TAX JUSTICE ACADEMY 2015
-
EDGAR ODARI
ECONEWS AFRICA
THE CHALLENGE
 81 countries driven by resources in 2011 accounting
for 26 percent of global GDP, up from 58 generating
only 18 percent of world GDP in 1995.
 69% of people in extreme poverty are in resourcedriven countries.
 Almost 80% of countries whose economies have
historically been driven by resources have per capita
income levels below the global average, and more
than 50% of these are not catching up.
 Almost 90% of resources investment has historically
been in upper-middle-income and high-income
countries.
2
THE OPPORTUNITY

~½ of the world’s known mineral and oil and gas
reserves are in non-OECD, non-OPEC countries.




Up to $17 trillion of cumulative investment in oil
and gas, and mineral resources could be needed by
2030—more than double the historical rate of
investment.
540 million people in resource-driven countries
could be lifted out of poverty by effective
development and use of reserves.
Opportunities to share much of the $2 trillion of
cumulative investment in resource infrastructure in
resource-driven countries to 2030.
50%+
improvement
in
resource-sector
competitiveness possible through joint government
and industry action.
3
‘Mineral dependence’ in sub-Saharan Africa (2010)
Metals and minerals
Oil and gas
 30 of 48 countries in Africa
 18 primarily minerals
 12 primarily oil and gas
‘Mineral dependent’ countries are those where mineral
exports account for more than 25% of total exports
www.icmm.com
Contribution of extractives to exports in Africa (2010)
Metals and minerals
www.icmm.com
Oil and gas
Unfair share: Income share of the poorest and richest 10 per cent in
resource-rich countries
Africa Progress Report
7
Principles of Mineral Policy since the 1980s
“Overall, the main objective of donor
intervention in African mining - whether through
technical assistance or investment financing should be to facilitate private investment and
help reduce the country and project-related risk
for the private investor.”
World Bank, Strategy for African Mining, 1992
8
Principles of Mineral Policy since 1980s
“The recovery of the mining sector in Africa will
require a shift in government objectives towards a
primary objective of maximizing tax revenues from
mining over the long term, rather than pursuing
other economic or political objectives such as
control of resources or enhancement of
employment. This objective will be best achieved by
a new policy emphasis whereby governments focus
on industry regulation and promotion and private
companies take the lead in operating, managing and
owning mineral enterprises.”
Strategy for African Mining – World Bank, 1992
9
Mineral Development Strategy since mid
1980s
• State withdrawal from production and privatization of
mining SOEs
• Emphasis on attracting foreign investment into sector
– Creating enabling environment for FDI
– Passage of laws, Creation of institutions and processes
deemed necessary for development of FDI based
export led mineral development strategy
– Overgenerous incentives regime (e.g. tax exemptions
and low rates, forex retention)
• Focus on developing minerals with export value
• Revenue stream main planned benefit of mining
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Unmet expectations- Revenue
Between 2002 and 2006 average net profits of
biggest mining firms increased by more than
1,400%, going up by 64% between 2005 and 2006
alone. (PWC,2007)
2003-2011 profits grew average 20% a year
In 2010, the financial results for the Top 40 were
spectacular:
– Revenues increased 32% – breaking $400 billion for
the first time
– Net profit was up 156% to $110 billion
– Operating cash flows grew 59%, leaving more than
$100 billion cash on hand at year end
– Total assets approached $1 trillion
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Net profit & net profit margin top 40
mining firms
Source: PWC –Mine 2012
12
From Bryan Land (World Bank) presentation “Taxing the
Minerals Industry in Turbulent Times”, 2009
Mining industry has done well!
In 2010
In 2012
• Revenues up 32% –
breaking $400 billion for
the first time
Revenue flat at $731 billion —a 6%
increase in production volume offset by
softer prices
• Net profit up 156% to
$110 bn
Net profits down 49% to $68 billion
• Op cash flows grew
59%, with > $100bn cash
on hand at year end
• Total assets →$1
trillion
• Net debt down to $46
billion, resulting in
gearing of only 8%
Market values down, gold miners hit
especially hard
Issuance of $108 billion of debt, including
$43 billion of bonds, sends gearing from 13%
to 24%
Estimated 2013 capex of $110 billion, 21%
lower than 2012
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Loopholes in benefit sharing
• Windfall gains for developing countries “have
been partly offset by increased profit
remittances by transnational corporations”
• “Cross country studies have shown that many
mining taxation regimes are regressive with
governments’ share of mining revenue of
falling as the profitability of operations rise”
UNCTAD 2009
15
Terms of Trade changes versus actual benefits
of price increases (UNCTAD, 2008)
16
Tax Avoidance
17
Switzerland’s copper imports from Zambia
18
Flow of Revenues Kenya
19
Flow of Revenues Kenya
20
Mechanism
Description
Up-front payment for acquiring exploration
rights. Commonly used as a bid parameter
Signature bonus
(Notably for petroleum in the US offshore
continental shelf)
Production
Fixed payment on achieving certain
Bonus
cumulative production or production rate
Specific (amount per unit of volume
produced)
Ad-valorem (percentage of product value)
Ad-valorem progressive with price
Royalties
Ad-valorem progressive with production
Ad-valorem progressive with operating
ratio/profit
Royalty applied to operating margin (net
profits royalty)
Number of countries
Mining Petroleum
1
16
None
10
2
1
17
1
31
9
8
3
1
2
0
State, provincial, and/or local
CIT
Variable income tax
Resource rent taxes
Rate of corporate income tax at the
state, provincial,or local level in addition
to federal level. Common in Canada and
2
5
the U.S. as a province/state resource
charge in addition to federally imposed
CIT.
CIT where the tax rates increase with the
ratio of taxable income to revenue,
32 None
between an upper and lower bound
Cash flow with accumulation rate/uplift.
5
5
Can be assessed before or after CIT.
Cash flow with limited uplift on losses
None
2
(UK).(surcharge tax on cash flow)
Allowance for Corporate Capital
None 13
Allowance for Corporate Equity
None 14
Other additional
income Tax
Other profit taxation mechanisms that do not fall
under any of the categories above
Fixed production share
Cumulative production
R-Factor: ratio of cumulative revenues to cumulative
Production sharing
costs
Rate of return, pre- or post-tax
Production Level
Free equity: government receives percentage of
dividends without payment of any costs
State participation Carried equity: government contributions met by
investor and recovered from dividends with interest
Paid equity: government pays its share of costs
Social investments/ Resource companies build infrastructure or make
infrastructure
other social investments (hospitals, schools, etc).
Number of
countries
1
3
None
5
None None
None
13
None
None
3
13
2
None
3
8
None
19
1
6
25
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Realizing the AMV: AMDC Work
Streams
Linkages,
investment and
diversification
Policy and
Policy and
Regulatory
Licensing
Frameworks
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AMDC work streams
Policy and regulatory frameworks
Development Goal – The mining sector in Africa supports a
broader share of social and economic development objectives
Mineral policies lack dev. Embed dev objectives
objectives –focus is on tax in policy & legal frwks
& equity participation
Optimise NPV of
resource rents
Fiscal terms are poorly
designed
Legislate against
transfer pricing
Transfer pricing is
common – Africa losing
Build value chain
$50 bn per year!
analysis capacity
Now
Medium term
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Establish SWFs
Explore infrastructure
funds
Establish long term
community dev funds
Invest in broader
national capacity
building
Long Term
AMDC work streams
Linkages and Diversification
Development Goal - Mining sector makes a significant
contribution to African resource-based industrialisation and
social economic development
Sector is poorly linked to
other economic and social
sectors
Need policies that
encourage innovation
and beneficiation
Greater diversification
of national economies
Improved economic
linkages within the
There is little R & D into
Link beneficiation with national economy
new processes and creation industrial dev and
of mineral value added
other sector strategies Improved availability
of infrastructure for
Poor infrastructure limit
Explore collateral
collateral economic
opportunities
infrastructure & mining and social use
investment eg SDIs
Local content policy
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Linkages with Sectors of the Economy
Using wasting assets
to underpin growth in
sustainable sectors
DOWNSTREAM
INFRASTRUCTURE:
Value-addition
Beneficiation
Export of resourcebased products
Puts in critical
infrastructure (transport,
energy) for other nonminerals economic
potential
SIDESTREAM
UPSTREAM
Inputs:
Plant, machinery,
equipment,
consumables,
services, (export)
HRD, R&D
TECHNOLOGICAL
Linkages:
“Nursery” for new
technology clusters,
adaptable to other
sectors
HRD, R&D
Resource
knowledge &
physical
infrastructure
Stabilisation Clauses
•
INTANGIBILITY CLAUSES: These clauses commit the parties not to modify
the contract except with the express consent of the parties.
• FREEZING CLAUSES: Such clauses limit the applicability of domestic laws
for the contract to the law that was applicable at the date of the
conclusion of the contract.
– COTCO-Cameroon Establishment Convention for Chad-Cameroon pipeline
which contained a commitment ‘not to modify the legal, tax, customs and
exchange control regime in such a way as to adversely affect the rights and
obligations of COTCO.
• CONSISTENCY CLAUSES: These clauses repudiate the applicability of
domestic legislation of a host state to the extent that such legislation is
inconsistent with the investment contract. Any law found to be
inconsistent is inapplicable.
• ECONOMIC EQUILIBRIUM CLAUSES: Any alterations to the terms and
conditions of the contract must have renegotiation intended at restoring
the original economic balance or in default of that payment of
compensation. West African Gas Pipeline Company
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Stabilisation Clauses (Cont..)
• International Project Agreement (Benin, Ghana, Nigeria & Togo) – West
African Gas Pipeline; Any regulatory change that “has a material adverse
effect on the company” or one which “causes the benefits derived by the
company from the project or the value of the company to the shareholders
to MATERIALLY DECREASE” would oblige the parties to “restore the
company and/or the shareholders to the same or an economically
equivalent position it was or they were in prior to such change” or institute
“prompt, adequate and effective compensation”.
• ISSUE-SPECIFIC STABILISATION CLAUSES: Investment contracts also contain
some clauses that address specific issues such as clauses for the
stabilisation of the fiscal regime or those that stabilise regulation of tariff
structures in the case of public utility projects.
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