Tax hikes threaten to eat into miners’ profits, but the government insists they are necessary to maximise the benefits from the industry.
Government in its 2012 budget statement announced that the corporate tax rate for miners is being increased from the current 25% to 35%, while a windfall profit tax of 10% will be imposed. Reactions have so far been mixed -- with mining firms fretting over the impact the measures would have on their earnings and investments even as groups such as the Ghana Mineworkers’ Union celebrate the changes.
But Vice President John Dramani Mahama has now assured mining companies that the new tax initiatives are not intended to be punitive nor a deliberate attempt to cripple the mining sector. The introduction of the new tax measures, according to him, is intended to create an enabling environment for the country to derive maximum economic and social benefits from the industry. “As partners in development, the time has come for the mining sector to contribute its due share to the development of the country,” he said.
Other government officials have sought to assuage miner’s concerns about the new taxes. Seth Terkper, Deputy Finance Minister, in a recent engagement with representatives of mining firms, said: “The changes in the taxes are part of a rationalisation plan. Later on, other natural resource sectors will be brought on board. So, it’s not about targetting mining companies; and they are not meant to be anti-investment.
Civil society organisations are commending government for the bold move, in particular for measures to rationalise fiscal operations in the natural resource sector. Others, especially the mining community that has been hard hit by the proposals, are unhappy and have called on government to take a second look at them.
In the wake of the announcement of the new taxes, Dr. Toni Aubynn, Chief Executive of the Ghana Chamber of Mines, worried that the new reforms could deter mining companies from making further investments in the sector. “Uncertainties must be looked at carefully. The country’s new tax moves have brought forth warnings and cautions about the impact these measures could have, such as making the nation unattractive for future mining efforts and scaring off investors,” he said.
The Ghana Aid Effectiveness Forum, an umbrella-body that brings together national networks on aid and development issues, commended government for the move -- arguing that although Ghana is a resource-rich country, the benefits from exploiting natural resources have been minimal and many communities where the resources are found are mired in abject poverty.
The proposals announced by the Minister of Finance and Economic Planning, Dr Kwabena Duffuor, in the 2012 budget include -- in addition to the hikes in corporate and windfall taxes -- a reduction in the capital allowance rate from 80% to 20% for a period of five years for all mining companies, as is the case in the oil and gas sector.
Other mineral-rich African states that have recently raised mining taxes or royalties include the region's top copper producer Zambia, and Zimbabwe which has the second-largest known platinum reserves in the world.
Several analysts have said the wave of resource nationalism, which coincides with sky-high commodity prices, is one of the biggest political risks to the mining sector in Africa.
In a sign that more actions will be taken, the government has set up a National Re-Negotiation Team to critically review the fiscal regimes and mining agreements with the view to ensuring that the country “benefits adequately and fairly from the gains in the mining sector.”
During the recent global financial crisis, prices of gold, cocoa and oil reached their highest levels ever on the international market. Yet the country did not benefit much in terms of government revenues from the price hikes, particularly from gold, Dr. Kwabena Duffuor argues.
The International Monetary Fund (IMF), believed to be an instigator of these new tax-reform measures, has stated that Ghana has not benefitted enough from rising gold prices. The Fund in a statement encouraged government to continue its efforts to strengthen tax administration. It also supported the adoption of additional tax policy measures, particularly in the area of natural resources where taxation is low in comparison with peer countries.
But Ghana’s private sector umbrella-body, the Private Enterprise Foundation, does not think the issue is necessarily so. PEF President, Asare Akuffo, opined that the corporate tax hike is in order since government and the country should benefit more from the mining sector. He however cautioned government to reconsider the proposed windfall tax on the mining companies.
“Companies thrive on profit; the reality in business however is that there are periods of losses and the savings made in good times are what keep the companies in operation,” Mr. Akuffo said, adding that the windfall tax may be a disincentive for future investments in Ghana’s mining sector.
The Chamber of Mines has warned that the new tax measures need to be implemented ‘scientifically’ because high gold prices do not necessarily mean mining companies are making more money. According to the Chamber, some gold miners are currently producing at US$1,200/oz.
At that rate, their gold mining costs appear to be far above the average for the continent. The average per ounce production cost in “other Africa”, which excludes South Africa, in Q1 2011 was US$647 -- resulting in a record cost/price differential of US$740/oz, according to a gold mine cost report.
Ernst & Young, the global accounting and consulting firm, reported that for 2011-2012 the number-one risk for miners is resource nationalisation (number four in 2010), which involves countries attempting to get more money from their minerals.
The report said resource nationalisation takes many forms, including increased royalties, taxes and mandatory participation whereby governments mandate the involvement of certain stakeholders. The mining and metals sector rebounded quickly from the global financial crisis, making it an early target to restore Treasury conditions, the report said.
2011 marked a period when more governments were aiming at that target. A growing amount of legislation has been implemented and is being considered that attempts to extract more profits from the minerals that miners are extracting. This is a trend that Ernst & Young predicts is only likely to increase.
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