Sylvester-TWN-Africa

12/4/2014

International Tax Academy, Nairobi Kenya

Outline of Presentation
Extractive Sector In Ghana
Major Policy Reforms over the years
Fiscal Regimes & logic
Effects
Newmont As a case in Point
Renegotiations of Contracts and Challenges/Power

Relations

12/4/2014

International Tax Academy, Nairobi Kenya

Introduction
Ghanas mineral potential and the countrys

contribution to global minerals output, especially gold

is well acknowledged
Ghana 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

12/4/2014

International 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 procedures

12/4/2014

International 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 companies

12/4/2014

International Tax Academy, Nairobi Kenya

Fiscal regime and incentives from

1975-2006
Items

SMCDa5
1975

PNDCL 153
1986

Amendments ACT 703, 2006

to Law 153

Initial capital
allowance

20%

75%

75%

Subsequent
capital
allowance

15%

50%

50%

Investment
allowance

5%

5%

5%

Up to five
years

Up to five
years

25% to 80%

25% to 80%

Incentives

Carried
n/a
forward Losses
for purposes of
taxation
Off-share
Retention of
12/4/2014

n/a

International Tax Academy, Nairobi Kenya

Fiscal Regime from 1975-2006

Item

SMCDa5
1975

Items
SMCDa5
Mineral
1975 duty 5-10%
PNDCL 153
duty
5-35%
import
1986
Foreign
Amendments
33-75%
Exchange
to Lawtax153
10%
Import
ACT 703, 2006

PNDCL 153
1986

Amendment ACT 703,

s
2006
to Law 153

Exempt

Exempt

Exempt

Exempt

Exempt

Exempt

Exempt

Exempt

license levy

Gold export
levy

12/4/2014

Exempt

Exempt

International Tax Academy, Nairobi Kenya

Exempt

Fiscal Regime
item

SMCDa
5
1975

PNDCL 153
1986

Amendmen ACT 703, 2006

ts
to Law 153

Corporate
income tax

50-55%

45%

35%

Royalties

6%

3 to 6%

3% to 6%

Withholding
tax

10%

10%

Capital gain
tax

10%

10%

Addi profit tax n/a

Govt equity in 55%
mining lease
12/4/2014

25%

0
10% free carried
interest with
International
Tax Academy, Nairobi Kenya
option

10% free
carried interest,
no option for

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

12/4/2014

International Tax Academy, Nairobi Kenya

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.

12/4/2014

International Tax Academy, Nairobi Kenya

Incentives contd
Royalty 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

12/4/2014

International Tax Academy, Nairobi Kenya

Incentives contd
In addition to these the mining companies are

exempted from payment of customs import duties on

plant, machinery equipment and accessories imported
for use in mining
Their staff are also exempted from payment of income
tax related to furnished accommodation at the mine
site

12/4/2014

International Tax Academy, Nairobi Kenya

Incentives contd
Personal remittance quota for expatriate personnel

was freed from any tax imposed for the transfer of

external currency out of the country
Apart 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 dividend
payment and remittance in respect of goods for
expatriate personnel, among others
12/4/2014

International 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.

12/4/2014

International Tax Academy, Nairobi Kenya

Policy logic underpinning the

reforms
The 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

12/4/2014

International 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 Bank
For 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)

12/4/2014

International Tax Academy, Nairobi Kenya

Revenue for mining

Low revenue from the Mining sector
This is because most mines coming on stream are

surface operations that use capital-intensive

techniques in their operations
Secondly, 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

12/4/2014

International Tax Academy, Nairobi Kenya

Revenue contd
Corporate 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
sector
Studies have revealed that Ghana loses Thirty Six
Million United States Dollars (US$36 million) through
transfer pricing in that sector alone. (2012 budget)
12/4/2014

International Tax Academy, Nairobi Kenya

Revenue contd
No 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

12/4/2014

International 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 clauses

Corporate taxes
Withholding taxes
Exemptions

Royalties
profit tax
Windfall tax etc
12/4/2014

International Tax Academy, Nairobi Kenya

Newmont Golden Year2011

Newmont started operations in Ghana in 2006
Newmont 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 America
12/4/2014

International 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

12/4/2014

International Tax Academy, Nairobi Kenya

Newmont Case Contd

It 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 bounds
In 2011, Newmont set aside $137 per ounce as
amortization cost

12/4/2014

International Tax Academy, Nairobi Kenya

Newmont Case Contd

The 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 margin

12/4/2014

International 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.

12/4/2014

International Tax Academy, Nairobi Kenya

Newmont Case Contd

But in terms of revenue the Govt was constrained

by the following:
Stability agreement and
generous fiscal incentives

12/4/2014

International Tax Academy, Nairobi Kenya

Newmont Case Contd

Should 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.
12/4/2014

International Tax Academy, Nairobi Kenya

Newmont Case Contd

the government of Ghana has no stake in Newmonts

operations, in contrast to other mines where the state

holds 10% equity stake
All these together with other companies caused
outrage among the public
In the 2012 Budget Statement some initiatives were
announced but never implemented

12/4/2014

International Tax Academy, Nairobi Kenya

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 years
- The budget sought to review the principle of ringfencing to prevent companies from tax evasion

12/4/2014

International 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.

12/4/2014

International 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

12/4/2014

International Tax Academy, Nairobi Kenya

End of Presentation
Thanks
Merci

12/4/2014

International Tax Academy, Nairobi Kenya