Ghana: Mining earmarked for tax overhaul

Buoyed by high international mineral prices, Ghana’s mining sector continues to post solid growth, with revenues for gold, which remains the country’s biggest export, up by 28% last year. However, concerns are mounting that the government’s plans to overhaul the industry’s tax structure, including the introduction of a new windfall tax, could deter foreign investors.

The Ghana Chamber of Mines reported total mineral revenue from its members – which produce more than 90% of the country’s mineral output – reached $4.78bn in 2011. This has come on the back of sustained high global demand for gold, which accounts for 90% of the mining sector’s activity.

The decision of some producers to focus on project expansion rather than maximising production meant total output decreased by 2% in 2011. However, figures from the Bank of Ghana show that gold exports for the first three months of 2012 inched up to a healthy $1.5bn, while prices for the commodity rose around 30% last year.

However, the improved revenues have provided only a muted boost to public coffers and with per-ounce prices continuing to defy gravity, the government has made moves to try and increase the amount of value it retains from its extractive industries. Due to the rollout of extremely generous terms in the 1980s, which were implemented in a bid to stimulate upstream investment, Ghana only retains a lower-than-average 5% of its total mineral production.

That has not stopped the sector from serving as one of the country’s primary revenue pillars, of course – mining represents 38.27% of total company tax collected by the Ghana Revenue Authority in 2011. However, along with other producers such as Australia, the government has introduced legislation to increase tax rates, which – coupled with expectations that gold prices will remain high – look likely to further boost revenue collection from exploration this year.

Under the plans, the government will increase the corporate tax rate for mining operators from 25% to 35%, reduce capital allowances and, controversially, introduce an additional 10% windfall tax.

The tax reforms are a key component of the government’s drive to ensure Ghana reaps more rewards from its natural resources on the back of high mineral prices. In particular, it plans to channel mining royalties into community development, with a bill that will establish a Minerals Development Fund currently awaiting parliamentary approval.

But while industry players acknowledge the importance of boosting economic returns, they also highlight the need to ensure Ghana retains its position as a competitive destination for mineral exploration investment.

Toni Aubynn, the CEO of the Ghana Chamber of Mines, believes the increased tax burden could not only put off investors, but also lead to some of the country’s biggest mine operators rethinking their expansion plans.

“The mention of forthcoming windfall taxes without a clear explanation of how they will be applied has created a non-existent cost for the industry,” Aubynn, told OBG. “If the government decided to go back now and announce that there will be no windfall taxes, this would bring a great deal of stability to the sector and to foreign investors.”

A further move by the government to begin reviewing the stability agreements signed with mining operators Newmont and Anglo Gold Ashanti, which were drawn up to secure their investments and determine specific benefits, has also prompted questions from some industry players. Concerns have been raised that a major revision of these agreements could put Ghana’s image as an attractive destination for mining at risk.

Producers are already feeling the impact of rising costs in gold production, according to the chamber. It said the cost of producing an ounce of gold in Ghanaian mines increased by almost 10% between 2010 and 2011, with the average aggregated cash cost rising from $684 an ounce to $751.

While some of its plans may be sending ripples through the industry, the government is also working to boost local involvement in the sector, which remains dominated by foreign expertise.

Efforts are under way to improve the level of mineral processing carried out in-country, increase value-added activities and drive up local participation. The industry was recently given a boost when the chamber identified 27 minerals that could be locally processed.

Parliament is also expected to pass a local content bill to determine and specify the level of local involvement it expects from foreign companies operating in Ghana’s oil and mining sectors. The government estimates that around 34% of the value of annual mineral exports should eventually revert to local companies providing associated mining services.

Ghana’s government is keen to ensure that the country enjoys more of the economic benefits of its mining industry, particularly across the regions. Its challenge, however, will be to strike a balance between increasing the demands it makes of foreign mining operators and maintaining an investment-friendly environment as it looks to encourage industry expansion and attract funding for new ventures.