Secret deals abetted culture of excessive tax subsidies to foreigners By PHILIP NGUNJIRI THE EAST AFRICAN Posted Saturday, March 28 2009 at 12:55 The report titled, Breaking the Curse: How Transparent Taxation and Fair Taxes can Turn Africas Mineral Wealth into Development, highlights the methods mining companies use to pay as little tax as possible as well as the mining taxation and transparency in seven African countries: Tanzania, Ghana, Sierra Leone, Zambia, Malawi, South Africa and the Democratic Republic of Congo. Related Stories How Africa was forced to accept robbery These methods involve governments to grant tax subsidies and concessions by threatening to go elsewhere if they are not forthcoming. They also insist that mining contracts signed with governments remain secret and some African governments anxious the contracts are not held up to public scrutiny are happy to oblige. They use the secrecy surrounding contracts to pursue aggressive tax avoidance strategies. For instance, in DRC, there have been allegations of corrupt politicians awarding illegal tax exemptions to mining companies in return for private gain. Creative accounting allegedly enables companies to artificially depress profits in countries where they operate to evade tax. The picture that emerges is one in which African governments are deprived of many millions of dollars, partly as a result of royalty rates that were set too low in tax laws, or exemptions from royalties negotiated by mining companies in secret mining contracts. In Ghana, where gold accounts for 90 per cent of exports, the Minerals and Mining Act of 2006 charges royalties on a sliding scale of 3-6 per cent of gross sales value, replacing a 1986 Act which set a top royalty rate of 12 per cent. In reality, no company has ever paid more than 3 per cent in royalties because of tax allowances and lack of expertise in the revenue collection authority. Between 1990 and 2007, this cost the country $1.163 billion (if royalties had been paid at 12 per cent) and $387.74 million (if royalties were paid at 6 per cent). In South Africa, the government has been drafting a new Royalties Bill for the past five years. The original draft proposed a royalty on company turnover of 8 per cent for diamonds, and 2.25 per cent for gold. The Bill, which has now reached the fourth draft, after pressure from mining companies, proposes royalty rates of 3.7 per cent and 2.1 per cent respectively, meaning the government will forgo up to an estimated $499 million a year in lost revenue. The mining companies routinely deprive African countries of huge amounts of tax revenue that could be used to combat poverty, the report charges. One practical step to addressing poverty in Africa is to ensure that all multinational mining companies pay equitable amounts of tax. If they did, governments could fund social welfare programmes with revenue generated from taxes rather than seeking to borrow money externally, said Brian Kagoro, ActionAids Pan African Policy Manager. Related Stories How Africa was forced to accept robbery Mining contracts and payments to governments need to be subjected to rigorous parliamentary scrutiny to improve accountability in this sector, he added. And we need to strengthen the capacity of national regulatory tax authorities as well as rationalise international accounting standards to ensure compliance. In Zambia, the two largest mining companies managed to negotiate royalty rates of 0.6 per cent , the lowest in Africa after copper mines were negotiated in the late 1990s. Historical comparison puts the forgone revenue into perspective. In 1992, international copper prices averaged around $2,280 a tonne and Zambian copper mines produced around 400,000 tonnes of copper. Revenue earned from taxes and other remittances was $200 million. In 2004, copper prices averaged $2.868 a tonne, and the country again produced 400,000 tonnes. However, this time around, Zambia earned only around $8 million from the copper mining industry. In Malawi, the government recently acquired a 15 per cent share in Paladin Africa Ltd, which is to open the countrys first large scale industrial mine, a uranium project. The report warns that although some attempts at reform are now being made in countries like Tanzania and Zambia, they could flounder because of the recent crash in international mineral prices.