Changes to corporate and royalty tax rates

Like many resource-rich countries, Ghana aims to strike a balance between ensuring revenues generated by its mineral wealth flow back to public coffers and maintaining a fiscal environment conducive to investment. Changes in recent years have increased taxes and royalties on the sector as the government has looked to both boost income as well as standardise practices across extractive industries.

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Mining accounted for 27% of tax revenue in 2012, according to government officials. Following recent changes to the tax structure, mining companies pay 35% corporate tax and a flat 5% royalty on revenues, set by the Ministry of Finance. Capital gains tax stands at 15%. The capital allowance rate is a flat 20% over a five-year period. In July 2013, the government re-imposed the National Fiscal Stabilisation Levy (NFSL), a 5% tax on the profits of several industries including mining, that runs through December 2014. The changes have not been welcomed by the sector, which previously paid 25% corporate tax and royalties on a sliding scale of 3% to 6%.

The Ghana Chamber of Mines (GCM) criticised the increasing fiscal burden, which came at a time when mining costs more broadly were rising and has been followed by a period in which gold prices have plunged.

Amponsiah Tawiah, manager of monitoring and evaluation at the Minerals Commission, told OBG the royalty regime was changed because the sliding scale was not being implemented, with the 3% rate standing when the gold price was as low as $850 or as high as $1975.

The law exempts mineral rights holders from import duties on plant, machinery, equipment and accessories. Employers are exempted from income tax related to furnished accommodation at mines, and expatriates can be exempted from tax on money transferred out of Ghana within a certain quota.

Tight Fiscal Space

Mining companies complain that the 35% corporate tax places a disproportionate burden on the industry, when other sectors are taxed at 25%. Some are also unhappy that the royalty charge is levied on all production, rather than just profit, meaning that cash will still flow to the government even when a company is making a loss. “We operate in a very tight fiscal space,” David Johnson, vice-president and head of stakeholder relations at Gold Fields Ghana, told OBG. “We have made the argument again and again that rather than the government taking a bigger piece of the pie, it is better that it helps grow the pie to benefit all investors,” said Johnson. “If the government reduced tax, it would free up more money to increase investment and then we might be able to increase production.” It has been suggested a 25% tax rate could yield the government more than the current 35% levy. It will be important for the government to study whether imposing a lower percentage tax would help mining firms expand production, thus giving the state a greater return ovefrall in a smaller cut of a larger sum.

The Minerals Commission, and the government as a whole, disagrees, pointing out that the 35% rate is fairly standard worldwide, and that it is consistent with other extractive sectors. Ghana’s growing oil industry pays a 35% rate, so mining is not being singled out. “There has to be a consistency, a level playing field for the minerals sector,” said Tawiah. It is widely accepted that the tax and royalties imposed are not exceptionally high by international standards, but what mining companies and communities receive from the government, in terms of investment and support, is inadequate compared to the money the state makes from the industry. It is a regular quibble: that the government sees mining as a cash cow rather than an integral driver of Ghana’s economy and potentially a major force behind social development. The argument is that mining companies must use roads and utilities that are not up to standard, increasing their own costs.

Allocation Issues

Miners complain that they have to pay both taxes and a high price for an unreliable energy supply. When there is a shortfall on the power grid, the government sometimes asks mines to “release power”, in other words cut their usage. This leads to lower production and as a result, mines sometimes deploy generators – which are inefficient and expensive. Gold Fields is considering building its own power plant at Tarkwa to ensure regular electricity supply, albeit “at huge cost”, said Johnson. “In light of the fluctuating electricity supply, dedicated power plants might make sense for energy-intensive manufacturers. However, the remaining challenge is transport of fuel to the site. Without pipelines, a manufacturers has to rely on liquefied natural gas shipment by truck,” Arthur Herbert, the managing director of Interplast, told OBG. The Minerals Commission would like to see more cash channelled into infrastructure to support mining activities, including railways, that will benefit growth and value creation, as well as the overall economy. “Some of the roads in mining areas are in a deplorable state,” Tawiah told OBG. “We should use more resources for developing power, roads and water.” This is central to the shift from resource rent to resource programming, he added.

Community Support

Meanwhile, of mining royalty revenues, 80% go to the consolidated fund (Ghana’s main public account) and 10% to the administration of stool lands, which is distributed as follows: 5.5% to chiefs and only 4.5% to district assemblies in mining communities. Industry leaders say the small proportion of royalties that filters back to communities contributes to the difficulties mining firms face. They are seen as intruders, rather than investors. The GCM argues that 30% of royalties should go to communities.

Windfall Tax

In January 2014, the finance minister, Seth Terkper, put plans to impose a windfall tax on mining on hold after intensive lobbying by the industry. The government had proposed a tax of 10% on profits to bolster Ghana’s budget and capitalise on bumper profits in the mining sector. When proposing the 2014 budget in November 2013, Terkper had said that the tax, mooted for some years, would be imposed, but did not give a timeframe.

“The suspension of the windfall tax has been well received internationally – though many would like the government to be straightforward in its communications on this topic,” Toni Aubynn, CEO of the Minerals Commission and former CEO of the Ghana Chamber of Mines, told OBG. “The IMF is partially to blame for recommending such a windfall tax. Bodies like the IMF showed that they don’t truly understand the industry. They were only looking at the rising price of commodities, but were ostensibly ignorant of the rising costs and decreasing margins. The windfall tax is not a bad thing in theory, but if there is no windfall profit, then don’t create a trap tax, as it scares investors.”

The Minerals Commission says the windfall tax has not been scrapped for good – if gold prices rise close to $2000 again, it is likely to come back onto the agenda. Industry figures are expecting the windfall tax to re-emerge as an issue if gold prices do rise, and are concerned that tax rises will offset gains made from higher margins. But not all are opposed to it. Speaking in January 2014, Aubynn said, “If companies are making windfall profit, it’s only fair that they share that with stakeholders.” Changes to the tax and royalty regime were made when prices were still high and margins generous; changing them again as prices start to look to the upside and miners have slimmed down might be counterproductive. A shift back to a sliding scale on royalties is possible, so is a windfall tax if profits soar. A more nuanced view, taken by the industry and its regulator, is that the revenues the state gains from mining could be better allocated. This will take time and political will and is not a priority for the government, but would benefit stakeholders in the longer run.