Introduction
The mining sector is an important segment of the Ghanaian economy and has
played a significant role in the country’s socioeconomic development since the
colonial period. Historically, the mining sector’s contribution to gross foreign
exchange, particularly gold, has only been paralleled by the cocoa sector.
Consequently, the mining sector has witnessed intense policy reforms and
restructuring since the dawn of the country’s structural adjustment programme
in the early 1980s. These reforms have led to increased investment in the sector,
increased new mines coming on-stream, ballooning minerals output and sales
value, especially the gold sub-sector. The sector therefore, presents strong
potential to generate substantial revenue and employment enough to provide
more visible economic benefits to the country and improved livelihood for the
population. The quantum of revenue and related benefits that a nation can exact
from the mining sector depends on the provisions of the national mining
legislation, particularly, the fiscal regime, which defines the quantum of taxes
and incentive packages for investors in the sector, in addition to resource
availability, market prices and global profitability of the industry.
Resource availability is not in contention, as outline above. Similarly minerals
commodities have enjoyed consistent price boom, accompanied by increased
global profits in the industry in the last five years or more
(PriceWaterhouseCoppers, 2007). However, there is strong scepticism as to
whether the mining sector’s fiscal regime presents opportunities for increased
government revenue from the mining sector for Ghana. That, despite surgical
mineral commodity prices, the contribution of the mining sector to the national
economic is clearly not visible.
Many have argued that the current state of the Ghanaian economy does not
suggest that there has been a significant positive impact. The country is unlikely
to meet the Millennium Development Goal (MDGs) of reducing poverty by half
by the year 2015. There is also conclusive evidence to suggest that poverty is
acutely pervasive. The country is placed relatively low on the UN Human
Development Index, ranking 131 out of 171 countries in 2006 (UNDP, 2006). The
question then is, how can the sustained minerals commodity price boom increase
national revenue from the mining sector? This study explores the impacts of
Ghana’s mining sector policy reforms on government revenue mobilisation and
examines how the range of taxes, tax incentives and other fiscal concessions
defined in the fiscal regime of the mining code have impacted on government
revenue generation, national development and poverty reduction efforts,
particularly in communities affected by mining activities. The study investigates
why government revenue from the sector has not kept pace with commodity
1
boom. Computation of potential revenue losses from royalty have been used to
illustrate government revenue leakage from the sector. The paper concludes with
policy recommendations that could help grow the country’s tax base from the
sector.
The conclusion is that the range of capital allowances, list of mining related
equipment and items exempted from customs and import duties, the non
payment of capital gain taxes, value added taxes (VAT), dividend withholding
taxes, corporate income taxes, the huge offshore sales revenue retentions and the
payment of royalty at the lowest allowable rate constrain government revenue
generation and resulting in less visible contribution of the sector to national
economic development. Similarly, constrained employment capacity of modern
mining methods, increased expatriate staff quotas in the mines and the negative
environmental and social impacts of mining activities on local mining
communities have contributed to dwarf the contribution of the sector to national
development and poverty alleviation.
Overview of Ghana’s Mining Sector
Ghana’s mineral potential and the country’s contribution to global minerals
output, especially gold is well acknowledged. The mining sector is an important
segment of the Ghanaian economy and has played a significant role in the
country’s socioeconomic development since the colonial period. The country was
one time, a leading producer of gold in the world and accounted for about 35.5 %
of total world gold output between 1493 and 1600 (Quashie et al., 1981, p38).
However, the country’s share of world gold output has since dwindled over
subsequent years. Ghana currently ranks around tenth in the global league of
major gold producers but is still the second largest gold producer in Africa after
South Africa.
The country is significantly endowed with varied other mineral resources
including manganese, diamond and bauxite that are currently under commercial
exploitation. Silver is produced as a by-product from gold mines while
aluminium is produced from imported alumna. Ghana also has considerable
inventories of iron, limestone, salt, and various other industrial minerals. There
is also growing potential for commercial gas and oil exploitation, with
announcements of significant discoveries of off-shore oil in June 2007, slated for
exploitation in 2010. Gold, however, is by far the most important mineral
currently being exploited. Gold accounts for, on the average, 90% of total value
of minerals won (Akabzaa 2007).
The mining industry, on the whole, accounts for over 50% of foreign direct
investment flows into the national economy since the commencement of reforms
2
under the Economic Recovery Programme (ERP) in 1983. Statistics on the mining
sector’s contribution to the national economy vary from year to year. On the
average, it accounts for about a third of gross foreign exchange and about 5
percent of gross domestic product (Table 1). Its contribution to government tax
revenue is around 4%, while its contribution to labour employment is about 0.7%
of working age population (UNCTAD, 2005; Baah, 2005).
Policy and institutional restructuring that have culminated in renewed investor
confidence and exploration and mining boom in the last two decades in Ghana
are equally well documented ( Jonah, 1987; Coakley, 1999; World Bank 1999,
Aryee, 2000; ECA 2002; Akabzaa, 2000). These reforms were part of the World
Bank and IMF prescribed structural adjustment package adopted by Ghana and
majority of African countries in the mid 1980s to fight decaying economic
performance. Ghana’s reform success and the boom in the mining sector in
particular reverberated locally and internationally and received charitable frontpage headlines in both local and international media. The government,
multinational mining companies and international financial institutions,
particularly the World Bank Group and the International Monetary Fund (IMF)
fronted Ghana as a trailblazer of the African mining industry.
Table 1: Gross Value of Mineral Export from 1984 -2007
Exports
1984
1990
1995
2000
2001
2002
2003
Gold (US$)
103.3
Total
Minerals
Exports (US$)
115.3
201.6
647.3
702.0
617.8
689.1
830.1
242.3
678.9
756.0
691.4
753.9
893.6
Total Exports (US$) 567.0
Minerals as % of
Exports
20.34
Gold as % of total
Exports
18.22
Gold as % of All
Minerals
89.59
896.7
1,431.2 1,936.3 1,867.1
2,015.2 2,602.6
27.02
47.44
39.04
37.03
37.41
34.33
22.48
45.23
36.26
33.09
34.19
31.90
83.20
95.35
92.87
89.36
91.40
92.90
2004
2005
2006
840.2
945.8
1277.25 1,733.80
880.0 995.2
2,739.2 2,836.2
2007
1371.7
2
1815.40
3,726.7 4,194.7
36.8
43.3
32.1
30.7
35.1
33.3
34.3
41.3
95.5
95.0
93.1
95.5
The key trust of these reforms sought to: improve the competitiveness of the
sector for private foreign investment; create, modernise and resource key mining
sector governmental institutions necessary to provide critical support to the
mining industry and to ensure swift response to investor demands. Institutional
3
reforms included establishment of the Minerals Commission as one-stop centre
for the promotion of mining investment, including the issuance of mineral rights;
the strengthening of Geological Survey Department to provide critical baseline
geological information on prospective mineral grounds to investors; Mines
Department to provide improved supervisions to ensure health and safety
standards and to collate critical production records from the mines for the
purposes of monitoring and evaluation of performance of these mines.
Major policy initiatives included the promulgation of the country’s first
independent mining code, the Minerals and Mining Law, PNDCL 153, of 1986.
This law was revised in 2006 as Minerals and Mining Act, Act 703. The minerals
code provided for the streamlining of all mineral rights licensing procedures, a
favourable competitive fiscal regime, and the establishment of minimum quotas
for minerals sales to be maintained by companies in offshore accounts, among
others.
The sector has attracted nearly US$ 6 billion worth of direct foreign investment
(FDI) at the close of 2005, accounting for nearly 60% of FDI flows to the national
economy during the period. The country now boasts of 16 operating mines and
over 150 local and foreign companies with exploration licenses, mainly in the
domain of gold. Total mine output for all major minerals mined increased
several fold. Annual gold production increased from 282,299 ounces in 1984 to
2,143,000 ounces in 2005 and surged further to 2,629290 ounces in 2007, bauxite
from 44,169 tonnes to 606,700 tonnes in 2005 and to 1,033,368 tonnes in 2007,
manganese from 267,996 tonnes to 1,719,589 tonnes, and to 1,305,809 tonnes and
diamond from 341,978 carats to1,065,923 carats, and 839,235 carats, during the
same period. Total annual mineral exports increased from US$115.3 million in
1984 to US$995.2 million in 2005 and further to US$1,793,343,307 in 2007. Gold as
the most important sub-sector for over 90% of total value of mineral exports
recoding as much 95% in 2007, largely due gold prices boom.
The Fiscal Regime of Ghana’s Mining Sector.
The fiscal regime defines an array of taxes, rents, fees and tax incentives to
foreign investors in the mining sector. The quanta of these taxes and incentives
have mirrored policy changes in the mining sector since independence.
Since the onset of structural adjustment programmes adopted by the government
in 1983 to date, there has been progressive reduction in tax rates and increased
fiscal incentives to mining companies (Table 2). The fiscal terms of the mining
sector were well elaborated in the Minerals and Mining Law, PNDC Law 153,
1986. However, since 2000, they have been removed and consolidated into the
Ghana Internal Revenue Act, Act 592, 2000 and its subsequent amendments.
4
In 2006 there was a new minerals code replacing the 1986 act and its
accompanying amendments. The fiscal provisions of this new act which are not
significantly different from the old code, except the removal of additional profit
tax and the reduction of the range of royalty rate from 3% to 12% to 3% to 6% .
The provisions of the new Act are yet to be consolidated into the Internal
Revenue Act, and there are also no legislative instruments for the
implementation of the new Act yet. For the purposes of this work, the fiscal
terms provided by the 1986 Minerals and Mining Law are discussed since they
are still in use.
Tax Incentives
Prominent among these incentives include: generous capital and investment
allowances that allow mining companies to write off 80% of total investment
against revenues in the first year of investment and the balance depreciated at
50% in subsequent years. The law provides for carry forward losses. This
provision allows companies to carry forward any deducted capital allowances
that exceed existing revenue for that year to subsequent years. There is no time
limit to how long losses can be carried forward. Considering the fact that mining
is a capital intensive venture, such high percentage depreciation allowances
affords companies the opportunity to carry forward losses sometimes beyond ten
years, thus providing virtual tax holidays for the companies. Given the fact that
surface mines have an average lifespan of between 10- 15 years, most companies
often deplete their resource without paying taxes.
Table 2: Comparison of the fiscal and related provisions of the Minerals and
Mining
legislations
from
(1975
to
2006).
Items
Incentives and Taxes
Initial capital allowance
Subsequent
capital
allowance
Investment allowance
Carried forward Losses
for purposes of taxation
Off-share Retention of
sales
Mineral duty
Import duty
Foreign exchange tax
Import license tax or
import levy
Gold export levy
SMCDa5
1975
PNDCL
1986
20%
15%
75%
50%
75%
50%
5%
5%
Up to five years
NA
25% to 80%
5%
Up
to
five
years
25% to 80%
5-10%
5-35%
33-75%
10%
Exempt
Exempt
Exempt
Exempt
Exempt
Exempt
Exempt
Exempt
Exempt
Exempt
Exempt
Exempt
153
Amendments
to Law 153
ACT 703, 2006
5
Corporate income tax
Royalty
Withholding tax
Capital gain tax
A.P.T.*
National Reconstruction
Levy
Others
Govt.
equity
participation in mining
lease
50-55%
6%
NA
NA
55%
45%
3% to 12%
10%
10%
25%
35%
2% of before
tax
profits(2001)
10%
free carried
interest with option
to buy additional
20%
shares at
market price
Fees
a
25%
3% to 6%
10%
10%
0%
0%
10%
free
carried interest,
no option for
acquisition of
further shares.
See table 2 for
details
Supreme Military Council Degree 5.
*Additional Profit Tax
Source: (PNDL 153, 1986; Minerals and Mining Act 703, 2006;
IRS Act 592, 2000)
The industry is exempted from the payment of import and export duties on a
range of items defined in a mining list of over 500 items. Companies are
provided relatively high immigration quotas on number of expatriate personnel
to be recruited; exemption of expatriate remittances from taxes imposed by any
enactment regulating the transfer of money out of the country and free
transferability of convertible currency (Mining and Minerals Act 2006. p 13-14). It
also provides for flexibility in royalty and corporate income payment schedules
and particularly empowers the Minister responsible for mining to use his
discretion to grant any request from distressed companies for deferment of
payment of royalties. Mining companies could maintain negotiated levels of their
gross mineral sales in offshore accounts, ranging from 25% to 100%. In addition,
the state has been restricted to10% mandatory equity participation in all mining
investment, with the option of increasing its participation to 20%, but paid for at
a commercial price (Akabzaa and Darimani, 2001). Additional Profit Tax (APT),
which was introduced in 1986, was removed. This tax was designed to be paid if
a mining company exceeds a specified rate of return in a given year. This is a
typically unique tax in the mining and petroleum sectors, designed to ensure
government participates in any windfall, commonly in situations of very high
metal or petroleum prices, as is the situation today.
Taxes, Fees and Rents
The range of taxes and fees to be paid by mineral rights holders are listed below
and briefly defined in (Table 3).
(i)
Mineral rights fees
(ii)
Ground rent
6
(iii) Property rates
(iv) Mineral Royalties
(v)
Corporate Tax
(vi) Dividends
(vii) Capital Gains Tax as a potential liability of the companies.
(vii) Taxes on interest payable to non-residents
(viii) Taxes on management and service fees payable to non-residents;
(ix)
Stamp Duties on transactions such as loan security documents;
(x)
Customs Duties
(xi) National Health Insurance Levy.
In addition, companies pay a range of fees categorized into:
(a) purchasing application forms,
(b) processing of applications for mineral rights,
(c) execution of mineral licences and mining leases,
(d) obtaining approvals for assignment or mortgages of mineral rights or
interests therein and
(e) searches in the records of the Minerals Commission.
Table 3: List of Defined Rents and Taxes provided by Act 703*.
Fiscal Element
Exemption Fees
Licensing Fees
1. Reconnaissance License
2. Prospecting License
1.
Mining Lease
Royalty
Corporate Income Tax
Withholding Tax
Capital Gain Tax
Dividends
Description
Paid to the MC to receive exemption for
duty free imports
Fees paid to obtain mineral rights
For reconnaissance exploration rights
For prospecting/Detail -exploration
rights
For mining rights
Production base tax by mining lease
holders to the government through the
Internal Revenue Service
Tax on Net profit of company
Tax on dividends to shareholders and
on management fees paid to contractors
Tax on profits on sale of mine assets or
mine
Government share of dividends
Ground Rent
Annual payment by mineral right
holders to land owners or to the Office
of the Administrator of Stool Lands, in
the case of stool land
Property Tax
Rates levied on immovable property of
mining companies including machinery
Amount/Quantum
US$10,000
US$15,000
US$30,000
3% of value of
minerals
won
(although law state a
sliding scale of 3% to
6%
25% of Net profits
10%
on
paid
dividends and fees
10% of Capital Gains
10%
of
declared
dividends
10,000 cedis/ha or
prospecting
license
holders and 30,000
cedis/ha for mining
leas holders
Variable.
Annual
rates set by by-laws
7
and equipment
Assemblies
to
host
District
Stamp duties
1.
2.
3.
Granting of prospecting license
Granting mining lease
Transfer of license or lease
4.
Principal security
5.
Collateral security
6.
Transfer of security
5,000 cedis
50,000 cedis
1% of value of
consideration
0.5%
if
amount
secured
0.25% of amount
secured
0.25
of
amount
secured
*
The defined fees are nearly unchanged from those defined by PNDCL 153, except royalty and corporate
income tax.
Source: Source: (PNDL 153, 1986; Minerals and Mining Act 703, 2006; Tilton et al 20002)
Drivers of Policy Regimes in Ghana’s Mining Sector
Developments in the mining industry, throughout times, have been spinned by
global trends, characterised by private multinational control, dominated by
British business, during the colonial times. Since the dawn of globalisation, the
industry has been shaped by International Financial Institutions, particularly the
World Bank Group (WBG), the International Monetary Fund (IMF), major
multinational mining companies and their home governments. The World Bank
Group and IMF, in particular, have been critical in Ghana’s policy shift from
state intervention in the economy to a system that has and allowed market forces
to determine resource allocation. This is indeed the trust of the structural
adjustment thesis that ensured the reorientation of development policies that
consigned the state to providing an enabling environment for market driven and
private enterprises-led economic growth. The conditionality of structural
adjustment lending that included trade and exchange rate reforms, the review of
national investment priorities, privatization of public-sector enterprises, and
fiscal policy reforms, as asserted by Songsore (2003, p159), left no important
sector of Ghana’s economic life untouched.
The mining sector was one of the favoured sectors targeted for these reforms,
and has continued to receive even more reforms since their initiation in 1983. The
Breton Wood Institutions have systematically acted to reduce the role of the state
in mineral resource management, devising effective strategies to deal with what
may be perceived as the risks associated with state dominance in the mineral
resources sector through specific mining sector reforms. These reforms included:
changes in mining sector legislation to make the sector attractive to foreign
8
investment; increasing fiscal liberation of the mining sector; strengthening and
reorientation of government support institutions for the mining sector;
privatisation of state mining assets; and other mining sector legislative changes
(World Bank, 1992).
The World Bank provided financial resources to facilitate these reforms covering
a number of operational areas. In the early 1980s, as part of the IDA’s support for
the ERP, about US$50 million was spent on the mining sector for promulgating
the 1986 mining law and rehabilitation of three gold mines ran by the state. The
second was the Export Sector Rehabilitation support, granted in 1988. This was
the Bank’s first lending tailored exclusively to the mining sector. The stated
objectives of this project were to (i) rehabilitate economically viable mines, (ii)
help attract private investment in mining, (iii) strengthen the governmental
agencies dealing with the mining sector, and (iv) increase the benefits to the
country from small-scale mining. The third Mining Sector Development and
Environmental Project, was to enhance the capacity of the government
institutions to carry out their functions of administering mineral rights,
providing reliable and modern geological information and encouraging and
regulating investment in an environmentally sound manner and supporting
viability and reducing environmental impacts of small-scale mining operations
(World Bank, 2002; 2003).
The reforms in Ghanaian mining industry were not a specific innovation for
Ghana. Indeed, they reflected global neo-liberal thinking that sought to increase
the power and leverage of multinational corporations and proscribe the power of
the state, with the World Bank and IMF acting as effective conduits for the
delivery of these goals. After having piloted with a number of countries such
Ghana, for the African regions, Peru, for Latin America and Caribbean, and
Papua New Guinea for Asia, in the 1980s, the World Bank Group through its
continent wide Strategy on mining documents (World Bank 1992, 1996) outlined
a set of reform measures that were considered imperative for mineral endowed
developing countries if these countries were to attract substantial foreign direct
investment. The documents clearly spelt out country-based mining development
strategies with private investors owning and operating mines; sale of existing
state mining companies; strong show of commitment to follow private sector
based development strategy; evolution of mining sector fiscal regimes which are
consistent with the taxation of other sectors of the economy, but recognising the
special features of mining and that such taxes should be earning related rather
than output or input related and must take account of tax levels in other mining
countries and that there should be clauses for stability agreements that would
insolate companies from future government actions that might hurt them.
Mining Investment and Development and Fiscal Stabilisation Agreements
9
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. The practice in Ghana is that these agreements are ratified by a
parliamentary select committee on mines, rather than the whole house. The act
provides for companies to negotiate stability agreements to ensure that the
mineral operator, for a period not exceeding 15 years, is not affected by new
legislative enactments and amendments that would adversely their operations.
In addition companies with investment portfolios exceeding US$500 million may
negotiate development agreements with the government. Such agreements
would enable companies negotiate specific rates and quotas for royalty,
expatriate employment, schedules for royalty payments etc (Minerals and
Mining Law, 2006. p22 -23).
In cases where the law has stipulated specific fiscal elements in the form of
minimum and maximum values, companies have exacted the maximum, in
terms of concessions or incentives and the minimum, in the case of payment to
government. The agreements also provide for deferment of payment of royalties
and other taxies, non payment of ground rent and licences fees and the retention
of substantial quotas of exports in offshore accounts. These exemptions include
non payment of other taxes imposed by Internal Revenue Act, Act 592. These
relate to withholding taxes on payments to non-residents, on interest on loans (at
the rate of 8%); payment of fees for management and technical services (at the
rate of 15%); and withholding taxes on the payment of dividends at 10%).
Companies, by law, are expected to pay royalty tax on a sliding scale of 3% to
12%, however, all companies pay the minimum of 3%. Similarly, companies may
retain 25% to 80% of the gross sales in offshore accounts, however, in their
negotiated agreements, companies have achieved between 60- -100% quotas for
themselves. Records from Ghana’s Central Bank suggest that, on average,
companies keep 71.2% of their export earnings in offshore accounts. In simple
terms the retained (returned to Ghana) value of minerals exports is about 28.5%.
In absolute terms, in the year 2000, gold exports accounted for 702 million US
dollars. This represented 36.6% of the total gross foreign exchange of the country
that year. However 519 million US dollars of the total gold revenue for that year,
representing 74% of gross gold export value for that year was maintained in
offshore accounts and only 183 million US dollars, representing 9.5% of the value
of gold exports that year was returned to the country. In other words, although
the gold sector accounted for 36.6% of total gross foreign exchange, foreign
exchange available to the country from the sector was 9.5%.
10
The ability of a company to exact more favourable fiscal concession depends on
the size of the company and the project. The bigger companies exact much more
concessions than smaller companies because of their clout. For instance,
Newmont Ghana Limited by the investment agreement they signed with the
government, is required to pay royalty at the minimum rate of 3% on the total
value of gold won, and in the case of mining in forest reserves, they would pay a
royalty rate of 3.6% (Newmont Investment Agreement, 2005). They are similarly
exempted from payment of Value Added Tax (VAT) on all items they import and
for all foreign and locally purchased services and supplies to the extent used in
connection with operations.
Transparency and Law enforcement in the mining sector
The key to prudent management of the country’s extractive resources are the
principles of transparency, accountability and the democratic participation of
citizens in decisions and choices that have to be made in respect of transactions
in the mining sector. This can only be achieved if citizens have unfettered access
to information. Public perception of the level of transparency in the mining
sector is that it is very low. There are barriers to information access due largely to
strong inertia on the part of some mining companies and some government
agencies to disclose information on mining transactions. The most daunting task
is information disclosure from both mining companies and national revenue
management agencies. Apart from inertia from the aforementioned agencies,
confidentiality clauses ensure that the public has no access to fiscal stability and
investment and development agreements, concluded between the mining
companies and the government. There are, in addition, generic tax
confidentiality laws that prohibit a third party from receiving information
pertaining to the details of tax payments
One process in Ghana that is facilitating increased transparency and
accountability is the Ghana’s Extractive Industry Transparency Initiative GEITI),
that seeks to implement the global EITI project in Ghana. The initiative is aimed
at ensuring the consolidation of revenue and payment information into a readily
understandable format and easily accessed source, thereby improving quality of
data coming to the public domain. Because EITI is an international standard, a
country that is listed as being “EITI compliant” is required to meet a series of
internationally agreed upon criteria on improving transparency with
performance independently monitored via validation. Greater accountability of
government’s, companies, and civil societies via EITI can improve trust among
the groups. By providing a platform for communication among all stakeholders,
EITI can facilitate the development of consensual solutions to problems and
thereby reduce the risk of conflicts.
11
Ghana formally signed on to the EITI in 2005 and has been implementing it.
Ghana has so far produced three reports, authored by an independent
aggregator; an inception report and two aggregated reports. The work of the
aggregator has unveiled a number of challenges that would have to be addressed
if the country is to maximize national benefits for signing on to the initiative.
These problems relate to transparency and law enforcement challenges in the
mining sector. The report of the Aggregator for 2004 and 2005 fiscal years point
to the fact that different gold mining companies report different revenues for
bullion sold on the same day and calls for the government to ensure
standardization. There are a number of potential sources of differences that could
lead to the problem observed by the Aggregator. Mining companies sell their
bullion under different refinery and sales contracts. The refinery charges vary
and are often specified in the contracts and deducted before payment. These
contracts often specify that payment be made, typically, for a certain level of
refined product at the price announced in the morning or afternoon trading at
the London Bullion Market on the day of delivery to the refinery or a specified
number of days later. In other words, though they use spot prices, these prices
could differ, depending on whether one is using the morning or afternoon fix.
Refinery charges are specified in the agreements and are to be deducted before
payment.
Tsikata (2008) has pointed out additional challenges with respect to minerals
such as diamond, bauxite and manganese, for which there are no published
prices. According to him, for these minerals, standardization may not address
the problem; secondly standardization might not confront challenges posed by
companies engaged in hedging transactions that do not utilize spot prices. These
observations constitute a clarion call for government to look seriously at
transparency issues relating to refinery and sales contracts of mineral
transactions.
Evidence of Discrimination against Other Sectors?
The fiscal regime generally contains discriminatory clauses that present disparity
in the payment of a variety of taxes with differing quanta. They vary according
to the type of industry and geographic location of the investment. Mining,
Agricultural, and the Housing Sectors of Ghana are, particularly, much more
favoured than other industries. The mining industry is exempted from the
payment of import and export duties and Value Added Taxes (VAT) on a range
of items defined in a mining list of over 500 items. The sector also enjoys higher
12
quotas of expatriate employment and reduced taxes to be paid by these
employees.
The mining sector is particularly favoured with respected to protocols for capital
allowances write-of (depreciation regimes). The industry is granted much more
accelerated write-off rates than other sectors. Capital allowances granted are
spelt out in the IRS Act, 2000, Act 592. The depreciation rates are categorised into
three different pools of items with rates of 20%, 40% and 80% respectively, in the
first year and 50% of remaining balance in subsequent years. Mining and
petroleum exploration and exploitation activities attract the highest rate of 80%.
Similarly, mining companies are exempted from payment of tax on the income of
expatriates workforce which is typically 25% of the gross income of the
individual. There is a stamp duty chargeable on instruments providing security
for loans , according to the Stamp Duty Act, 2005 (Act 689), at the rate of 0.5% in
respect of principal security and 0.25% in the case of additional security. This
could yield significant amounts in the case of loan financing for large mining
projects, however, mining companies have through negotiated stability
agreements received exemptions on the payment of stamp duties. Similarly
under the National Health Insurance Act, 2003 (Act 650) a levy of 2.5% is
imposed on the production, supply or importation of goods and services
however, mining companies have received exemption from this tax for all plant,
equipment and spare parts for mining.
Constraints to Government Revenue Maximisation
One of the most reliable fiscal elements for revenue generation to government
during the last two decades had been royalty payment based on three percent of
the quantity produced or gross sales, and independent of profitability. Royalty
therefore has the advantage of been a more stable source of government income
than taxes on profits which may fluctuate widely, or may yield no revenues at
all. However, it has been one of the most contentious taxes. Mining companies
consider royalties highly unfair as they do not consider profitability and having
the disadvantage of constituting a cost of production (Otto et al., 2006). In fact
many mineral rich countries in Africa, Latin America and Asia such as Zambia,
Tanzania, South Africa, Chile, Peru and Indonesia, have recognized the role of
royalty in government revenue extraction from the mining sector and are
changing mining sector fiscal policies to accommodate higher royalties. Nearly
80% of government revenue from the mining sector in Ghana comes from royalty
(Akabzaa, 2004), table 4.
It has been observed that Ghana does not maximize its royalty tax revenue due
to collection difficulties. Royalty is charged as a percentage of the total value of
13
minerals won, however, inconsistencies in valuation of minerals won makes
revenue tracking more difficult. Similarly, lack of uniformity in pricing of gold
and other mineral commodities produced by mining companies has led to
variation in the computation of royalties, while the application of different
exchange rate regimes by mining companies for the payment of mineral royalties
have produced distortions in the computation of royalty (Boas Associates (2006).
The fiscal arrangement allows for companies to defer or delay royalty payment
with permission from the sector Minister. Such requests are commonplace and
the granted delayed or deferred payment of royalties has often affected
government projected revenue streams and consequently government plans for
such revenues.
Another significant source of tax revenue to government from the mining sector
is employee income tax (PAYE). However the full impact of this source to
government revenue is limited by a number of reasons. First, the income
generated from local labour in the mining sector accounts for a relatively small
share of the total value of production. This is because all mines coming on stream
are surface operations that use capital-intensive techniques in their operations
rather than adapt to the factor endowment of the Ghanaian economy. 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
investment agreements.
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. The GEITI report emphasized
the constraints impeding the mining sector to contribute significantly to national
revenue. The report revealed that only two and four companies paid corporate
income taxes for 2004 and 2005 fiscal years. No mining company paid capital
gain taxes, although nearly all mining projects in the last ten years have changed
ownership. Similarly no company paid additional profit tax and withholding
taxes (Boas and Associates, 2007).
The Government also obtains dividends from the profits made by mining
companies through its equity participation in mining companies. Before the 2006
mining act, government equity in mining ranged from 10 and 30%. There was
progressive sale of these shares from 1997 to 2000. Since most mining companies
do not declare profits, the government certainly cannot maximise revenue
streams from this facility. The new mining act constrains government equity to
10%. This will significantly reduce government income from this source. Table 5
14
shows the dividends paid to the government from 1990 to 2002 in Million US
dollars.
Table 4: Contribution of mining to Revenue Collection by IRS (in billions of
cedis)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Corporate Royalti
income
es
2.83
0.82
4.56
4.39
7.21
20.39
9.16
9.87
14.45
31.12
15.79
24.81
23.50
68.14
100.33
235.95
215.66
1.89
3.02
4.55
7.49
12.78
20.91
35.49
34.59
49.84
48.62
118.74
127.36
153.45
194.39
215.74
269.90
316.25
PAYE
2.65
4.81
7.95
16.83
25.02
31.02
27.84
59.24
76.11
101.46
141.05
134.36
154.37
182.71
NRL
4.25
26.47
16.78
53.19
19.52
15.83
Total
mining
Taxes
4.72
3.84
9.10
14.54
24.81
49.29
62.74
77.85
95.31
107.58
193.77
232.53
304.89
420.36
503.62
679.73
730.50
Mining as
total
IRS
collections
8.9
6.3
12.2
12.8
14.9
17.9
14.8
12.9
12.1
11.9
13.7
11.9
10.7
11.0
9.4
11.0
9.66
15
Table 5: Government Revenue from Dividends (Millions of US dollars)
Yea
r
US
$
199
0
2.1
8
199
1
3.8
2
199
2
2.8
5
199
3
8.0
3
199
4
6.2
8
199
5
6.4
199
6
7.6
1
199
7
4.3
2
199
8
2.1
8
199
9
0.5
200
0
-
200
1
1.0
200
2
-
Source: Minerals Commission
Institutional Capacity Constraints
In addition to the fiscal elements which constrain the maximization of
government revenue from the mining sector, institutional capacity constrains
and apparent lack of inter-sectoral collaboration have also contributed to the
problem. The Internal Revenue Service (IRS), that has responsibility for internal
tax collection, and the Customs Excise and Preventive Service (CEPS) with
responsibility for collection of export and import taxes have demonstrated
capacity constrains. GEITI inception report pointed to lack of formalized contacts
between the IRS and other mining sector agencies for the reconciliation of figures
related to royalties is a source of worry. The IRS, in addition, has no dedicated
desk to deal with mining issues and does not keep separate accounts for revenue
receipts thereby making tracking difficult. CEPS has representatives at the mine
sites to check on the quantity and quality of gold won, however they can only
ascertain the weight. They do not determine the fineness/grade of gold bullion
produced (Boas Associates, 2007) and indeed, have no capacity to do so.
Fiscal and Related Concessions, National Development and Poverty Reduction
Imperatives
There is general agreement that significant success had been achieved in
attracting foreign direct investment and expanding activities in Ghana’s mining
sector, leading to increased mine output . However, according to (UNCTAD,
2005), “attracting FDI in the mining sector is only part of the story. The other is to
assess the impact in terms of wider economic and developmental gains to the
state and the population at large. As minerals are considered national assets and
are non-renewable resources, their exploitation is closely linked to the exercise of
national sovereignty, and the underlying philosophical presumption is that the
owner of these assets should derive maximum benefits from any surplus
generated. However, governments typically have a wider set of economic
considerations in mind when designing strategies to best exploit these assets,
16
aiming to maximize the value of locally retained earnings, creating forward and
backward linkages to the rest of the economy, transferring technology and
creating jobs, minimizing environmental damage and social impact, and
expecting firms, regardless of their ownership, to compensate for damages
incurred”. An examination of two decades of radical reforms in the mining sector
shows that Ghana has not been able to solve it’s major problems, beyond the
increase of investment inflows and the absolute number of mining projects
coming on stream.
The over all result of low taxes, minimal local purchases and labour incomes is
that the industry’s contribution to government revenue is grossly dwarfed by the
sector’s share of gross foreign exchange earnings. In 2001 tax revenue from
mining was US$31 million, representing about 4% of total government tax
revenues (World Bank, 2003). In all, government revenue represents nearly 6%
of total value of mine production. The mining sector’s share of corporate taxes in
the country has equally been dwarfed by other sectors. It accounts for less than
2% of total corporate taxes, compared to 29% for the financial sector, 10% for
commerce and 16% for manufacturing (ISSER, 2004). According to the World
Bank (2003) various tax allowances means that corporate income payments by
mining companies are minimal, despite their combined turnover in excess of
US$600 million in 2002.
The incentives accorded mining companies have greatly limited the share of
government revenue from the mining sector and constrained the opportunities
for government to mobilize adequate resources to fund social and development
programmes. Mining has consequently not fulfilled its poverty reduction role
and poverty reduction has not been mainstreamed into mining policies. The
large-scale mining sector in Ghana has demonstrated low capacity for labour
absorption. The sector’s share of total employment of the working age
population is only 0.7%, compared to agriculture 55%, trade 18%, manufacturing
12%, according to the Ghana Living Standards Survey report of 2000 (GLSS,
2000). The major reasons for the relatively poor labour absorptive capacity
include the weak linkage between the mining sector and the rest of the national
economy and the shift from labour-intensive underground mining to capitalintensive surface mining.
The statistics show negative correlation between labour employment, on one
hand and mineral output, export values and number of mines, on the other hand,
from the period between 1986 and 2007. While exports and mine output surged
between the periods, mine labour decreased from 21,270 to 14, 310. In the period
between 1950 and 1965, the total mine employment averaged 40,000, nearly three
times the labour figures for 2007. Equally, while there is growing reduction in the
levels of employment in the sector, the quota of expatriate employees in the
17
sector keeps growing as a result of increased migration quotas for expatriate
staffing in mining prescribed by the mining code. The percentage of expatriate
staff to Ghanaian senior staff increased from 8.8% to 13.3% from 1994 to 2007.
The growing number of expatriate workforce in the mining sector has been a
cause of concern for segment to the Ghanaian public and has recently been
described as ‘recolonialisation of the mining sector’ through the recruitment of
expatriates to replace Ghanaian workers by the Member of Parliament for Obuasi
(Daily Graphic, 2006 p. 14)
In a recent Social Watch Reports, poverty situation in Ghana was brought to
focus (Social Watch, 2005). It states that economic conditions represent one of the
most important threats to human security in the country. It highlights growing
poverty and inequalities in access to social services, resulting from years of neoliberal economic reforms. More recent studies attest to exacerbation of the trend.
According a survey by the Ghana Centre Development (CDD-Ghana), two-thirds
of Ghanaians face economic uncertainty (CDD, 2002). There is growing mass
formal unemployment and underemployment and widening of the gab between
the poor and the rich. Despite a series of debt cancellations following the
country’s declaration of its HIPC status, the national debt still stands over $6
billion dollars.
The mining code is silent on measures that might be required to effectively
deliver mining benefits to local communities directly impacted by mining and
protect physical environment and, particularly, the rights of vulnerable segments
of the populations.
Widespread poverty is a common and a growing
phenomenon in mineral resource endowed districts of the country. It is unlikely
that Ghana can meet the Millennium Development Goals (MDGs) of reducing
poverty by half by the year 2015. Indeed, there is conclusive evidence to suggest
that poverty is acutely pervasive in the country.
Quantifying Lost Tax Revenue to the State
It would have been relatively easy to quantify the tax revenues lost to
government due to tax concessions provided to mining companies if information
was easily available. However, as discussed in the section above, it is extremely
difficult to access information from both government ministries and agencies and
mining companies that could enable these computations. It is clear that due to
the broad array of tax incentives many mining companies do not pay a range of
taxes and fees. Apart from the fees, most of these taxes are a function of
profitability of the business, which is difficult to ascertain. In the light of these
constraints, publicly available information has been applied to calculate lost
royalties to illustrate the extent of tax revenue leakage from the mining sector,
just to scrap the tip of iceberg.
18
Revenue Losses from Royalty
The Minerals and Mining Law, PNDCL 153, 1986 and the new Minerals and
Mining Act of 2006, Act 703, provide for the payment of royalty in respect of
mining operations calculated on the basis of the total revenue from minerals
produced. A rate ranging from 3% to 12%, in the case of the 1986 law and 3% to
6%, in the case of the 2006 Act, of the total value of mineral produced is payable
to government as royalty tax. The precise rate applicable for a particular mine for
a given period is determined according to regulations prescribed by the Minister.
In the case of the 1986 law, these regulation are the Minerals (Royalties)
Regulations, 1987 (L.I. 1349), which set out a formula for determining the
applicable rate. The advantage of a formula is that it regulates rate setting in a
predictable manner.
Table 6: Calculation of Royalty Revenue Loss to Government (1990-2007)
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
Total
Mineral
Export
(US$)
232.30
351.80
388.70
473.60
588.20
678.90
641.30
612.88
717.81
749.11
755.95
691.40
753.90
893.70
904.54
1034.76
1371.72
1815.40
Royalty (3%)
6.97
10.55
11.66
14.21
17.65
20.37
19.24
18.39
21.53
22.47
22.68
20.74
22.62
26.81
27.14
31.04
41.15
54.46
Royalty
(6%)
13.94
21.11
23.32
28.42
35.29
40.73
38.48
36.77
43.07
44.95
45.36
41.48
45.23
53.62
54.27
62.09
82.30
108.92
Min. Lost
revenue
6.97
10.55
11.66
14.21
17.65
20.37
19.24
18.39
21.53
22.47
22.68
20.74
22.62
26.81
27.14
31.04
41.15
54.46
Royalty
(12%)
27.876
42.22
46.64
56.83
70.58
81.47
76.96
73.55
86.14
89.89
90.71
82.97
90.47
107.24
108.54
124.17
164.61
217.85
Max
Lost
revenue
35.25
36.09
45.17
56.38
63.82
56.59
54.31
67.75
68.36
68.24
60.29
69.73
84.63
81.73
97.04
133.56
176.70
163.39
12924.57
387.74
775.47
387.74
1550.95
1163.21
19
In a recent report of the independent Aggregator, reconciling companies’
payments and government receipts, observed that no company has paid more
than 3%, even at times of high metal prices. He identifies high capital allowances
and the admission by the IRS, the tax collecting authority, that it has no
competence in using the formula as reasons for the status quo. With the
Enactment of Act 703, new draft regulations are being considered by the
Minerals Commission in consultation with stakeholders. However, it is unlikely
that it will address the concerns of the Aggregator. In this calculation, payable
royalty amounts are compute based on the scale of 3% to 12%. We calculate the
amount payable for applied royalties of 3% (the minimum payable rate, 6%
(average payable on the scale) and 12% (maximum payable rate).
It is clear from Table 5, that between 1990 and 2007, the country lost revenue of
between US$387.74 and US$1163.21 from the mining sector from non
optimisation of royalty receipts from the sector. Annual revenue loss from
royalty from 2005 was more that 50% of total annual debt services payment of
the country, while annual revenue lost from royalty alone far exceeded the
annual HIPC relieves for the period. From 2002 to 2007, total royalty revenue
losses represented more than 10% of the total national debt (Table 7).
Table 7: Revenue Loss from Non Payment of Royalty at the Maximum Allowable
level compared to HIPC relieves and Debt Services Payment
2002
2003
2004
2005
Max Royalty Lost
Ghana’s Debt
204
126.14
182.61
224.74
services Payment
62.4
81.1
109
HIPC Relief
NA
Source: ISSER (2007). State of the Economy in 2006 pp102
84.63
81.73
97.04
133.56
2006
2007
176.70
163.39
164.34
NA
NA
NA
Conclusions
Progressive policy reforms in the mining sector in Ghana has led to phenomenal
foreign investment and increased production, resulting in unprecedented total
gross sales value from the sector, largely bolstered by surging mineral
commodity prices, particularly gold.
The mining sector in Ghana has a dominant potential to contribute to national
development efforts. However, the sector’s contribution to government revenue
20
has not grown with the same pace, and the over all impact of the sector to
national economic, despite the mineral commodity boom is not very visible.
The study concludes that the range of capital allowances, list of mining related
equipment and items exempted from customs and import duties, the non
payment of capital gain taxes, value added taxes (VAT), dividend withholding
taxes, corporate income taxes, the huge offshore sales revenue retentions and the
payment of royalty at the lowest allowable rate constrain government revenue
generation and resulting in less visible contribution of the sector to national
economic development.
While globally, the industry is reporting historic profit levels and dividends to
share holders, many mining companies in Ghana are reporting losses in their
accounting books, depriving the government of all profit based revenues such as
corporate income taxes, dividends and dividend withholding taxes.
Similarly, the constrained employment capacity of modern mining methods, the
increased expatriate staff quotas in the mines and the negative environmental
and social impacts of mining activities on local mining communities have
contributed to dwarf the contribution of the sector to national development and
poverty alleviation.
In addition, capacity constraints on the part of government agencies with
oversight responsibilities for revenue mobilisation, in particularly, has allowed
some mining companies to exact disproportionate concessions to their advantage
in negotiated investment and stabilisation agreements. In another vein, capacity
constrains resulted in lack of standardisation in finery contracts with strong
variations in prices used to compute government revenue, particularly royalty,
for transactions taking place during the same period.
The study shows that royalty constitute the most secure and assured tax revenue
from the mining sector, because of its non- profit base nature and the fact that it
is easies to collect, and therefore provides the bulk of the tax revenue from the
mining sector.
Policy Recommendations
1. In assessing the implications of the new mining code for the Ghanaian
economy, no one can question the positive strides relating to increased
productivity in the sector. However, an evaluation of the contribution of
the sector to employment creation, to government revenue, net foreign
21
exchange retained in the national economy and the social and
environmental impacts of the upsurge in mining activities, paint a quite
different picture. The framework of recent mining legislation in the Ghana
which generally seeks to encourage foreign investment is not necessarily
compatible with the attainment of social and economic development and
the protection of the environment. Ghana therefore needs to undertake a
complete evaluation of the fiscal regime and investment and stabilisation
agreements in the mining sector if the country is to grow its tax base from
the commodity boom. It will require re-examination of the Minerals and
Mining Law and review of mining contracts.
2. In designing a new regime for the sector, government should consider
capacity constraint of the mining sector governmental oversight agencies.
The new regime should adopt and emphasise taxation systems that are
simple to collect and less manipulative by companies. Royalty and other
production based taxes are recommended. Since there is apparent lack of
capacity for government tax authorities to apply sliding-scale tax rates, it
is recommended that fixed royalty rates in the neighbourhood of 5 to 6
percent of total value of mine output be used.
3. The current fiscal provisions have no clear mechanisms for communities’
participation in revenue sharing. Thus while mining communities bare the
heavy brunt of the negative impacts of mining activities, they seldom have
opportunities to benefit from mining revenue. Efforts at re-engineering
these fiscal regimes should have clear provisions for communities’ direct
participation in minerals revenues.
4. The study shows that the implementation of Extractive Industry Review
Imitative (EITI) in Ghana has helped to highlight some of the major
challenges to the maximization of government revenue from the sector.
Although the EITI has its own challenges, it should be encouraged. It has
particularly identified the problem of information access in the mining
sector as a major challenge to transparency and accountability in the
sector. It should be important for the country to have in place an EITI law
that will give legal backing to the process. The law should facilitate
citizens’ access to information on contracts, revenue, production data, etc.
It should mandate the publication of extractive resources related contracts
and should require disclosure and public access to all contracts relating to
the participation of the state or any enterprise or entity owned or
controlled in whole or in part by the state. Making contracts public
ensures the integrity of negotiations, which in turn ensures that contract
adequately accommodate national and citizens’ interest.
22
5.
The variation of prices used by mining companies in their refinery
contracts and in the computation of royalty should be a cause for worry
and echoes the need for standardisation of the sector. The problem of
standardization could be ensured if the Minister who has the power to
grant licenses for exports or sale of the mineral produced, exercises these
powers on terms that allow for a designated Government institution with
appropriate expertise to verify that these agreements contain arms-length
terms. In the case of minerals such as diamonds, bauxite and manganese,
without published prices, there must be transparent agreement on the
terms of sales of these commodities using international best practices. In
addition, standardised accounting format should be used in the sector to
minimise these distortions.
6. Given the tendency for mining companies to compare fiscal regimes of
mining codes in the individual countries, provoking competition and “a
race to the bottom” among these mineral producers, efforts should be
made to ensure harmonisation of mining codes, especially the fiscal
provisions of these codes. These harmonisation processes should have
strong citizens’ participation and should be aimed at ensuring
maximization of national and communities’ take from the extraction of the
continent’s resources. There are currently such harmonisation efforts at
ECOWAS, SADC and ECA, the AMP under NEPAD levels, these should
be encouraged and efforts made to ensure effective citizens’ participation.
7. Political opportunities exist that serve as good conduits to advocate for
these changes. Currently regional and sub-regional initiatives are engaged
in debating the extractive sector and its role in the economic development
of the continent with strong emphasise on revaluation of mining codes. At
the individual country level, some countries have processes in place to reexamine exiting mining contracts. These present opportunities for
invention.
23
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25