Striking a balance between attracting investment into the mining sector and securing a fair share for the host country is a key preoccupation for African governments and one of the reasons for the rise of resource nationalism. Although African governments have for years favoured the implementation of legislation that grants mining operators various tax incentives, their objective now tends to be the capture of a greater share of the mineral revenues and the improvement of the allocation of resources within their countries.
The exploitation and commercialisation of minerals require huge investments and are therefore capital intensive. Because of the significant technical and financial burdens associated with extracting activities, the majority of African countries historically attracted foreign investment through appealing provisions in establishment or mining conventions. These often proved to be far less efficient than expected initially, and even detrimental to the development of countries and the interests of local communities.
Fiscal regimes vary across jurisdictions and minerals, but in most countries mining projects are subject to specific taxation arrangements that usually include, in addition to corporate income taxes, fiscal instruments such as royalties, resource rent taxes, state participation in local exploitation companies, local participation, dividend/interest withholding taxes and indirect taxes. Although many countries still have mining conventions, tax conditions are increasingly governed by legislative enactments and the provisions of mining conventions can in principle only supplement the law.
Moreover, in certain countries, state-owned mining companies entered into joint venture agreements that granted the foreign partners certain preferential advantages to the detriment of the states, sometimes preventing them from adapting tax conditions to new economic and political circumstances. This situation gave rise in some countries, e.g., the Democratic Republic of the Congo and Guinea in 2007, to “revisitations” of the joint venture agreements and the advantages granted by them in order to find a better balance between the interests involved.
Above all, the sharp increase in the price of certain minerals, such as gold, during recent years has led various countries to reassess their tax structures. The general trend is that African countries have increased royalty rates, in particular in relation to certain metallic minerals such as copper, gold and platinum. Mining royalties tend to be set in mining codes, rather than in mining conventions.
The Controversial Windfall Tax
In addition to usual value-based, specific or profit-based royalties, some countries in Africa and other continents have contemplated implementing price-based royalties similar to those observed in the petroleum industry. Such windfall taxes on mining profits, calculated as a percentage of the production value based on a price sale, were levied in Zambia (repealed in 2009), Mongolia (repealed in 2010) and Australia (modified in 2010). In 2012 and 2013, other African countries (Ghana, Tanzania and Côte d’Ivoire) also contemplated introducing or re-introducing a windfall tax: the 1995 Mining Code of Côte d’Ivoire provides for a “tax on the additional profit”. No implementing regulations had been taken, however, until an ordinance of 28 December 2011 that set a 7 per cent tax rate, and another ordinance discussed by the Côte d’Ivoire Government in 2012 intended to increase the tax to between 13 per cent and 19 per cent. Such attempts were opposed vehemently by mining companies, despite the boom in international prices of minerals, suggesting that raising taxes could engender uncertainty in future investments in the sector.
Notwithstanding the previous failed attempts, several African governments are still weighing their chances of rendering windfall taxes effective and acceptable by the industry.
New Forms of State Participation
State participation usually occurs through a stated-owned company or a joint venture between the country and a private investor at the exploitation stage of a mining project. This has been used by African countries to protect national interests while allowing the government to develop an economic investment vehicle. There is usually an interest for the state, e.g., the Economic Community of West African States Mining Code provides that the state is entitled to 10 per cent, with an option for the government to negotiate with the mining investor the purchase of an additional share. The major downside associated with such state participation is, however, that the governments often do not realise the full value of the equity share.
Following the example of the petroleum sector, some African governments are planning to institute production sharing agreements in order to increase mining revenue returns. For instance, this concept was introduced in the 2011 Guinea Mining Code (Article 6) and the Côte d’Ivoire minister in charge of mines reaffirmed in January 2013 that the Ivory Coast Government was seriously considering the use of such an instrument.
Better Sharing of Mining Revenues
One major area of concern relates to the benefits generated for local communities in order to ensure a fair balance between national and local preoccupations and interests. The key point is to make sure that local communities receive an appropriate portion of mining revenues, and that such funds are well managed and used for the development of local people. Considering the limited duration of projects, it is crucial to implement forward-looking mechanisms so local economies diversify their resources and are not adversely affected when the natural resources run out. The creation of national or regional stabilisation/development funds to invest in long-term alternative economic activities, infrastructures and/or sector programs, e.g., agriculture and education, can be an appropriate solution. State investment funds have also been created in Libya, Algeria, Mauritania, Gabon and Sudan to mitigate raw material price variations.
The Impact of the International Agenda
Some international initiatives intended to better track the revenues within the mining sector and improve transparency have had a direct impact on the governments of mining countries:
- The Extractive Industries Transparency Initiative was launched in 2002 with the aim of increasing the transparency of payments made by companies and the revenues of governments of countries with extracting industries.
- In October 2008, the Africa Mining Vision, developed by the African Union, pointed out the requirement for countries that are gifted with natural resources to reassess their mining policies. The same year, the African Development Bank established the African Legal Support Facility to help improve the negotiating skills of states in relation to complex mining agreements.
- In July 2010, the US Congress passed the Dodd-Frank law, compelling all companies registered by the US Securities and Exchange Commission to disclose payments made to national governments, with a breakdown by country and project.
- Following this US law, in 2011 the European Commission also began to draft its own legislation that will require publishing the profits of multinational companies carrying out activities in Africa.
- Although it is difficult to reconcile tax efficiency, fair sharing and the use of mining revenues with the interests of investors, new African mining legislations aim to address the inefficiencies that affect the mining industry.