Mutual benefits: The government seeks to strike a balance between incentivising investors and benefitting local communities

Despite its long and distinguished history, Ghana’s mining sector encountered a number of difficulties in the post-independence era and began to thrive only once liberalisation policies were passed in the mid-1980s. The Minerals and Mining Law of 1986 set the tone for renewed private investment, with generous terms set out for capital allowance and tax responsibilities. By the early 1990s mining was the country’s second-highest foreign exchange earner. The sector has maintained a central position over the past two decades and mining is now the country’s biggest source of exports.

However, liberalisation remains an issue. The legacy of offering strong incentives to capture investment and offset the risks in a capital-intensive industry has had both positive and negative effects. While the sector has brought more than $11bn in investment since 1983, according to the Minerals Commission, it has also created local resentment over potential lost earnings for the government and local communities. The debate over finding the right balance remains strong.

REGULATION DEBATES: The issue is not simply one of politics and populism. To some degree, the debate on Ghana’s mining industry has come full circle, with the IMF, an early advocate for liberalisation in the 1980s now urging a government re-evaluation of the tax regime. IMF’s mission head, Christina Daseking, said in October 2011 said the government should now be looking to bolster revenue generation from mining. In the 1980s the IMF tied loan conditions to liberalisation, but its recommendations of increasing taxes are seen by the private sector as “akin to the ongoing resource nationalism,” according to Toni Aubynn, the CEO of the Ghana Chamber of Mines.

This debate over taxation is part of a wider public discourse over government revenues and benefits accruing to the local economy from the extractive industries that will define the direction the sector takes over the coming years. A groundswell of opinion among media, government, non-profits and the public has taken place in recent years over the mining industry’s impact on local development. In Ghana, the IMF recommendation has recast the debate. Coming from such a bastion of free market policy, the recent announcement has given the government significant leeway and credibility in its decision to revisit tax policy.

CORPORATE TAX INCREASE: The government’s action, announced in the 2012 budget, should therefore come as little surprise. Announcing the policy shift, Kwabena Duffuor, the minister of finance and economic planning, said, “the economic and social benefits that the sector provides do not meet our expectations.” As such, for fiscal year 2012, the government has increased the sector’s corporate tax rate from 25% to 35%, introduced a windfall profit tax of 10% and altered the capital allowance from 80% in year one and 50% per year thereafter to a flat rate of 20% over five years.

As expected, the operators have not welcomed this policy. “Unfortunately Ghana is losing its superiority in terms of cost,” Aubynn told OBG. “If you look at the tax changes that have been introduced, it puts us at the higher end of the cost spectrum. There are places still more expensive than us, but Ghana is now one of the high-cost areas.” The tax hike puts Ghana on a par with 2010 rates in countries such as the US and Argentina (both 35%), but below India, which has the most stringent regime for foreign mining companies (42.23%), according to global consultancy firm PwC.

Nonetheless, with the implementation of these laws returning Ghana’s corporate tax regime in the mining sector to its pre-2006 levels, there seems to be little public sympathy for mining operators. Many press articles have noted the cheap cost of production in Ghana, with Newmont’s 2011 annual report showing the country has the lowest direct gold mining and production costs of any of its global operations, at $427 per oz.

RETHINKING THE TAX REGIME: Aubynn, however, said the recent announcement on tax revision may lead operators to reconsider their future investment and expansion plans. “I think there’s a general push by most developing countries in Africa to get more from their resources,” he told OBG. “For Ghana the national strategy has provided a framework to push for more. But this will lead companies to see where they can get the best returns. They will start looking where their future investments should be. Some companies have sunk in so much that they won’t leave but the challenge is further expansion.” Yet with the gold price having more than doubled since 2006, and other commodities showing strong price growth, Ghana is not the only country looking to reassess its tax regime and introduce a windfall tax. Australia has had its own political firestorm as a result of plans to introduce a windfall tax on iron ore and coal profits. Zambia, Africa’s top copper producer, had also been considering reintroducing a windfall tax that was scrapped in 2009 (levied at a rate of 25%). Ghana is, therefore, not alone in revising its taxation policy in the light of global commodity price spikes and has, in fact, introduced comparatively modest rates.

The problem for the industry, however, is not simply the tax itself but the lack of certainty over financial agreements between the government and operators. “What they also need is stability, even if taxes are high,” Aubynn said. “Returns for mining take a long time. If companies could be sure that the corporate tax could be held constant for 10 to 15 years and royalties were held constant, they would be confident that they will get back the $2bn-3bn that they invested.”

LACK OF CLARITY: One major uncertainty is the nature of the windfall tax, given that there is little clarity over how it will be structured or if it will be introduced at all. According to Aboagye, the bill is currently being prepared and its administrative structures put in place. This uncertainty is also bothering operators that have previously signed stability agreements with the government. Newmont Ghana, for example, signed such a contract with the government in 2003. Newmont agreed to pay corporate tax at 25%, with the rate not to exceed 32.5%, as well as to pay fixed gross royalties of 3% on gold production. However, the new tax increase announced in the budget threatens this agreement, with the government now discussing plans to raise their corporate tax to 35% and royalty payment to 5%, in line with the highest current rate in the industry.

With this agreement in jeopardy, Newmont highlighted in its 2011 report “contracts with government” as one of the biggest risks to doing business in Ghana. Aboagye would not comment on the specifics of renegotiating stability agreements, but did note that, “These discussions are ongoing through the renegotiating committee handled by the government. This comprises representatives from the Revenue Committee, the Ministry of Finance and the Minerals Commission.”

SILVER LINING: While these developments have created instability, they could also contribute to a level playing field, with all operators paying the same tax and royalty rates. The government, overall, wants to establish a framework to be applied across the board. This in itself would be a welcome result of a highly divisive issue.