Taxation and Extractive Sector in Ghana-Case Study-Nairobi

Sylvester-TWN-Africa12/4/2014International Tax Academy, Nairobi Kenya

International Tax Academy, Nairobi Kenya

Outline of Presentation Extractive Sector In Ghana Major Policy Reforms over the years Fiscal Regimes & logicEffects Newmont As a case in Point Renegotiations of Contracts and Challenges/Power Relations 12/4/2014International Tax Academy, Nairobi Kenya


Introduction Ghanas mineral potential and the countrys contribution to global minerals output, especially gold is well acknowledgedGhana is second after South Africa in the continent in terms of gold production This presentation will focus only on the solid minerals especially gold mining 12/4/2014International Tax Academy, Nairobi Kenya


Policy reforms Major policy initiatives included: -the promulgation of the countrys first independent mining code, the Minerals and Mining Law, PNDCL 153, of 1986.-This law was revised in 2006 as Minerals and Mining Act, Act 703.The minerals code provided for the streamlining of all mineral rights licensing procedures12/4/2014International Tax Academy, Nairobi Kenya


Fiscal regime flowing from the Policy reforms The fiscal regime defines an array of taxes, rents, fees and tax incentives to foreign investors in the mining sector.Since the onset of structural adjustment programmes there has been progressive reduction in tax rates and increased fiscal incentives to mining companies12/4/2014International Tax Academy, Nairobi Kenya


Fiscal regime and incentives from 1975-2006

12/4/2014International Tax Academy, Nairobi Kenya

Items SMCDa51975PNDCL 1531986Amendmentsto Law 153ACT 703, 2006Incentives Initial capital allowance20%75%75%Subsequent capital allowance15%50%50%Investment allowance 5%5%5%Carried forward Lossesfor purposes of taxationn/aUp to five years Up to five years Off-share Retention ofsalesn/a25% to 80%25% to 80%


Fiscal Regime from 1975-2006Items SMCDa51975PNDCL 1531986Amendmentsto Law 153ACT 703, 2006


Item SMCDa51975PNDCL 1531986Amendmentsto Law 153ACT 703, 2006

Mineral duty5-10%ExemptExempt

import duty5-35%ExemptExempt

Foreign Exchange tax33-75%ExemptExempt

Import license levy10%ExemptExempt

Gold export levy -ExemptExemptExempt


Fiscal Regime 12/4/2014International Tax Academy, Nairobi Kenya

itemSMCDa51975PNDCL 1531986Amendmentsto Law 153ACT 703, 2006

Corporate income tax50-55%45%35%25%Royalties 6%3 to 6%3% to 6%Withholding tax10%10%Capital gain tax10%10%Addi profit taxn/a0Govt equity in mining lease55%10% free carriedinterest with optionto buy additional20% shares10% freecarried interest,no option foracquisition offurther shares


Summary of the incentives The laws with generous provision of tax incentives to foreign investors constitute the main legislation and jurisdiction over fiscal issues of the mining sector.These policies include:-tax breaks,flexible labour policy,unregulated repatriation of profits and cheap asset transfers



Incentives contd corporate income tax, which stood at 50 55% in 1975, was reduced to 45% in 1986 and further scaled down to 25% by 2006 but now 35%Initial capital allowance to enable investors recoup their capital expenditure was increased from 20% to 80% in the first year of production and 15% to 50% for subsequent annual allowances in 1986.12/4/2014International Tax Academy, Nairobi Kenya


Incentives contdRoyalty rate, which stood at 6% of total value of mineral in 1975, was reduced to 3% in 1987 and now a fixed rate of 5%Other duties such as Mineral duty 5%, import duty (5 35%) and Foreign Exchange Tax (33 75%) that prevailed and contributed significantly to government revenue from the sector until the reforms were all scrapped



Incentives contdIn addition to these the mining companies are exempted from payment of customs import duties on plant, machinery equipment and accessories imported for use in miningTheir staff are also exempted from payment of income tax related to furnished accommodation at the mine site



Incentives contdPersonal remittance quota for expatriate personnel was freed from any tax imposed for the transfer of external currency out of the countryApart from these, a holder of a mining lease may be permitted by the Bank of Ghana to retain a minimum of 25% of the operators foreign exchange earnings in an external account for the purpose of acquiring equipment, spare parts, raw materials and for dividendpayment and remittance in respect of goods for expatriate personnel, among others12/4/2014International Tax Academy, Nairobi Kenya


Fiscal stabilization agreements The minerals and mining Law of Ghana provides for fiscal stabilisation agreements and mining investment and development agreements. These agreements are suppose to be signed by mining companies with mining leases to specific mining prospects and the minister of mines, but will have to be ratified by parliament.12/4/2014International Tax Academy, Nairobi Kenya


Policy logic underpinning the reformsThe reforms in Ghanaian mining industry were not a specific innovation for Ghana.Reflection of global neo-liberal thinking that sought to increase the power and leverage of multinational corporations and proscribe the power of the state,The sector is dominated by MNCs and mainly from Australia, UK, US 12/4/2014International Tax Academy, Nairobi Kenya


Funding sources some of the mining companies in the country have their investments promoted and guaranteed and protected by the World BankFor examples, the IFC has been among the funding source for large-scale mining industries like Ashanti Goldfields Company expansion, Now Anglo Gold Bogosso Gold Limited (BGL) and Ghana Australian Gold Ltd. (GAG)12/4/2014International Tax Academy, Nairobi Kenya


Revenue for miningLow revenue from the Mining sector This is because most mines coming on stream are surface operations that use capital-intensive techniques in their operationsSecondly, while in Ghana the income tax law provides for the taxation of all revenues, whether national or expatriate, in practice investors have obtained exemption or reduced taxation on the income of their employed expatriates in their negotiated agreements 12/4/2014International Tax Academy, Nairobi Kenya


Revenue contdCorporate income tax receipts are relatively low. The incentives provided in the fiscal regime have particularly diminished corporate income taxes liabilities of mining companies.The result is that corporate income taxes constitute less than 4% of government receipts from the mining sectorStudies have revealed that Ghana loses Thirty Six Million United States Dollars (US$36 million) through transfer pricing in that sector alone. (2012 budget)



Revenue contdNo mining company paid capital gain taxes, although nearly all mining projects in the years ten years have changed ownership. Similarly no company paid additional profit tax and withholding tax 12/4/2014International Tax Academy, Nairobi Kenya


Newmont Company-A classic example of the Regime A subsidiary of Newmont Mining Corporations will be highlighted as an example of a company taking advantage of the generous tax incentives such as:Stability clausesCorporate taxes Withholding taxes Exemptions Royalties profit tax Windfall tax etc 12/4/2014International Tax Academy, Nairobi Kenya


Newmont Golden Year2011Newmont started operations in Ghana in 2006Newmont Ghana produced 566,000 ounces of gold in 2011 at a cost of $474 per ounce, a considerable $117 lower than Newmonts average of $591 per ounce. This achievement, from its Ahafo mine, made Africa the cheapest region/continent for Newmont to operate, in contrast to Asia, Pacific where Newmont spent $639 per ounce on cost applicable to sales: $560 in South America and $594 in North America12/4/2014International Tax Academy, Nairobi Kenya


Newmont The cost which excludes amortization, depletion and depreciation, is made up of direct mining and production costs, royalties and production taxes, and other related costs.So Newmonts $474 cost applicable to sales in Ghana includes royalties 12/4/2014International Tax Academy, Nairobi Kenya


Newmont Case ContdIt was exempted from paying property tax to the local assembly and enjoyed a long holiday from payment of profit tax, even as its profits leapt in boundsIn 2011, Newmont set aside $137 per ounce as amortization cost12/4/2014International Tax Academy, Nairobi Kenya


Newmont Case ContdThe global gold companys average realized price for 2011 was a whopping $1,562 per ounce (compare this with $474 per ounce in cost applicable to sales at its Ghana mine)! Newmont Ghana Gold recorded a massive $1,088 per ounce in operating margin12/4/2014International Tax Academy, Nairobi Kenya


Newmont Case Contd. Consequently, Newmont Ghana realized $869million in net gold sales at an estimated total cost (applicable to sales) of $268million, making a colossal profit (gross) of $601million in 2011.12/4/2014International Tax Academy, Nairobi Kenya


Newmont Case ContdBut in terms of revenue the Govt was constrained by the following: Stability agreement and generous fiscal incentives



Newmont Case ContdShould Newmont become eligible in future to pay corporate income tax, its stability agreement requires that rate must not exceed 32.5% (the rate will not exceed 30% if Newmont lists on the Ghana Stock Exchange). This same agreement fixes Newmont Ghanas gross royalties on gold production at 3.0% (3.6% for any production from forest reserve areas, an indication that their concession includes forest reserve) for the life of any Newmont project. Any increment will not affect Newmont. 12/4/2014International Tax Academy, Nairobi Kenya


Newmont Case Contdthe government of Ghana has no stake in Newmonts operations, in contrast to other mines where the state holds 10% equity stakeAll these together with other companies caused outrage among the public In the 2012 Budget Statement some initiatives were announced but never implemented



Reaction to the Regime after boom The following were introduced in the 2012 budget:-increase corporate tax rate from 25% to 35%;-install a windfall tax of 10%; implement a uniform regime for capital allowance of 20% for five yearsThe budget sought to review the principle of ring-fencing to prevent companies from tax evasion12/4/2014International Tax Academy, Nairobi Kenya


2012 budget and transfer pricing Ghanas 2012 national budget statement indicated the extent to which multinational companies domiciled in Ghana were manipulating transfer prices to rob the country it indicated that studies have revealed that Ghana loses Thirty Six Million United States Dollars (US$36 million) through transfer pricing in that sector alone. 12/4/2014International Tax Academy, Nairobi Kenya


Conclusion In order to optimise revenue there is the need for Regime change Fiscal regime change Increase the Role of the state in the sector Ensure value addition



End of Presentation Thanks Merci 12/4/2014International Tax Academy, Nairobi Kenya


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Taxation and Extractive Sector in Ghana-Case Study-Nairobi

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