Do mining taxes threaten investment?

By Emma Hughes, Nilima Choudhury
Published: Friday, 24 January 2014

South African mining bill debate intensifies and Morocco is named as investors’ preferred destination

Royalty rates across Africa have caused disruption to the continent’s resource sector in recent years as investment opportunities were quashed by fluctuations in tax amounts and difficulty in understanding certain regulatory requirements.

In a bid to overcome this problem, several African nations have reformed mining legislation, considering where to place royalty rates in order to continue to attract investment.

South Africa

Up until 2007, South Africa was the only major country on the continent without a royalty on mining.

In 2008, the government implemented a profit-based royalty at between 0.5% and 7% to enable firms to recover from the effects of the global financial crisis.

Then, in 2013, the South African government released modifications to the 2002 Mineral and Petroleum Resources Development Act.

These potential changes include greater national ownership of mining projects, raising mineral royalties and setting minimum prices at which mineral products can be sold to local industries.

The ministers said that government negotiations with mining companies, unions and other stakeholders in the country were ongoing, and that the South African parliament was opening a debate on the bill this month.

Mining investment

While these reforms were aimed at improving South Africa’s resource sector, those working the domestic natural resources sector have argued that the bill could threaten new investment, violate bilateral investment treaties and lead to legal battles.

In response to these concerns, ministers have said they will discuss the bill’s proposals both internally and with the national community before reaching a final policy decision.

Other nations

In Kenya, towards the end of last year, the government announced royalty charges lower than those announced in August 2013, which were set at 5%. Royalties currently stand at 2%, increasing to 3% in June 2015 for two years. The government has further legislated that royalties will then increase to 4% after 2017.

Tanzania sees royalty rates of 3%, which has led to a growth rate of 7.8% in 2012, up from just 2.2% in 2011, helped by increased investments in the mining industry.

The country’s ruling Chama cha Mapinduzi party in Dar es Salaam has set itself the goal of reducing tax incentives offered to foreign companies to below 1% of GDP, in an effort to balance the necessity of attracting investors with the need to collect revenues for the government’s treasury.

In 2013, tax exemptions accounted for $1.1bn, or 4.3% of Tanzania’s GDP, making up a considerable portion of the total $2.8bn estimated to be lost by East African nations in tax incentives every year, according to a report compiled by Tax Justice Network-Africa and Action Aid.

The government’s National Development Vision estimates that the contribution of mining to GDP will reach 10% by 2025. Official figures show that during 1997-2012, mining companies paid a total of $1.4bn to the government in terms of royalties, statutory taxes and other contributions.

In Mozambique, the mining industry as a whole has paid more than $1bn in taxes and royalties to the government. The royalty rate currently stands at between 3% and 10%.

Uncertainty abounds in Zimbabwe, however, where the government is looking to reduce the royalty fee from 7% to 3% to attract investors although an official decision is yet to be announced.

Zambia is also finding it difficult to reach its potential due to a high royalty rate of 6%, but until the government decides whether or not to defer payments, overseas investors will likely keep the country at arm’s length.

According to a US Geological Survey (USGS) report published in 2011, mining companies have cited Morocco’s long mining history, well-developed infrastructure, low sovereign risk, low mining taxation rate of 17.5%, and mining royalty of 3% as attributes that have encouraged them to invest in the sector.

Liberia’s industrial mineral resources included dolerite, granite, ilmenite, kyanite, phosphate rock, rutile, and sulphur. Its royalty rate is set at between 3 and 10% which, according to its Extractive Industries Transparency Initiative covering the period from 1 July 2009, to 30 June 2010, brought in revenues of $69.7m in taxes, royalties, and other administrative fees.

Mining taxes and investment

Over 30% of the world’s global mineral reserves are found in Africa, yet less than 5% of the total global mineral exploration and extraction budget is invested in the continent.

With many countries either having made the changes or proposing changes, African governments are advising each other to make an attempt to strike a balance between promoting mining growth through lower royalty fees and the need to ensure the countries do not lose out on the profits from the mining of their minerals.

Olle Ostenson, from Caromb Consulting, said in a recent presentation that the advantages of a royalty tax is that it is easy to implement, makes it difficult for companies to cheat the state, and helps companies achieve stable revenues.

The disadvantages as according to him were that it distorts investment incentives and can lead to some deposits either becoming unprofitable to mine or companies may be forced to leave some deposits in the ground.

The African Development Bank last year suggested that Africa has managed to strike a balance between reasonable royalty tax so the state does not lose out on impressive profits and investors will feel welcome.

Mining policy reforms were designed to attract foreign capital into a sector that had previously been dominated by state-owned companies, said the ADB. Key aspects of these reforms included the reduction of royalty rates to around 3% as a way of increasing the returns to private investors since royalties count as a cost of production.