Fair Taxes for Development Financing

the case of Oil and Mining Companies and responsible Corporate Tax Behaviour in Ghana

A Conference on Tax and Corporate Responsibility

CopenhagenJune 21, 2012

Mohammed Amin Adam

Presentation format

• Tax Issues are CSR issues: the Principles

• Oil and Mining Companies and corporate responsibility on Tax– Are they paying fair taxes– Mineral tax reforms– The response of mining companies– Ghana’s lost oil taxes

• Are oil and mining companies in Ghana following the principles for Corporate Responsibility on Tax?

• Why tax revenues are critical for development?

Tax issues are CSR issues: Some principles?

• OECD Guidelines on Taxation• It is important that enterprises contribute to the public finances of host

countries by making timely payment of their tax liabilities. In particular, enterprises should comply with the tax laws and regulations in all countries in which they operate and should exert every effort to act in accordance with both the letter and spirit of those laws and regulations. This would include such measures as providing to the relevant authorities the information necessary for the correct determination of taxes to be assessed in connection with their operations and conforming transfer pricing practices to the arm‘s length principle.

• Ghana Chamber of Mines• The principles that will guide corporate decision-making which the members

of the Chamber will not compromise whilst achieving the mission and pursuing the vision of the Chamber are: Honesty, Transparency, Good Governance, Good Corporate Citizenship, Commitment and Unity.

Are tax issues CSR issues?

• NEPAD: APRM Report, June, 2005“Good corporate governance provides a level of disclosure and transparency regarding the conduct of corporations and their boards of directors that enables the supervision of their accountability while ensuring that they comply with their legal obligations and remissions, are accountable to shareholders and responsible to stakeholders including employees, suppliers, creditors, customers and communities, and act responsibly regarding the environment”

• The Principles for Corporate Responsibility on Tax– Substance– Accountability– Transparency– Reporting– Structure– Power– Governance

Oil and mining companies and corporate responsibility on Taxes?

• Are mining companies paying fair taxes?

‘’In matters of mining taxation, governments rarely believe that companies pay too much tax; companies rarely believe that they pay too little tax; and citizens rarely believe that they actually see tangible benefits from the taxes that are paid’’.

(Otto et al., 2006: xi)

Corporate Taxes in Ghana: Are companies paying too much taxes?

2007 2008 2009 2010

123,021,866159,272,905

224,663,856

365,973,362

IRS/GRA Collections (US$ mil)

Source: Ghana Revenue Authority; Domestic Tax Revenue Division

Total investments from 2000 to 2010 stood at $6.2 billion. However, by 2006, about $3.5 billion had already been invested. Therefore, even with capital allowance most of the early investments should have been producing significant corporate taxes now especially at the

time gold prices have also been increasing

2009 2010

Revenue NaN 2842.8 3620.8

Tax NaN 225 336

250

750

1250

1750

2250

2750

3250

3750

Mining Sector Tax ContributionU

S$ m

il

Mining sector Tax payments in Ghana: Are companies paying too much taxes?

Royalties in Ghana: an un-captured revenue potential

• Until 2010, royalty of between 3% - 6% was charged on mining companies operating profit. However, no company has paid more than 3%, even at times of high revenues (GHEITI, 2007).

• 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 (Akabza & Ayamdoo, 2009).

• 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 (Ibid).

• From 2002 to 2007, total royalty revenue losses represented more than 10% of the total national debt (Ibid).

Other Taxes: Lost potential

• Capital gains Tax– Except the transaction between Newmont Ghana Limited and

Normandy Plc, many mining companies that changed hands in last decade did not pay capital gains tax (Boas and Associates, 2007).

• Windfall tax– In Ghana, the Mining and Minerals Act abolished windfall taxes– Between 2002 and 2008, mining companies made huge profits,

above the average threshold of 25%, typically required for the application of the tax with some companies recording annual net return on investment of more than 35% (PWC, 2007)

A Wave in Mineral Tax Reforms

•Royalties on metals increased from 3% to 5%. •Royalties on rough diamonds and gemstones increased from 5% to 7%.•Royalties for polished stones raised from zero to 3%.•Mining companies should be charged a fuel tax

Tanzania

•Suspension of stability agreements that waved taxes•Increased royalties (from 0.6% to 3%)•Increased corporate tax from 25% to 30%•Windfall tax (suspended??)

Zambia

A Wave in Mineral Tax Reforms

•To impose 50% windfall tax•50% capital gains tax on sale of prospecting rights

South Africa

•Royalty from 3%-6% to 5% •Corporate tax from 25% to 35%•Windfall tax of 10%•Review of Stability Agreements with Anglogold and Newmont

Ghana

The Response of Mining Companies

• ‘The rise of resource nationalism’’ – Economist – February 11, 2012

• ‘’The most worrying thing to the 30 biggest global miners in 2011’’ – Ernst & Young, 2012.

• Where is the corporate responsibility?– In Ghana, Anglogold has openly opposed the review of its

stability agreement, threatening a potential dip in its investments

– If Ghana implements these reforms, she will receive about $150 million in 2012

• BUT are these criticisms fair?

Is Ghana really on Reform Path to warrant Anglogold Opposition?

Fiscal Term NRDC Decree1975

PNDCL 153 (1986)

Act 703 (2006)

Act 703 (Amended)

2012 Reforms

Royalty 6% 3 - 12% 3 - 6% 5% 5%Corporate Tax 50-55% 45% 25% 25% 35%Windfall Tax - 25% 0% 0 10%Withholding Tax - 10% 10% 10% 10%Capital Allowance - 75% 75% 80% 20%

for 5 years

Subsequent allowance

- 50% 50% 50% 20%

Ghana’s lost Oil Taxes in 2011• Government projected to collect about

$320 mil in corporate taxes• The Oil companies did not pay because

of carry-forward losses, allowed under the Petroleum Income Tax law

• Curious!! Where is the corporate responsibility?– Production strategy of companies

(2010)– Defective flow meters for almost a

year– No verification of calibrations on

production meters– Electronic seals not allowed by

Tullow

Revenue Stream

Actual (GH¢ mil)

Forecast (GH¢ mil)

Total Oil Revenue

666.2 1,250.0

o/w Royalties

184.4 201.25

o/w Carried and Participating Interest

481.8 445.77

o/w Corporate Taxes

NIL 603.76

Are Oil and Mining Companies in Ghana following the principles for Corporate Responsibility on Tax?

• Accountability: Companies have exploited weaknesses in the tax frameworks to pay less taxes.

• The royalty of 3-6% based on operating profit ensured that not any company paid more than 3%.

• The amendment to royalty and recent tax increases are not being implemented because of company resistance using Stability agreements.

Transparency: Companies have neither been transparent in their tax policy nor in the taxes they pay, especially the oil companies.• Power: Mining companies particularly

Newmont had superior concessions in is its investment agreement including a negotiated royalty at the minimum 3% and 3.6% in forest reserves.

• Similarly, oil companies got supper-attractive terms (low tax rates, high profit oil, no cost recovery limits) because of Ghana’s pre-production status.

Tax revenues from Oil and Mining companies are

critical for development

Failing MDGs Dwindling

ODA

Large fiscal deficits

Large infrastructure finance deficit

Widening Debt burden

Large fiscal deficits

2005 2006 2007 2008

-20

-10

0

10

20

30

40

The Twin Deficits (% of GDP)

Total Revenue Overall Fiscal Balance

Year

% o

f GD

P

Source: Ministry of Finance, Ghana, IMF and World Bank

Source: Africa Infrastructure Country Diagnostic, 2010.

ICT POWER TRANSPORT WATER TOTAL0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Ghana Infrastructure Finance deficit

Ghana Infrastracture Needs

Am

ount

(US$

Bill

ion)

Infrastructure financing Needs

Source: Ministry of Finance and Economic Planning Ghana

2006 2007 2008 2009 20100

10

20

30

40

50

60

70

Debt Profile (% of GDP)

Domestic Debt External Debt Total Public Debt

Debt

s (%

of G

DP)

Widening Debt burden

Dwindling Aid inflows

2002 2003 2004 2005 2006 2007

10.67

12.69

15.8

10.79.24

7.67

ODA trends to Ghana (%GDP)

2006 2007 2008 2009 2010 2011

33.02

26.42 25.73

34.62

21.26 20.12

MDBS Contribution (% of total aid)

Source: World Development Indicators (2009)

Source: Ministry of Finance and Economic Planning

Failing the MDGs

GOAL BASE % RECENT %

MDG1a. Poverty headcount ratio, national poverty line (%of population) 1992 51.7 2006 28.5

MDG2. Primary non-completion rate, total (% of relevant age group) 1991 38.8 2008 15

MDG3. Ratio of girls to boys in primary and secondary education (%) 1991 78.5 2007 95.2

MDG4. Mortality rate, under - 5 (per 1,000) 1990 119.7 2008 80

MDG5. Births not attended by skilled health staff (% of total) 1988 59.8 2008 43

MDG7a. Improved water source (% of population without access) 1990 44 2006 26

Discussions

amin@ibiswestafrica.com