported tax payments of US$1m in 2007

53 The Report of the Presidential Committee to Advisethe Government on Oversight of the Mining Sector,United Republic of Tanzania, Volume 2, April 2008,headed by Judge Mark Bomani (unofficial English translation)

54 Budget quoted in Mark Curtis and Tundu Lissu: ‘A Golden Opportunity? How Tanzania is Failing to

Benefit from Gold Mining’, CCT, National Council ofMuslims in Tanzania, Tanzania Episcopal Conference,October 2008

55 AngloGold Ashanti Annual Report 2006, p. 80,www.anglogoldashanti.com

56 Tanzania’s Sunday Citizen, October 7, 200757 Mark Curtis, ‘Sierra Leone at the Crossroads: Seizing

the Chance to Benefit from Mining’, National Advocacy Coalition on Extractives (NACE),Freetown, March 2009 (forthcoming)

58 Cited in Mark Curtis and Tundu Lissu, ‘A Golden Opportunity: How Tanzania is Failing to Benefit fromGold Mining’, published by the Christian Council ofTanzania, National Council of Muslims in Tanzania,Tanzania Episcopal Conference, October 2008

59 Ibid.60 This table has been compiled from information

provided in the background studies commissioned forthis report on Sierra Leone, Malawi, Ghana, Tanzania,Zambia, South Africa and the DRC. See footnote x.Additional information is provided in Mark Curtis ‘African Mining and Tax Regimes: A Comparative Table’, mimeo, drawn from various government sources in these countries.

61 Interviewed in 2006, quoted in Alastair Fraser and John Lungu, ‘For Whom the Windfalls? Winners andLosers in the Privatisation of Zambia’s Copper Mines’, Zambia Civil Society Trade Network and Catholic Centre for Justice Development and Peace (CCJDP, now Caritas), 2006

62 These figures are taken from PriceWaterhouseCoopers, Metals and Mining, Reviewof Global Tends in the Mining Industry, 2007

63 Ngandu Magande, MP and minister for finance and national planning, budget address, February 3, 2006,www.zra.org.zm

64 These figures were cited in a Zambia Chamber ofMines presentation given by the chair of the Chamberto a visiting IMF mission in October 2006, entitled ‘Zambian Mining Industry: Post-privatisation’,unpublished

65 Calculated in A Rich Seam: Who Benefits from RisingCommodity Prices?’, Christian Aid, January 2007

66 United Republic of Tanzania: ‘Report of the Presidential Committee to Advise the Government onOversight of the Mining Sector’, Volume 2, April 2008

67 Mark Curtis and Tundu Lissu, ‘A Golden Opportunity: How Tanzania is Failing to Benefit fromGold Mining’, published by the Christian Council of

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Tanzania, National Council of Muslims in Tanzania,Tanzania Episcopal Conference, October 2008

68 Interviewed by Judith Melby, March 2008, and cited in‘Death and Taxes: The True Toll of Tax Dodging’,Christian Aid, May 2008

69 See ‘Kayalekera Uranium Project Malawi’, September2008, www.paladinenergy.com.au, and John Borshoff,Managing Director, Paladin Energy Ltd, quoted in Marketwire, November 20, 2008

70 The Bankable Feasibility Study is cited by Patrick Kambewa in the background study prepared for this report.

71 These calculations are based on Paladin Africa Ltd financial calculations of the expected returns on its investment in the uranium mine. According to its ownassumptions (www.paladinenergy.com.au) 1,493t U308 (uranium) will be produced in the first seven years, and 530t over the last four years. Total capital expenditure is expected to be US$300m, according to…. The project operating costs are expected to rangefrom US$19/pound for the first 7 years, to US$23/lbover the life of the project. These calculations also assume a flat real price for U308 of US$60/lb over the entire 11-year period.

72 Quoted in Mark Curtis, ‘Sierra Leone At the Crossroads: Seizing the Chance to Benefit from Mining’, NACE, March 2009 (forthcoming)

73 The chair of the parliamentary committee on mining,quoted in Mark Curtis, ‘Sierra Leone at the cross-roads: seizing the chance to benefit from mining’,NACE, March 2009, claims that he has never seen theagreement.

74 Recent studies and exposés include the Final Report of the UN Panel of Experts on the Illegal Exploitation of Natural Resources and Other Formsof Wealth of the Democratic Republic of Congo, UNS/2002/1146, ‘The State Versus the People:Governance, Mining and the Transitional Regime in the DRC’, IPIS, Netherlands Institute for Southern Africa, and Fatal Transactions, 2006. DRC former mining minister Florent Mututulo, who took office in1997, has described on public radio how he has beenapproached by foreign mining businessmen willing topay bribes, but how he has refused to take these bribes. Transcript of the Dan Rather Reports, broadcastin the US on 17 September 2008, episode number 330, entitled ‘All Mine’

75 The contracts of a number of joint venture contractsbetween state-owned enterprises and private companies were posted on the website of the

Congolese Ministry of Finance in October 2007.http://www.minfinrdc.cd..Several pages are missing from some of the contracts

76 The government has expropriated First African Diamonds from Sengamines in September 1998. It now plans to negotiate a new contract with a Russianco-owner. First African Diamonds is planning legal action, as reported by John Helmer, ‘Alrosa Agrees with DRC on Sengamines Takeover’ in Mineweb,September 16, 2008 on www.mineweb.net. Before signing the current contract with Oryx in 2005,Sengamines was jointly owned by MIBA and a Zimbabwean company called Operation Sovereign Legitimacy (Osleg). Dumisani Ndlela reported in the Zimbabwe Financial Gazette on 3 February 2005 thatthis company was owned by four prominent Zimbabwean citizens, two of whom were key figuresin the Zimbabwe Defence Force during the war in theDRC. This company was named in the Final Report of the UN Panel of Experts on the Illegal Exploitation of Natural Resources and Other Formsof Wealth in the DRC, 2002, S/2002/1146 as one of85 companies operating in the DRC at the time of thewar that were in breach of the OECD Guidelines onMultinational Enterprises.

77 International Peace Information Service, ‘SengaminesExport Data, June 2001-September 2003’, Antwerp,11 November 2003, www.ipisresearch.be

78 Claude Kabemba, ‘Is a Genuine and Transparent Process of Mining Contract Renegotiation Possible inthe DRC?’, Southern Africa Resource Watch, Open Society Initiative of Southern Africa (OSISA), mimeo

79 World Bank, ‘DRC Growth with Governance in the Mining Sector’, November 2007, cited in Raf Custers‘World Bank and DRC Congo Mining Session’,International Peace Information Service, Paris,November 30,2007

80 We are citing the figure arrived at by Global FinancialIntegrity researchers using the Gross Excluding Reversals method to calculate illicit capital outflows resulting from under-invoicing of exports and over-invoicing of imports. This figure is cited in Table 16 on page 16 of the report: ‘Illicit Financial Flows fromDeveloping Countries 2002-2006’, Dev Kar and Devon Cartwrigh-Smith, Global Financial Integrity,Centre for International Policy, Washington DC, 2008

81 These figures have been calculated by the London-based New Economics Foundation, based on trade figures provided by Simon Pak, a US expert on trademis-invoicing. Quoted in ‘A Rich Seam: Who Benefits

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from Rising Commodity Prices?’, Christian Aid,January 2007

82 Quoted in Mark Curtis ‘Sierra Leone at the Crossroads: Seizing the Chance to Benefit from Mining’, National Advocacy Coalition on Extractives,March 2009

83 Alex Steward Assayers Report, ‘The Evaluation of theGold Mining Programme’, mimeo, pp5-8. The government has not shared this report with any of thegold mining companies. In response to the allegationsmade in the report, the Tanzania Chamber of Miningand Energy ‘it is an essential element of audit procedure that an auditee be given the opportunity toexplain any apparent anomalies found during an audit.This has unfortunately never happened and given riseto a lot of speculation on the sugject [of this report].The report is still a matter of discussion between thegovernment and respective mining companies’.

84 Sunday Citizen, May 13, 200785 The Citizen, 13 June 200886 Cited in Mark Curtis, ‘Sierra Leone at the Crossroads:

Seizing the Chance to Benefit from Mining’, NationalAdvocacy Coalition on Extractive, March 2009 (forthcoming), p 29

87 Ibid.88 The Income Tax Amendment Bill, 2008,

Memorandum, N.A.B, January 24, 200889 Reported in Northern Miner, September 200890 A number of prominent economists such as Jeffrey

Sachs and Thorvadur Gylfason have tried to demonstrate through regression analyses that there isa negative relationship between economic growth andresource dependency; others have questioned the dataused in these analyses.

91 Transparency International’s corruption index for many countries correlates positively to their dependence on mineral or petroleum resources. Manycountries that are not dependent on mineral resourcesalso score poorly on the index.

92 Antonio M.A. Pedro, ‘Mainstreaming Mineral Wealthin Growth and Poverty Reduction Strategies’, ECA Policy Paper No 1, date unknown, United Nations Economic Commission for Africa

93 Such mechanisms would include a fully functioning government auditor, well-informed parliamentarians that hold government to account, legal rights to access information, structures through which citizenscan help shape government policy, and enforceable sanctions for corruption.

94 This is also the case in Mozambique, Burkina Faso,

Senegal, and Mali. But there are no provisions for fiscal stabilisation in the mining laws of mineral-rich countries such as Angola, Namibia, Zimbabwe,Uganda, Kenya, or Cote d’Ivoire. Mark Curtis,‘African Mining and Tax Regimes: A Comparative Table’, October 2008, mimeo

95 Cited in Mark Curtis and Tundu Lissu: ‘A Golden Opportunity: How Tanzania is Failing to Benefit fromGold Mining’, published by the Christian Council ofTanzania, National Council of Muslims in Tanzania,Tanzania Episcopal Conference, October 2008

96 As reported by Frank Jomo, March 8, 2007 on www.mineweb.net

97 Cited in ‘Sierra Leone at the Crossroads: Seizing the Chance to Benefit from Mining’, National Advocacy Coalition on Extractives (NACE), Freetown, March 2009 (forthcoming)

98 Interview with Judith Melby, March 2008, quoted in ‘Death and Taxes: The True Toll of Tax Dodging’,Christian Aid, May 2008

99 Koidu Diamonds, the only industrial miner, pays 5%100 Quoted in Mark Curtis, ‘Mining Briefing: How Can

the Commodity Boom Grow Africa’s Tax Base – South African Case Study’, mimeo, October 2008

101 This template has been adapted from the EITI Sourcebook, March 2005, www.eititransparency.org

102 Publish What You Pay and Revenue Watch Institute,Briefing Paper, IASB Roundtable of the Extractives Activities Research Team, September 15, 2008

103 International Accounting Standard 14, Segment Reporting, 2005 Update, Submission to IASB by the Publish What You Pay Coalition, including Global Witness, OSISA, Care, CAFOD, Transparency International

104 The World Bank has been encouraging mineral-rich countries to integrate mining development into their poverty reduction strategy papers and supporting extractive industry transparency in client countries.DfID has paid the legal fees of the advisors to the Zambian government on its recent mining tax reforms, and the UNDP is funding a pilot programmeto develop the capacity of governments to collect more revenue from mining – pilot countries are SierraLeone and Mozambique in Africa. Additionally, the Africa Development Bank is considering a legal facility to help governments with the legal aspects ofcontract negotiations.

105 This involvement is detailed in Alastair Fraser and John Lungu, ‘For Whom the Windfalls? Winners andLosers in the Privatisation of Zambia’s Copper

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Mines’, Zambia Civil Society Trade Network and Catholic Centre for Justice Development and Peace (CCJDP, now Caritas), 2006

106 International Study Group, Terms of Reference for the Review of African’s Mining Regimes, Antonio Pedro, UN ECA, mimeo

107 See Denis Tougas, ‘Canada in Africa: The Mining Superpower’, Pambazuka News, November 20, 2008

108 Evans Rubera, ‘Mining and Colonial Practices in Tanzania: The Return of Victorian Era Exploitation?’,Pambazuka News, November 20,2008

109 Quoted in a letter dated December 3, 2007, to the Chairman of the Mineral Sector Regulatory System Review Committee, by the Minister for Industries,Trade and Marketing, Basil Mramba, relating what happened when, in 2004, the government repealed the Income Tax Act of 1973 and replaced it with the2004 Income Tax Act. Cited in Death and Taxes: TheTrue Toll of Tax Dodging’, Christian Aid, May 2008

110 The Report of the Presidential Committee to Advisethe Government on Oversight of the Mining Sector,United Republic of Tanzania, Volume 2, April 200

111 Raf Custers, IPIS112 Quoted in a transcript of the Dan Rather reports,

broadcast in the US on September 17, 2008, episode number 330, entitled ‘All Mine’.

113 Peter Rosenblum, professor, Columbia University andDan Rather, quoted in a transcript of the Dan Ratherreports, broadcast in the US on September 17, 2008,episode number 330, entitled ‘All Mine’.

114 Rupiah Banda in his State of the Nation address on January 16, 2008, published by Reuters on January 16,2009

115 Birgir Anarson, IMF Resident Representative n Zambia, quoted in a Reuters report, 13 January 2009,www.miningweekly.com

116 Barry Sargeant, ‘The Mining Curtains are Falling in Katanga Province, DRC, as Ambitious Mid-tier Miners with Battered Balance Sheets Continue to HaltOperations, Mainly in Cobalt,’ Mineweb, November 24,2008

117 The African Publish What You Pay campaign, whichmet in Abuja in September 2008, also called for the EITI reporting requirements to be embedded in national law, for the introduction of freedom ofinformation Bills in all African countries, and for mining contract transparency. See Publish What You Pay Communiqué, issued at the Africa Regional Meeting, September 10, 2008

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Design and Layout: Paul Wade, JohannesburgPrint Production: DS Print Media, Johannesburg

Cover picture: Residents from Mutakuja village in Tanzania have been displaced by Geita, a gold-mine owned by Anglo-Gold Ashanti.Picture taken by Evelyn Hockstein

Document picture: Mine workers at NFC Africa Mining shaft at Chimbishi. Since the sale of themine by the government in 1997, the mine shafts were left to flood and the infrastructure of theplant was left to rot. A Chinese company has since come in and reinvested in the mines providing1800 jobs for local miners who work 8 hour shifts, as the mines operate 24 hours a day.

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breaking the curse: how transparent taxation and fair...

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