The African Mining Vision and Tax Policy

Tetteh Hormeku, TWN-Africa

TAX JUSTICE NETWORK-AFRICA International Tax Academy, 1-6 Dec 2014 Machakos, Kenya

Introductory

• Main argument:– The logic of the African Mining Vision poses a

broader role for taxation as a policy tool than what it has been so far (since the mid-1980’s)

– From a narrow tool generate revenue in a way that is consistent with attracting FDI

– To one that: (a) optimises mining revenue to African countries; (b) helps link mining to development; (c) minimises social and env. damage.

–

Outline:

I. Broader Agenda of Mining and DevelopmentII. The World Bank-IMF mining policy framework

in place since the mid-1980s, the role of taxation, and the effects;

III. The Alternative Logic of the African Mining Vision;

IV. A New Approach to Taxation and the Extractive Sector.

Mining-Development Nexus: Key Pillars

I. Revenue(a) How much is generated?(b) How much of it stays in the economy?

II.Economic Development(a) Enclave?(b)inter-sectoral linkage & structural transformation?

III. Social Disruption and Environmental Degredation?

A Bit of History

I. Colonial: Scramble, Appropriation and Expropriation

II. Immediate Post-Colonial: Capturing commanding heights nationally, sub-sumed within international fmwk.

Nationalisation, Joint ownership, royalties.Limitations:

Companies had day to day managment; devices to control earnings

Global mining framework– mining, processesing, trade, etc controlled by companies

III. Crisis and World Bank 80’s

Existing Mining Policy Regimes

“The recovery of the mining sector in Africa will require a shift in government objectives towards a primary objective of maximizing tax revenues from mining over the long term, rather than pursuing other economic or political objectives such as control of resources or enhancement of employment. This objective will be best achieved by a new policy emphasis whereby governments focus on industry regulation and promotion and private companies take the lead in operating, managing and owning mineral enterprises.”

Strategy for African Mining – World Bank, 1992

Role of Taxation

• Attract Foreign Investment. In context of race to the bottom. Thus, roughly similar over-generous tax regimes in all countries:- No VAT - No import or export taxes (except SL)- CIT rates down from 40% during 70s/80s to 30% or lower- Extremely low witholding taxes (between 10 and 15%) on dividends,

loan interest and consultant fees compared to other mining economies (20-35%).

- No windfall or additional profit taxes - Very low royalties: average 3%- Stability agreements

Supplemented by:

• Tax avoidance and evasion practices by TNC– Transfer mispricing

– Tax Havens

– Abuse of Tax Holidays

– Etc

Effects: 1

• Revenue capture by TNCs at the expense host countries – Case of Zambia in Copper Bonanza.

• From 2004-2008 copper prices rose from $1000 to $8,000 per tonne.

• Konkola Mining Firm profit rose from $52.7 million to $206.3. First Quantum profit rose from $4.6 million to $152.8 million.

• Zambia got: $10million (2005/2006). 2004- copper price $2,868; 400,000tonnes export- Zambia $8m; from same volume and price Zambia got $200m in 1992, i.e.- before privatisation

Effects: 2

• Perpetuation of Primary Commodity Export Dependence and Consequences:– Global crisis and collapse of export revenues and economies: e.g.

dramatic case of Botswana. [At height of crsis loan up 1.5billion euros from ADB. Largest ever ADB loan]

– Terms of trade declined by 24% and 21% respectively for North and Sub Saharan Africa Cumulative terms of trade losses in 1970-1997 represented almost 120% of GDP, a massive and persistent drain of purchasing power”. (World Bank, (2000)

– UNCTAD: resources lost would have raised Africa’s investment ratio by almost 6% in non-oil producing African countries and added 1.4% yearly to annual growth. This would give a per capita GDP of $478 for 1997 instead of the actual level of $323.

–

Effects:3

• Environmental Degradation and Social Disruption Borne by Mining Communities

The AMV Alternative

• A short history

– Adopted in 2009 by AU Summit– Action Plan with nine programme clusters to be

implemented at national and regional levels approved by Ministers in December 2011

– Report: Minerals and Africa’s Development published December 2011

– Implementation coordination centre AMDC being established at ECA

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The AMV Alternative (Contd)• A knowledge-driven African mining sector that catalyses &

contributes to the broad-based growth & development of, and is fully integrated into, a single African market through:

• Down-stream linkages into mineral beneficiation and manufacturing;

• Up-stream linkages into mining capital goods, consumables & services industries;

• Side-stream linkages into infrastructure (power, logistics; communications, water) and skills & technology development (HRD and R&D);

• Mutually beneficial partnerships between the state, the private sector, civil society, local communities and other stakeholders;

Related Policy Interventions

• Trade:– regulating import and export policy in favour of

domestic supply, production• Technology– access to and transfer of technology; local adaptation; and

development.

• Investment– setting terms for foreign investment to promote

productive capacity in local economy; primacy to national investment

Related Policy Interventions (contd)

• Finance:– Moblising mining revenue in support;– developing finance insitutions and mechanisms– A domestic procurement and processing fund?

• Enterprise Development– state support for local enterprises– state enterprises (fully, joint with local private...)

• Cross-cutting: knowledge, infrastructure, etc

Tax and the AMV Alternative

• Taxation and Optimal Revenue:– Review of existing regimes of incentives,

frameworks, and contracts to ensure a better fit between revenue purposes:• royalties, windfall tax, capital gains tax

– Remove the immense and unjustifiable subsidisation of mining companies through the generous tax regimes

– More stringent/holistic regimes to combat transfer mispricing and other illicit flows. Eg: W.U.T

Tax and the AMV Alternative: Contd

• Linkages and Diversification:– Domestic Procurement- Optimally, suppliers based

in national and/or regional markets supply inputs into mining that are produced from region.

– Beneficiation or more local use/processing of end products of mining by operators in local/regional economy

– Migration of mining technology, skills, products to other sectors.

Domestic Procurement: An example

ACTIVATED CARBON

• Used for : Absorbing Gold in Cyanide bleach solution. Wider use: To remove mercury vapour from water and air

• Total Global Imports: 2009: US $1.08 billion: Japan (13%); US (12%) Germany (8%)

• West Africa imports: Ghana: ($3.8m (2008); from Philippines (62%), Nertherlands (24%) and India (6%)Burkin Faso $2.3 million in (2010); from Philippines (76%), Indi (15%),

and Ghana (4.8%)– Guinea-$251,000 (2008); from India (54%); Netherlands (34%)

Indonesia (12%)

• Raw Materials: Conconut Shell, Palm Kernel, Wood Chips, Sawdust, Corncobs, Seeds

ALL LOCAL MANU-FACTURING

NO LOCAL MANUFAC-TURING

LOCAL PARTICIPATION, OWNERSHIP, MANAGEMENT AND EMPLOYMENT

LOCALLY BASED FOREIGN MANUFACTURER/SERVICE PROVIDER

SUPPLIER NUMBER 4

LOCALLY BASED FOREIGNMANUFACTURER/PROVIDER

WITH SOME LOCALPARTICIPATION

SUPPLIER NUMBER 5 SUPPLIER NUMBER 6

LOCALMANUFACTURER/PROVIDER

LOCAL IMPORTER

SUPPLIER NUMBER 3

FOREIGN EXPORTER /

WITH SOME LOCAL

PARTICIPATION

SUPPLIER NUMBER 2

FOREIGN EXPORTER

SUPPLIER NUMBER 1

EXTE

NT

OF

LCO

AL

VALU

E A

DD

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Tax and the AMV Alternative: Contd

• Equity: Support of local producers, including ASM

• Environmental Sustainability: Factoring in the cost.

Tax and the AMV alternative: Fin

• The Fiscal Challenge:– Raise Revenue– Re-orient tax devices and policies and target them

to support the development of domestic production capacity• in extractive sector,• domestic manufacturing• overall economy.

AMV – Follow-Up Steps and CSOs

• Action Plan• AMDC• Regional Mining Policy– Ecowas Mineral Development Policy (EMDP)– SADC Mining Protocol

• Country Mining Vision• CSO Mobilising and Engagement