Mining has been quickly getting back to business during the Covid-19 pandemic with a global market that has managed to grow from $1,641 billion in 2020 to $1,845 billion in 2021. The market may reach $2,427 billion, pushed by a functional and global scaled production, export, and transformation chain for minerals and metals. The second year of Covid-19 has seen international mining companies such as BHP Billiton Ltd., Glencore plc., Vale S.A., Rio Tinto Group and CRH plc growing their business, based on rearranging their operations.
If the mining sector has been so good in recovering, it is due to long years of governance improvement, agile management and a safety-first culture that has enabled firms to find short-term solutions and long-term scenarios. The “new normal” is already set to be operative for the mining industry.
However, this does not mean that the sector is now free of risk in 2021. One of the major risks the industry is facing globally, but in particular in West Africa, is geopolitics. Years before the outbreak of Covid-19, West African countries were already on the verge of renegotiating their mining policies with foreign investors, leaving behind a business-friendly approach for a more nationalist framework, encouraged by bullish mineral prices in global markets: Covid-19 may just have provided the momentum.
The trend is not specific to West Africa. It has occurred already in South America and other developing countries, with various tariff adjustments, increase in royalties and taxation, protection of strategic minerals, changes in licensing requirements and export bans being increasingly considered to develop local downstream mining industries.
Aside from mining royalty, a key instrument of protectionism in the international mining trade is export tax. Export taxes are taxes on goods or services that become payable when the goods leave the economic territory or when the services are delivered to nonresidents. They include export duties, profits of export monopolies and taxes resulting from multiple exchange rates. In Africa in general, but in West Africa in particular, export tax is a key leverage for governments, but also one of their key tools to become an attractive investment destination for mining companies.
Primarily, governments aim to have foreign traders, buying the minerals exported from their countries at international prices, supporting the cost of the tax, even if in practice the export tax is paid at the customs border by the exporter, i.e., the mining investor. In reality, the mining investor will bear the cost due to an elastic demand but an inelastic supply: which may be the current situation when we look at graphics of ores and metals exports. That may explain the reduced interest from foreign investors, even where minerals tend to be rare or valuable, for a region such as West Africa.
And even today, the mining investment market remains predominantly in Asia-Pacific to a very large extent and in North America to a lesser one. Behind the Middle East, West Africa still has a long way to go to reach a better place in the global mining market. The export tax story is likely to explain why.
Pitfalls in African Mining Sector
It is a curious story how export tax has become a pitfall. Trade analysts and investors will find it helpful to know more about the legal instruments establishing export tax in West African jurisdictions: we therefore consider below six key countries of the West African market—Senegal, Sierra Leone, Ghana, Guinea, Democratic Republic of Congo (Congo) and Gabon—and discuss the main attributes of their export tax and mining royalty.
Global Demand But a Local Offer
These six countries are typical of the mining industry in West Africa in different ways.
First, these countries set up mining investment policies years ago and have established agencies and granted incentives to mining investors, hoping that foreign investment will generate the boost they need for their economies.
These countries are also strategic at a global level by having a significant percentage of rare metals or rare earth, such as titanium and zirconium for Senegal and Sierra Leone, manganese for Ghana and Gabon, aluminum for Guinea, cobalt, copper, tantalum, tin for Congo.
And to go further, these countries are natural resources exporters, with a limited diversified economy and a high dependency on mineral trade. In this regard, they need the global economy as much as the global economy needs them.
Never-Achieved Policy Harmonization
However, being in a selling position on the global market has not helped West African countries to develop a harmonized map for their mineral export tax. If there is a common need for generating public revenues, conserving natural resources, promoting further processing or value adding, or even protecting their local downstream economy, they have never agreed on the rates that shall apply at the time of exporting minerals at their customs border.
And this is only one of the major divergences in their policies and their attractiveness for international trade of mining products, with some countries choosing not to tax at all and others collecting taxes at the border on minerals.
If final consumers never see the impact on their consumption price (cars, computers, telephones, steel used in construction), middlemen and mining exporters have, during the inevitable period of Covid-19 turmoil, inveighed against governments willing to take a higher share of the international price of mining commodities through their export tax. Export tax on minerals is never seen as a positive instrument by exporters and traders as it ultimately comes on top of the value of a commodity that has already been subject to production royalty plus any price effect generated by local direct and indirect taxes.
In 2021, international organizations are still working on a benchmark on export tax on minerals, in particular one showing how the instrument could be an incentive but also a source of public revenue.
Worse, West African countries tend to increase or decrease export taxation on specific mining products that they may, or may not, protect. Accordingly, numerous countries do not have a unique rate of export tax for minerals, but instead have various differing rates. In the same region of West Africa, minerals are then taxed at export on the basis of different rates, resulting in tax breaks that encourage illicit trade of metals, minerals and precious stones.
While countries do not share the same view on the same mining commodities produced on their domestic markets (one may judge copper critical for their market, while another may not even regulate copper), they could share the same standards for valuing these minerals, engaging in transparency in extractive industries or even protecting mining investors.
Regional Export Tax Measures
We do not focus below on the oldest instrument, but rather on the latest one still in force in 2021.
- 3% rate in Senegal: the country has been operating an export tax instrument within its legal framework since 2014 with its special duty on mine and quarry products (Contribution Spéciale sur les Produits des Mines et Carrières). The special duty is a Finance Act instrument, applies to minerals produced on the domestic market and sold for the first time, and follows the same collection rule as value-added tax (VAT). On top of the special duty, the mineral supplier is still subject to the mining royalty that varies from 1.5% (gold) to 5% (iron concentrate), since 2016.
- No export tax in Sierra Leone: but an express and strict obligation to settle the mining royalty payable before any export. Mining royalty in Sierra Leone varies from 3% (standard minerals) to 15% (precious stones), since 2009.
- No export tax in Ghana: with no express obligation to settle mining royalty payable before any export. Mining royalty in Ghana cannot be more than 6% and cannot be less than 3%, since 2006.
- Guinea: the country has been consistently charging export duty of 2% since 2011 against minerals based on its customs tariffs. Mining royalty in Guinea (Tax on the Production of Mineral Substances other than Precious Metals) varies from 0.075% (bauxite) to 5% (iron ore), since 2013.
- Congo: the country has been levying export tax (droits de sortie) at rates from 0.5% to 4% against minerals since 2008, but also an export surtax (Taxe rémunératoire à l’exportation) from 1% to 2.5%, also since 2008. Mining royalty in Congo varies from 0.5% (iron and ferrous metals) to 2.5% (precious metals), since 2018.
- Gabon: the country may levy export tax against minerals at rates known to vary from 0 to 5% but on the basis of the mining agreement (Convention Minière) signed between the government and each investor, which gives rise to numerous options here. Mining royalty in Gabon varies from 3% (standard minerals) to 10% (previous stones), since 2015.
Bullish Market But Tax Risk Exposed
As we saw above, export tax (intended to be supported by the foreign buyer) and royalty (intended to be supported by the mining investor) rates have normally remained stable, as international prices of minerals have started to boom, which increases export tax revenues for West African governments. In the last year, all minerals have seen a tremendous increase in the purchasing price that is used for export value and incidentally as the basis for export tax: for example, tin (+74.68%), copper (+82.14%), nickel (+39.01%), lead (+19.36%), zinc (+48.57%), aluminium (+57.25%), copper (+80.4%), platinum (+49.8%), palladium (+28.49%), silver (+63.61%) and gold (+1.05%).
However, geopolitics threats, in particular natural resources nationalism speeches, are likely to produce an adverse effect for mining investors through export. We will consider why below.
2021 Is Not a Sabbatical Year
West African countries are primarily exposed to a debt burden rising risk that is not compensated by their traditional fiscal resources collection and management. Governments are likely to look for tax revenue increase, and a bullish mineral market is likely to be an opportunity for increasing mining royalties and export tax. As experienced in the past, these increases (if they happen) are likely to be made by unilateral government policy decisions, hence affecting the business confidence climate in these jurisdictions.
- In Congo, a country hosting critical copper, cobalt and rare earth reserves, many mining companies will make any new investment conditional on non-intervention from the Congolese government in the tax rates of minerals as adopted recently in 2018.
- In Gabon, international business reviewed the country as full of mining opportunity but the tax regime under the mining code as disadvantageous.
- In Guinea, the deductibility of the mining royalty may raise debates within the business community and issues found in 2021 are likely to be communicated to the government.
- In Senegal, government is promoting public-private partnership projects to fund and develop infrastructure and key investments, which may reshape the export tax approach for mining.
- In Sierra Leone, there are artisanal mining calls for government intervention to review the tax policy and boost the local industry.
- In Ghana, illegal mining is a concern that public opinion requests the government to address, and export tax on illicit trade may be considered.
- International minerals prices are at a very high level: scrutiny by the tax administration and customs authority is likely to be high also. Taxpayers should ensure that minerals exports are properly documented, and the price supported when reaching the customs borders.
- In a bullish and volatile market, the timing of tax calculation creates opportunity: solid monitoring and benchmarking of minerals prices will ensure that the right prices are applied to each export for tax purposes.
- Involvement in local official working groups such as chambers of commerce or chambers of mines will help taxpayers to make their voice heard by governments on topics such as mining royalty or export tax.
- The current context does not protect financial projections on new mining investments in the region: taxpayers can follow closely the current discussions with governments and adopt a defensive approach when estimating their financials.
- Mining royalty is usually a deductible cost for the investor when calculating the year’s corporate income tax (CIT) in West Africa. Export tax may follow a different treatment. Taxpayers should review the CIT deductibility of such taxes on the basis of their mining agreement (if any signed with local government) or most recent Finance Act.
Mining Tax Requires Increased Monitoring
Foreign investors and traders should keep a careful eye on the topic of mining tax in West Africa. On one side, there is no such guarantee of legal or fiscal stability in a region of untapped mining potential but eroded by market lack of attractiveness and poor efficiency. Public expenditure for social and security programs may require West African governments to sacrifice business incentives for tax and customs revenues. This risk has a high likelihood of occurring.
On the other side, West African governments may make a win in achieving mining tax rates alignment for the whole region. It would certainly stabilize mining regimes and provide legal and fiscal guarantees to foreign investors and traders. It would also contribute to a better allocation of mining industrial assets in the region and favor the emergence of key missing infrastructure (road, transportation services, warehouses, transformation units, power supply plants, etc.).
A very good example of how a harmonized export tax regime in West Africa has resulted in a positive market effect has been the reduction of the illicit gold trade between Mali, Burkina Faso and Ivory Coast. Where these three countries have harmonized their export tax rate of artisanal gold to 3%, it has started to put an end to illegal cross-border gold trade motivated by neighboring tax breaks. Mali gold production, exported to Swiss and South African refiners, tends now to be declared for exports from Mali itself, and less from Burkina Faso or Ivory Coast.
West Africa countries will benefit from any policy and practice alignment in the taxation of their minerals production and export, and a regional approach is likely to gain higher confidence from international investors and traders.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Anthony Assassa is Director of Operations at BDO Francophone West Africa. He is an experienced adviser dealing with situations of high complexity for investors and shareholders involving reporting, compliance and change issues, with over 12 years’ experience in IFRS, accounting, tax, compliance and advisory in Africa and Asia.
The author may be contacted at: firstname.lastname@example.org