Introduction The mining sector is an important segment of the Ghanaian economy and has played a significant role in the country’s socioeconomic development since the colonial period. Historically, the mining sector’s contribution to gross foreign exchange, particularly gold, has only been paralleled by the cocoa sector. Consequently, the mining sector has witnessed intense policy reforms and restructuring since the dawn of the country’s structural adjustment programme in the early 1980s. These reforms have led to increased investment in the sector, increased new mines coming on-stream, ballooning minerals output and sales value, especially the gold sub-sector. The sector therefore, presents strong potential to generate substantial revenue and employment enough to provide more visible economic benefits to the country and improved livelihood for the population. The quantum of revenue and related benefits that a nation can exact from the mining sector depends on the provisions of the national mining legislation, particularly, the fiscal regime, which defines the quantum of taxes and incentive packages for investors in the sector, in addition to resource availability, market prices and global profitability of the industry. Resource availability is not in contention, as outline above. Similarly minerals commodities have enjoyed consistent price boom, accompanied by increased global profits in the industry in the last five years or more (PriceWaterhouseCoppers, 2007). However, there is strong scepticism as to whether the mining sector’s fiscal regime presents opportunities for increased government revenue from the mining sector for Ghana. That, despite surgical mineral commodity prices, the contribution of the mining sector to the national economic is clearly not visible. Many have argued that the current state of the Ghanaian economy does not suggest that there has been a significant positive impact. The country is unlikely to meet the Millennium Development Goal (MDGs) of reducing poverty by half by the year 2015. There is also conclusive evidence to suggest that poverty is acutely pervasive. The country is placed relatively low on the UN Human Development Index, ranking 131 out of 171 countries in 2006 (UNDP, 2006). The question then is, how can the sustained minerals commodity price boom increase national revenue from the mining sector? This study explores the impacts of Ghana’s mining sector policy reforms on government revenue mobilisation and examines how the range of taxes, tax incentives and other fiscal concessions defined in the fiscal regime of the mining code have impacted on government revenue generation, national development and poverty reduction efforts, particularly in communities affected by mining activities. The study investigates why government revenue from the sector has not kept pace with commodity

1

boom. Computation of potential revenue losses from royalty have been used to illustrate government revenue leakage from the sector. The paper concludes with policy recommendations that could help grow the country’s tax base from the sector. The conclusion is that the range of capital allowances, list of mining related equipment and items exempted from customs and import duties, the non payment of capital gain taxes, value added taxes (VAT), dividend withholding taxes, corporate income taxes, the huge offshore sales revenue retentions and the payment of royalty at the lowest allowable rate constrain government revenue generation and resulting in less visible contribution of the sector to national economic development. Similarly, constrained employment capacity of modern mining methods, increased expatriate staff quotas in the mines and the negative environmental and social impacts of mining activities on local mining communities have contributed to dwarf the contribution of the sector to national development and poverty alleviation. Overview of Ghana’s Mining Sector Ghana’s mineral potential and the country’s contribution to global minerals output, especially gold is well acknowledged. The mining sector is an important segment of the Ghanaian economy and has played a significant role in the country’s socioeconomic development since the colonial period. The country was one time, a leading producer of gold in the world and accounted for about 35.5 % of total world gold output between 1493 and 1600 (Quashie et al., 1981, p38). However, the country’s share of world gold output has since dwindled over subsequent years. Ghana currently ranks around tenth in the global league of major gold producers but is still the second largest gold producer in Africa after South Africa. The country is significantly endowed with varied other mineral resources including manganese, diamond and bauxite that are currently under commercial exploitation. Silver is produced as a by-product from gold mines while aluminium is produced from imported alumna. Ghana also has considerable inventories of iron, limestone, salt, and various other industrial minerals. There is also growing potential for commercial gas and oil exploitation, with announcements of significant discoveries of off-shore oil in June 2007, slated for exploitation in 2010. Gold, however, is by far the most important mineral currently being exploited. Gold accounts for, on the average, 90% of total value of minerals won (Akabzaa 2007). The mining industry, on the whole, accounts for over 50% of foreign direct investment flows into the national economy since the commencement of reforms

2

under the Economic Recovery Programme (ERP) in 1983. Statistics on the mining sector’s contribution to the national economy vary from year to year. On the average, it accounts for about a third of gross foreign exchange and about 5 percent of gross domestic product (Table 1). Its contribution to government tax revenue is around 4%, while its contribution to labour employment is about 0.7% of working age population (UNCTAD, 2005; Baah, 2005). Policy and institutional restructuring that have culminated in renewed investor confidence and exploration and mining boom in the last two decades in Ghana are equally well documented ( Jonah, 1987; Coakley, 1999; World Bank 1999, Aryee, 2000; ECA 2002; Akabzaa, 2000). These reforms were part of the World Bank and IMF prescribed structural adjustment package adopted by Ghana and majority of African countries in the mid 1980s to fight decaying economic performance. Ghana’s reform success and the boom in the mining sector in particular reverberated locally and internationally and received charitable frontpage headlines in both local and international media. The government, multinational mining companies and international financial institutions, particularly the World Bank Group and the International Monetary Fund (IMF) fronted Ghana as a trailblazer of the African mining industry. Table 1: Gross Value of Mineral Export from 1984 -2007

Exports

1984

1990

1995

2000

2001

2002

2003

Gold (US$) 103.3 Total Minerals Exports (US$) 115.3

201.6

647.3

702.0

617.8

689.1

830.1

242.3

678.9

756.0

691.4

753.9

893.6

Total Exports (US$) 567.0 Minerals as % of Exports 20.34 Gold as % of total Exports 18.22 Gold as % of All Minerals 89.59

896.7

1,431.2 1,936.3 1,867.1

2,015.2 2,602.6

27.02

47.44

39.04

37.03

37.41

34.33

22.48

45.23

36.26

33.09

34.19

31.90

83.20

95.35

92.87

89.36

91.40

92.90

2004

2005

2006

840.2

945.8

1277.25 1,733.80

880.0 995.2 2,739.2 2,836.2

2007

1371.7 2 1815.40 3,726.7 4,194.7 36.8

43.3

32.1 30.7

35.1 33.3

34.3

41.3

95.5

95.0

93.1

95.5

The key trust of these reforms sought to: improve the competitiveness of the sector for private foreign investment; create, modernise and resource key mining sector governmental institutions necessary to provide critical support to the mining industry and to ensure swift response to investor demands. Institutional 3

reforms included establishment of the Minerals Commission as one-stop centre for the promotion of mining investment, including the issuance of mineral rights; the strengthening of Geological Survey Department to provide critical baseline geological information on prospective mineral grounds to investors; Mines Department to provide improved supervisions to ensure health and safety standards and to collate critical production records from the mines for the purposes of monitoring and evaluation of performance of these mines. Major policy initiatives included the promulgation of the country’s first independent mining code, the Minerals and Mining Law, PNDCL 153, of 1986. This law was revised in 2006 as Minerals and Mining Act, Act 703. The minerals code provided for the streamlining of all mineral rights licensing procedures, a favourable competitive fiscal regime, and the establishment of minimum quotas for minerals sales to be maintained by companies in offshore accounts, among others. The sector has attracted nearly US$ 6 billion worth of direct foreign investment (FDI) at the close of 2005, accounting for nearly 60% of FDI flows to the national economy during the period. The country now boasts of 16 operating mines and over 150 local and foreign companies with exploration licenses, mainly in the domain of gold. Total mine output for all major minerals mined increased several fold. Annual gold production increased from 282,299 ounces in 1984 to 2,143,000 ounces in 2005 and surged further to 2,629290 ounces in 2007, bauxite from 44,169 tonnes to 606,700 tonnes in 2005 and to 1,033,368 tonnes in 2007, manganese from 267,996 tonnes to 1,719,589 tonnes, and to 1,305,809 tonnes and diamond from 341,978 carats to1,065,923 carats, and 839,235 carats, during the same period. Total annual mineral exports increased from US$115.3 million in 1984 to US$995.2 million in 2005 and further to US$1,793,343,307 in 2007. Gold as the most important sub-sector for over 90% of total value of mineral exports recoding as much 95% in 2007, largely due gold prices boom. The Fiscal Regime of Ghana’s Mining Sector. The fiscal regime defines an array of taxes, rents, fees and tax incentives to foreign investors in the mining sector. The quanta of these taxes and incentives have mirrored policy changes in the mining sector since independence. Since the onset of structural adjustment programmes adopted by the government in 1983 to date, there has been progressive reduction in tax rates and increased fiscal incentives to mining companies (Table 2). The fiscal terms of the mining sector were well elaborated in the Minerals and Mining Law, PNDC Law 153, 1986. However, since 2000, they have been removed and consolidated into the Ghana Internal Revenue Act, Act 592, 2000 and its subsequent amendments.

4

In 2006 there was a new minerals code replacing the 1986 act and its accompanying amendments. The fiscal provisions of this new act which are not significantly different from the old code, except the removal of additional profit tax and the reduction of the range of royalty rate from 3% to 12% to 3% to 6% . The provisions of the new Act are yet to be consolidated into the Internal Revenue Act, and there are also no legislative instruments for the implementation of the new Act yet. For the purposes of this work, the fiscal terms provided by the 1986 Minerals and Mining Law are discussed since they are still in use. Tax Incentives Prominent among these incentives include: generous capital and investment allowances that allow mining companies to write off 80% of total investment against revenues in the first year of investment and the balance depreciated at 50% in subsequent years. The law provides for carry forward losses. This provision allows companies to carry forward any deducted capital allowances that exceed existing revenue for that year to subsequent years. There is no time limit to how long losses can be carried forward. Considering the fact that mining is a capital intensive venture, such high percentage depreciation allowances affords companies the opportunity to carry forward losses sometimes beyond ten years, thus providing virtual tax holidays for the companies. Given the fact that surface mines have an average lifespan of between 10- 15 years, most companies often deplete their resource without paying taxes. Table 2: Comparison of the fiscal and related provisions of the Minerals and Mining legislations from (1975 to 2006). Items Incentives and Taxes Initial capital allowance Subsequent capital allowance Investment allowance Carried forward Losses for purposes of taxation Off-share Retention of sales Mineral duty Import duty Foreign exchange tax Import license tax or import levy Gold export levy

SMCDa5 1975

PNDCL 1986

20% 15%

75% 50%

75% 50%

5%

5% Up to five years

NA

25% to 80%

5% Up to five years 25% to 80%

5-10% 5-35% 33-75% 10%

Exempt Exempt Exempt Exempt

Exempt

Exempt Exempt Exempt Exempt

Exempt

Exempt

Exempt

153

Amendments to Law 153

ACT 703, 2006

5

Corporate income tax Royalty Withholding tax Capital gain tax A.P.T.* National Reconstruction Levy Others Govt. equity participation in mining lease

50-55% 6%

NA NA

55%

45% 3% to 12% 10% 10% 25%

35%

2% of before tax profits(2001) 10% free carried interest with option to buy additional 20% shares at market price

Fees a

25% 3% to 6% 10% 10% 0% 0%

10% free carried interest, no option for acquisition of further shares. See table 2 for details

Supreme Military Council Degree 5.

*Additional Profit Tax Source: (PNDL 153, 1986; Minerals and Mining Act 703, 2006;

IRS Act 592, 2000)

The industry is exempted from the payment of import and export duties on a range of items defined in a mining list of over 500 items. Companies are provided relatively high immigration quotas on number of expatriate personnel to be recruited; exemption of expatriate remittances from taxes imposed by any enactment regulating the transfer of money out of the country and free transferability of convertible currency (Mining and Minerals Act 2006. p 13-14). It also provides for flexibility in royalty and corporate income payment schedules and particularly empowers the Minister responsible for mining to use his discretion to grant any request from distressed companies for deferment of payment of royalties. Mining companies could maintain negotiated levels of their gross mineral sales in offshore accounts, ranging from 25% to 100%. In addition, the state has been restricted to10% mandatory equity participation in all mining investment, with the option of increasing its participation to 20%, but paid for at a commercial price (Akabzaa and Darimani, 2001). Additional Profit Tax (APT), which was introduced in 1986, was removed. This tax was designed to be paid if a mining company exceeds a specified rate of return in a given year. This is a typically unique tax in the mining and petroleum sectors, designed to ensure government participates in any windfall, commonly in situations of very high metal or petroleum prices, as is the situation today. Taxes, Fees and Rents The range of taxes and fees to be paid by mineral rights holders are listed below and briefly defined in (Table 3). (i) Mineral rights fees (ii) Ground rent 6

(iii) Property rates (iv) Mineral Royalties (v) Corporate Tax (vi) Dividends (vii) Capital Gains Tax as a potential liability of the companies. (vii) Taxes on interest payable to non-residents (viii) Taxes on management and service fees payable to non-residents; (ix) Stamp Duties on transactions such as loan security documents; (x) Customs Duties (xi) National Health Insurance Levy. In addition, companies pay a range of fees categorized into: (a) purchasing application forms, (b) processing of applications for mineral rights, (c) execution of mineral licences and mining leases, (d) obtaining approvals for assignment or mortgages of mineral rights or interests therein and (e) searches in the records of the Minerals Commission. Table 3: List of Defined Rents and Taxes provided by Act 703*. Fiscal Element Exemption Fees Licensing Fees 1. Reconnaissance License 2. Prospecting License 1. Mining Lease Royalty

Corporate Income Tax Withholding Tax Capital Gain Tax Dividends

Description Paid to the MC to receive exemption for duty free imports Fees paid to obtain mineral rights For reconnaissance exploration rights For prospecting/Detail -exploration rights For mining rights Production base tax by mining lease holders to the government through the Internal Revenue Service

Tax on Net profit of company Tax on dividends to shareholders and on management fees paid to contractors Tax on profits on sale of mine assets or mine Government share of dividends

Ground Rent

Annual payment by mineral right holders to land owners or to the Office of the Administrator of Stool Lands, in the case of stool land

Property Tax

Rates levied on immovable property of mining companies including machinery

Amount/Quantum

US$10,000 US$15,000 US$30,000 3% of value of minerals won (although law state a sliding scale of 3% to 6% 25% of Net profits 10% on paid dividends and fees 10% of Capital Gains 10% of declared dividends 10,000 cedis/ha or prospecting license holders and 30,000 cedis/ha for mining leas holders Variable. Annual rates set by by-laws

7

and equipment Assemblies

to

host

District

Stamp duties 1. 2. 3.

Granting of prospecting license Granting mining lease Transfer of license or lease

4.

Principal security

5.

Collateral security

6.

Transfer of security

5,000 cedis 50,000 cedis 1% of value of consideration 0.5% if amount secured 0.25% of amount secured 0.25 of amount secured

*

The defined fees are nearly unchanged from those defined by PNDCL 153, except royalty and corporate income tax. Source: Source: (PNDL 153, 1986; Minerals and Mining Act 703, 2006; Tilton et al 20002)

Drivers of Policy Regimes in Ghana’s Mining Sector Developments in the mining industry, throughout times, have been spinned by global trends, characterised by private multinational control, dominated by British business, during the colonial times. Since the dawn of globalisation, the industry has been shaped by International Financial Institutions, particularly the World Bank Group (WBG), the International Monetary Fund (IMF), major multinational mining companies and their home governments. The World Bank Group and IMF, in particular, have been critical in Ghana’s policy shift from state intervention in the economy to a system that has and allowed market forces to determine resource allocation. This is indeed the trust of the structural adjustment thesis that ensured the reorientation of development policies that consigned the state to providing an enabling environment for market driven and private enterprises-led economic growth. The conditionality of structural adjustment lending that included trade and exchange rate reforms, the review of national investment priorities, privatization of public-sector enterprises, and fiscal policy reforms, as asserted by Songsore (2003, p159), left no important sector of Ghana’s economic life untouched. The mining sector was one of the favoured sectors targeted for these reforms, and has continued to receive even more reforms since their initiation in 1983. The Breton Wood Institutions have systematically acted to reduce the role of the state in mineral resource management, devising effective strategies to deal with what may be perceived as the risks associated with state dominance in the mineral resources sector through specific mining sector reforms. These reforms included: changes in mining sector legislation to make the sector attractive to foreign

8

investment; increasing fiscal liberation of the mining sector; strengthening and reorientation of government support institutions for the mining sector; privatisation of state mining assets; and other mining sector legislative changes (World Bank, 1992). The World Bank provided financial resources to facilitate these reforms covering a number of operational areas. In the early 1980s, as part of the IDA’s support for the ERP, about US$50 million was spent on the mining sector for promulgating the 1986 mining law and rehabilitation of three gold mines ran by the state. The second was the Export Sector Rehabilitation support, granted in 1988. This was the Bank’s first lending tailored exclusively to the mining sector. The stated objectives of this project were to (i) rehabilitate economically viable mines, (ii) help attract private investment in mining, (iii) strengthen the governmental agencies dealing with the mining sector, and (iv) increase the benefits to the country from small-scale mining. The third Mining Sector Development and Environmental Project, was to enhance the capacity of the government institutions to carry out their functions of administering mineral rights, providing reliable and modern geological information and encouraging and regulating investment in an environmentally sound manner and supporting viability and reducing environmental impacts of small-scale mining operations (World Bank, 2002; 2003). The reforms in Ghanaian mining industry were not a specific innovation for Ghana. Indeed, they reflected global neo-liberal thinking that sought to increase the power and leverage of multinational corporations and proscribe the power of the state, with the World Bank and IMF acting as effective conduits for the delivery of these goals. After having piloted with a number of countries such Ghana, for the African regions, Peru, for Latin America and Caribbean, and Papua New Guinea for Asia, in the 1980s, the World Bank Group through its continent wide Strategy on mining documents (World Bank 1992, 1996) outlined a set of reform measures that were considered imperative for mineral endowed developing countries if these countries were to attract substantial foreign direct investment. The documents clearly spelt out country-based mining development strategies with private investors owning and operating mines; sale of existing state mining companies; strong show of commitment to follow private sector based development strategy; evolution of mining sector fiscal regimes which are consistent with the taxation of other sectors of the economy, but recognising the special features of mining and that such taxes should be earning related rather than output or input related and must take account of tax levels in other mining countries and that there should be clauses for stability agreements that would insolate companies from future government actions that might hurt them. Mining Investment and Development and Fiscal Stabilisation Agreements

9

The minerals and mining Law of Ghana provides for fiscal stabilisation agreements and mining investment and development agreements. These agreements are suppose to be signed by mining companies with mining leases to specific mining prospects and the minister of mines, but will have to be ratified by parliament. The practice in Ghana is that these agreements are ratified by a parliamentary select committee on mines, rather than the whole house. The act provides for companies to negotiate stability agreements to ensure that the mineral operator, for a period not exceeding 15 years, is not affected by new legislative enactments and amendments that would adversely their operations. In addition companies with investment portfolios exceeding US$500 million may negotiate development agreements with the government. Such agreements would enable companies negotiate specific rates and quotas for royalty, expatriate employment, schedules for royalty payments etc (Minerals and Mining Law, 2006. p22 -23). In cases where the law has stipulated specific fiscal elements in the form of minimum and maximum values, companies have exacted the maximum, in terms of concessions or incentives and the minimum, in the case of payment to government. The agreements also provide for deferment of payment of royalties and other taxies, non payment of ground rent and licences fees and the retention of substantial quotas of exports in offshore accounts. These exemptions include non payment of other taxes imposed by Internal Revenue Act, Act 592. These relate to withholding taxes on payments to non-residents, on interest on loans (at the rate of 8%); payment of fees for management and technical services (at the rate of 15%); and withholding taxes on the payment of dividends at 10%). Companies, by law, are expected to pay royalty tax on a sliding scale of 3% to 12%, however, all companies pay the minimum of 3%. Similarly, companies may retain 25% to 80% of the gross sales in offshore accounts, however, in their negotiated agreements, companies have achieved between 60- -100% quotas for themselves. Records from Ghana’s Central Bank suggest that, on average, companies keep 71.2% of their export earnings in offshore accounts. In simple terms the retained (returned to Ghana) value of minerals exports is about 28.5%. In absolute terms, in the year 2000, gold exports accounted for 702 million US dollars. This represented 36.6% of the total gross foreign exchange of the country that year. However 519 million US dollars of the total gold revenue for that year, representing 74% of gross gold export value for that year was maintained in offshore accounts and only 183 million US dollars, representing 9.5% of the value of gold exports that year was returned to the country. In other words, although the gold sector accounted for 36.6% of total gross foreign exchange, foreign exchange available to the country from the sector was 9.5%.

10

The ability of a company to exact more favourable fiscal concession depends on the size of the company and the project. The bigger companies exact much more concessions than smaller companies because of their clout. For instance, Newmont Ghana Limited by the investment agreement they signed with the government, is required to pay royalty at the minimum rate of 3% on the total value of gold won, and in the case of mining in forest reserves, they would pay a royalty rate of 3.6% (Newmont Investment Agreement, 2005). They are similarly exempted from payment of Value Added Tax (VAT) on all items they import and for all foreign and locally purchased services and supplies to the extent used in connection with operations.

Transparency and Law enforcement in the mining sector The key to prudent management of the country’s extractive resources are the principles of transparency, accountability and the democratic participation of citizens in decisions and choices that have to be made in respect of transactions in the mining sector. This can only be achieved if citizens have unfettered access to information. Public perception of the level of transparency in the mining sector is that it is very low. There are barriers to information access due largely to strong inertia on the part of some mining companies and some government agencies to disclose information on mining transactions. The most daunting task is information disclosure from both mining companies and national revenue management agencies. Apart from inertia from the aforementioned agencies, confidentiality clauses ensure that the public has no access to fiscal stability and investment and development agreements, concluded between the mining companies and the government. There are, in addition, generic tax confidentiality laws that prohibit a third party from receiving information pertaining to the details of tax payments One process in Ghana that is facilitating increased transparency and accountability is the Ghana’s Extractive Industry Transparency Initiative GEITI), that seeks to implement the global EITI project in Ghana. The initiative is aimed at ensuring the consolidation of revenue and payment information into a readily understandable format and easily accessed source, thereby improving quality of data coming to the public domain. Because EITI is an international standard, a country that is listed as being “EITI compliant” is required to meet a series of internationally agreed upon criteria on improving transparency with performance independently monitored via validation. Greater accountability of government’s, companies, and civil societies via EITI can improve trust among the groups. By providing a platform for communication among all stakeholders, EITI can facilitate the development of consensual solutions to problems and thereby reduce the risk of conflicts.

11

Ghana formally signed on to the EITI in 2005 and has been implementing it. Ghana has so far produced three reports, authored by an independent aggregator; an inception report and two aggregated reports. The work of the aggregator has unveiled a number of challenges that would have to be addressed if the country is to maximize national benefits for signing on to the initiative. These problems relate to transparency and law enforcement challenges in the mining sector. The report of the Aggregator for 2004 and 2005 fiscal years point to the fact that different gold mining companies report different revenues for bullion sold on the same day and calls for the government to ensure standardization. There are a number of potential sources of differences that could lead to the problem observed by the Aggregator. Mining companies sell their bullion under different refinery and sales contracts. The refinery charges vary and are often specified in the contracts and deducted before payment. These contracts often specify that payment be made, typically, for a certain level of refined product at the price announced in the morning or afternoon trading at the London Bullion Market on the day of delivery to the refinery or a specified number of days later. In other words, though they use spot prices, these prices could differ, depending on whether one is using the morning or afternoon fix. Refinery charges are specified in the agreements and are to be deducted before payment. Tsikata (2008) has pointed out additional challenges with respect to minerals such as diamond, bauxite and manganese, for which there are no published prices. According to him, for these minerals, standardization may not address the problem; secondly standardization might not confront challenges posed by companies engaged in hedging transactions that do not utilize spot prices. These observations constitute a clarion call for government to look seriously at transparency issues relating to refinery and sales contracts of mineral transactions. Evidence of Discrimination against Other Sectors? The fiscal regime generally contains discriminatory clauses that present disparity in the payment of a variety of taxes with differing quanta. They vary according to the type of industry and geographic location of the investment. Mining, Agricultural, and the Housing Sectors of Ghana are, particularly, much more favoured than other industries. The mining industry is exempted from the payment of import and export duties and Value Added Taxes (VAT) on a range of items defined in a mining list of over 500 items. The sector also enjoys higher

12

quotas of expatriate employment and reduced taxes to be paid by these employees. The mining sector is particularly favoured with respected to protocols for capital allowances write-of (depreciation regimes). The industry is granted much more accelerated write-off rates than other sectors. Capital allowances granted are spelt out in the IRS Act, 2000, Act 592. The depreciation rates are categorised into three different pools of items with rates of 20%, 40% and 80% respectively, in the first year and 50% of remaining balance in subsequent years. Mining and petroleum exploration and exploitation activities attract the highest rate of 80%. Similarly, mining companies are exempted from payment of tax on the income of expatriates workforce which is typically 25% of the gross income of the individual. There is a stamp duty chargeable on instruments providing security for loans , according to the Stamp Duty Act, 2005 (Act 689), at the rate of 0.5% in respect of principal security and 0.25% in the case of additional security. This could yield significant amounts in the case of loan financing for large mining projects, however, mining companies have through negotiated stability agreements received exemptions on the payment of stamp duties. Similarly under the National Health Insurance Act, 2003 (Act 650) a levy of 2.5% is imposed on the production, supply or importation of goods and services however, mining companies have received exemption from this tax for all plant, equipment and spare parts for mining.

Constraints to Government Revenue Maximisation One of the most reliable fiscal elements for revenue generation to government during the last two decades had been royalty payment based on three percent of the quantity produced or gross sales, and independent of profitability. Royalty therefore has the advantage of been a more stable source of government income than taxes on profits which may fluctuate widely, or may yield no revenues at all. However, it has been one of the most contentious taxes. Mining companies consider royalties highly unfair as they do not consider profitability and having the disadvantage of constituting a cost of production (Otto et al., 2006). In fact many mineral rich countries in Africa, Latin America and Asia such as Zambia, Tanzania, South Africa, Chile, Peru and Indonesia, have recognized the role of royalty in government revenue extraction from the mining sector and are changing mining sector fiscal policies to accommodate higher royalties. Nearly 80% of government revenue from the mining sector in Ghana comes from royalty (Akabzaa, 2004), table 4. It has been observed that Ghana does not maximize its royalty tax revenue due to collection difficulties. Royalty is charged as a percentage of the total value of

13

minerals won, however, inconsistencies in valuation of minerals won makes revenue tracking more difficult. Similarly, lack of uniformity in pricing of gold and other mineral commodities produced by mining companies has led to variation in the computation of royalties, while the application of different exchange rate regimes by mining companies for the payment of mineral royalties have produced distortions in the computation of royalty (Boas Associates (2006). The fiscal arrangement allows for companies to defer or delay royalty payment with permission from the sector Minister. Such requests are commonplace and the granted delayed or deferred payment of royalties has often affected government projected revenue streams and consequently government plans for such revenues. Another significant source of tax revenue to government from the mining sector is employee income tax (PAYE). However the full impact of this source to government revenue is limited by a number of reasons. First, the income generated from local labour in the mining sector accounts for a relatively small share of the total value of production. This is because all mines coming on stream are surface operations that use capital-intensive techniques in their operations rather than adapt to the factor endowment of the Ghanaian economy. Secondly, while in Ghana the income tax law provides for the taxation of all revenues, whether national or expatriate, in practice investors have obtained exemption or reduced taxation on the income of their employed expatriates in their negotiated investment agreements. Corporate income tax receipts are relatively low. The incentives provided in the fiscal regime have particularly diminished corporate income taxes liabilities of mining companies. The result is that corporate income taxes constitute less than 4% of government receipts from the mining sector. The GEITI report emphasized the constraints impeding the mining sector to contribute significantly to national revenue. The report revealed that only two and four companies paid corporate income taxes for 2004 and 2005 fiscal years. No mining company paid capital gain taxes, although nearly all mining projects in the last ten years have changed ownership. Similarly no company paid additional profit tax and withholding taxes (Boas and Associates, 2007). The Government also obtains dividends from the profits made by mining companies through its equity participation in mining companies. Before the 2006 mining act, government equity in mining ranged from 10 and 30%. There was progressive sale of these shares from 1997 to 2000. Since most mining companies do not declare profits, the government certainly cannot maximise revenue streams from this facility. The new mining act constrains government equity to 10%. This will significantly reduce government income from this source. Table 5

14

shows the dividends paid to the government from 1990 to 2002 in Million US dollars. Table 4: Contribution of mining to Revenue Collection by IRS (in billions of cedis)

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Corporate Royalti income es 2.83 0.82 4.56 4.39 7.21 20.39 9.16 9.87 14.45 31.12 15.79 24.81 23.50 68.14 100.33 235.95 215.66

1.89 3.02 4.55 7.49 12.78 20.91 35.49 34.59 49.84 48.62 118.74 127.36 153.45 194.39 215.74 269.90 316.25

PAYE

2.65 4.81 7.95 16.83 25.02 31.02 27.84 59.24 76.11 101.46 141.05 134.36 154.37 182.71

NRL

4.25 26.47 16.78 53.19 19.52 15.83

Total mining Taxes 4.72 3.84 9.10 14.54 24.81 49.29 62.74 77.85 95.31 107.58 193.77 232.53 304.89 420.36 503.62 679.73 730.50

Mining as total IRS collections 8.9 6.3 12.2 12.8 14.9 17.9 14.8 12.9 12.1 11.9 13.7 11.9 10.7 11.0 9.4 11.0 9.66

15

Table 5: Government Revenue from Dividends (Millions of US dollars) Yea r US $

199 0 2.1 8

199 1 3.8 2

199 2 2.8 5

199 3 8.0 3

199 4 6.2 8

199 5 6.4

199 6 7.6 1

199 7 4.3 2

199 8 2.1 8

199 9 0.5

200 0 -

200 1 1.0

200 2 -

Source: Minerals Commission

Institutional Capacity Constraints In addition to the fiscal elements which constrain the maximization of government revenue from the mining sector, institutional capacity constrains and apparent lack of inter-sectoral collaboration have also contributed to the problem. The Internal Revenue Service (IRS), that has responsibility for internal tax collection, and the Customs Excise and Preventive Service (CEPS) with responsibility for collection of export and import taxes have demonstrated capacity constrains. GEITI inception report pointed to lack of formalized contacts between the IRS and other mining sector agencies for the reconciliation of figures related to royalties is a source of worry. The IRS, in addition, has no dedicated desk to deal with mining issues and does not keep separate accounts for revenue receipts thereby making tracking difficult. CEPS has representatives at the mine sites to check on the quantity and quality of gold won, however they can only ascertain the weight. They do not determine the fineness/grade of gold bullion produced (Boas Associates, 2007) and indeed, have no capacity to do so.

Fiscal and Related Concessions, National Development and Poverty Reduction Imperatives There is general agreement that significant success had been achieved in attracting foreign direct investment and expanding activities in Ghana’s mining sector, leading to increased mine output . However, according to (UNCTAD, 2005), “attracting FDI in the mining sector is only part of the story. The other is to assess the impact in terms of wider economic and developmental gains to the state and the population at large. As minerals are considered national assets and are non-renewable resources, their exploitation is closely linked to the exercise of national sovereignty, and the underlying philosophical presumption is that the owner of these assets should derive maximum benefits from any surplus generated. However, governments typically have a wider set of economic considerations in mind when designing strategies to best exploit these assets,

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aiming to maximize the value of locally retained earnings, creating forward and backward linkages to the rest of the economy, transferring technology and creating jobs, minimizing environmental damage and social impact, and expecting firms, regardless of their ownership, to compensate for damages incurred”. An examination of two decades of radical reforms in the mining sector shows that Ghana has not been able to solve it’s major problems, beyond the increase of investment inflows and the absolute number of mining projects coming on stream. The over all result of low taxes, minimal local purchases and labour incomes is that the industry’s contribution to government revenue is grossly dwarfed by the sector’s share of gross foreign exchange earnings. In 2001 tax revenue from mining was US$31 million, representing about 4% of total government tax revenues (World Bank, 2003). In all, government revenue represents nearly 6% of total value of mine production. The mining sector’s share of corporate taxes in the country has equally been dwarfed by other sectors. It accounts for less than 2% of total corporate taxes, compared to 29% for the financial sector, 10% for commerce and 16% for manufacturing (ISSER, 2004). According to the World Bank (2003) various tax allowances means that corporate income payments by mining companies are minimal, despite their combined turnover in excess of US$600 million in 2002. The incentives accorded mining companies have greatly limited the share of government revenue from the mining sector and constrained the opportunities for government to mobilize adequate resources to fund social and development programmes. Mining has consequently not fulfilled its poverty reduction role and poverty reduction has not been mainstreamed into mining policies. The large-scale mining sector in Ghana has demonstrated low capacity for labour absorption. The sector’s share of total employment of the working age population is only 0.7%, compared to agriculture 55%, trade 18%, manufacturing 12%, according to the Ghana Living Standards Survey report of 2000 (GLSS, 2000). The major reasons for the relatively poor labour absorptive capacity include the weak linkage between the mining sector and the rest of the national economy and the shift from labour-intensive underground mining to capitalintensive surface mining. The statistics show negative correlation between labour employment, on one hand and mineral output, export values and number of mines, on the other hand, from the period between 1986 and 2007. While exports and mine output surged between the periods, mine labour decreased from 21,270 to 14, 310. In the period between 1950 and 1965, the total mine employment averaged 40,000, nearly three times the labour figures for 2007. Equally, while there is growing reduction in the levels of employment in the sector, the quota of expatriate employees in the

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sector keeps growing as a result of increased migration quotas for expatriate staffing in mining prescribed by the mining code. The percentage of expatriate staff to Ghanaian senior staff increased from 8.8% to 13.3% from 1994 to 2007. The growing number of expatriate workforce in the mining sector has been a cause of concern for segment to the Ghanaian public and has recently been described as ‘recolonialisation of the mining sector’ through the recruitment of expatriates to replace Ghanaian workers by the Member of Parliament for Obuasi (Daily Graphic, 2006 p. 14) In a recent Social Watch Reports, poverty situation in Ghana was brought to focus (Social Watch, 2005). It states that economic conditions represent one of the most important threats to human security in the country. It highlights growing poverty and inequalities in access to social services, resulting from years of neoliberal economic reforms. More recent studies attest to exacerbation of the trend. According a survey by the Ghana Centre Development (CDD-Ghana), two-thirds of Ghanaians face economic uncertainty (CDD, 2002). There is growing mass formal unemployment and underemployment and widening of the gab between the poor and the rich. Despite a series of debt cancellations following the country’s declaration of its HIPC status, the national debt still stands over $6 billion dollars. The mining code is silent on measures that might be required to effectively deliver mining benefits to local communities directly impacted by mining and protect physical environment and, particularly, the rights of vulnerable segments of the populations. Widespread poverty is a common and a growing phenomenon in mineral resource endowed districts of the country. It is unlikely that Ghana can meet the Millennium Development Goals (MDGs) of reducing poverty by half by the year 2015. Indeed, there is conclusive evidence to suggest that poverty is acutely pervasive in the country. Quantifying Lost Tax Revenue to the State It would have been relatively easy to quantify the tax revenues lost to government due to tax concessions provided to mining companies if information was easily available. However, as discussed in the section above, it is extremely difficult to access information from both government ministries and agencies and mining companies that could enable these computations. It is clear that due to the broad array of tax incentives many mining companies do not pay a range of taxes and fees. Apart from the fees, most of these taxes are a function of profitability of the business, which is difficult to ascertain. In the light of these constraints, publicly available information has been applied to calculate lost royalties to illustrate the extent of tax revenue leakage from the mining sector, just to scrap the tip of iceberg.

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Revenue Losses from Royalty The Minerals and Mining Law, PNDCL 153, 1986 and the new Minerals and Mining Act of 2006, Act 703, provide for the payment of royalty in respect of mining operations calculated on the basis of the total revenue from minerals produced. A rate ranging from 3% to 12%, in the case of the 1986 law and 3% to 6%, in the case of the 2006 Act, of the total value of mineral produced is payable to government as royalty tax. The precise rate applicable for a particular mine for a given period is determined according to regulations prescribed by the Minister. In the case of the 1986 law, these regulation are the Minerals (Royalties) Regulations, 1987 (L.I. 1349), which set out a formula for determining the applicable rate. The advantage of a formula is that it regulates rate setting in a predictable manner.

Table 6: Calculation of Royalty Revenue Loss to Government (1990-2007)

Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Total

Total Mineral Export (US$) 232.30 351.80 388.70 473.60 588.20 678.90 641.30 612.88 717.81 749.11 755.95 691.40 753.90 893.70 904.54 1034.76 1371.72 1815.40

Royalty (3%) 6.97 10.55 11.66 14.21 17.65 20.37 19.24 18.39 21.53 22.47 22.68 20.74 22.62 26.81 27.14 31.04 41.15 54.46

Royalty (6%) 13.94 21.11 23.32 28.42 35.29 40.73 38.48 36.77 43.07 44.95 45.36 41.48 45.23 53.62 54.27 62.09 82.30 108.92

Min. Lost revenue 6.97 10.55 11.66 14.21 17.65 20.37 19.24 18.39 21.53 22.47 22.68 20.74 22.62 26.81 27.14 31.04 41.15 54.46

Royalty (12%) 27.876 42.22 46.64 56.83 70.58 81.47 76.96 73.55 86.14 89.89 90.71 82.97 90.47 107.24 108.54 124.17 164.61 217.85

Max Lost revenue 35.25 36.09 45.17 56.38 63.82 56.59 54.31 67.75 68.36 68.24 60.29 69.73 84.63 81.73 97.04 133.56 176.70 163.39

12924.57

387.74

775.47

387.74

1550.95

1163.21

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In a recent report of the independent Aggregator, reconciling companies’ payments and government receipts, observed that no company has paid more than 3%, even at times of high metal prices. He identifies high capital allowances and the admission by the IRS, the tax collecting authority, that it has no competence in using the formula as reasons for the status quo. With the Enactment of Act 703, new draft regulations are being considered by the Minerals Commission in consultation with stakeholders. However, it is unlikely that it will address the concerns of the Aggregator. In this calculation, payable royalty amounts are compute based on the scale of 3% to 12%. We calculate the amount payable for applied royalties of 3% (the minimum payable rate, 6% (average payable on the scale) and 12% (maximum payable rate). It is clear from Table 5, that between 1990 and 2007, the country lost revenue of between US$387.74 and US$1163.21 from the mining sector from non optimisation of royalty receipts from the sector. Annual revenue loss from royalty from 2005 was more that 50% of total annual debt services payment of the country, while annual revenue lost from royalty alone far exceeded the annual HIPC relieves for the period. From 2002 to 2007, total royalty revenue losses represented more than 10% of the total national debt (Table 7).

Table 7: Revenue Loss from Non Payment of Royalty at the Maximum Allowable level compared to HIPC relieves and Debt Services Payment

2002

2003

2004

2005

Max Royalty Lost Ghana’s Debt 204 126.14 182.61 224.74 services Payment 62.4 81.1 109 HIPC Relief NA Source: ISSER (2007). State of the Economy in 2006 pp102 84.63

81.73

97.04

133.56

2006

2007

176.70

163.39

164.34

NA

NA

NA

Conclusions Progressive policy reforms in the mining sector in Ghana has led to phenomenal foreign investment and increased production, resulting in unprecedented total gross sales value from the sector, largely bolstered by surging mineral commodity prices, particularly gold. The mining sector in Ghana has a dominant potential to contribute to national development efforts. However, the sector’s contribution to government revenue

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has not grown with the same pace, and the over all impact of the sector to national economic, despite the mineral commodity boom is not very visible. The study concludes that the range of capital allowances, list of mining related equipment and items exempted from customs and import duties, the non payment of capital gain taxes, value added taxes (VAT), dividend withholding taxes, corporate income taxes, the huge offshore sales revenue retentions and the payment of royalty at the lowest allowable rate constrain government revenue generation and resulting in less visible contribution of the sector to national economic development. While globally, the industry is reporting historic profit levels and dividends to share holders, many mining companies in Ghana are reporting losses in their accounting books, depriving the government of all profit based revenues such as corporate income taxes, dividends and dividend withholding taxes. Similarly, the constrained employment capacity of modern mining methods, the increased expatriate staff quotas in the mines and the negative environmental and social impacts of mining activities on local mining communities have contributed to dwarf the contribution of the sector to national development and poverty alleviation. In addition, capacity constraints on the part of government agencies with oversight responsibilities for revenue mobilisation, in particularly, has allowed some mining companies to exact disproportionate concessions to their advantage in negotiated investment and stabilisation agreements. In another vein, capacity constrains resulted in lack of standardisation in finery contracts with strong variations in prices used to compute government revenue, particularly royalty, for transactions taking place during the same period. The study shows that royalty constitute the most secure and assured tax revenue from the mining sector, because of its non- profit base nature and the fact that it is easies to collect, and therefore provides the bulk of the tax revenue from the mining sector. Policy Recommendations 1. In assessing the implications of the new mining code for the Ghanaian economy, no one can question the positive strides relating to increased productivity in the sector. However, an evaluation of the contribution of the sector to employment creation, to government revenue, net foreign

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exchange retained in the national economy and the social and environmental impacts of the upsurge in mining activities, paint a quite different picture. The framework of recent mining legislation in the Ghana which generally seeks to encourage foreign investment is not necessarily compatible with the attainment of social and economic development and the protection of the environment. Ghana therefore needs to undertake a complete evaluation of the fiscal regime and investment and stabilisation agreements in the mining sector if the country is to grow its tax base from the commodity boom. It will require re-examination of the Minerals and Mining Law and review of mining contracts. 2. In designing a new regime for the sector, government should consider capacity constraint of the mining sector governmental oversight agencies. The new regime should adopt and emphasise taxation systems that are simple to collect and less manipulative by companies. Royalty and other production based taxes are recommended. Since there is apparent lack of capacity for government tax authorities to apply sliding-scale tax rates, it is recommended that fixed royalty rates in the neighbourhood of 5 to 6 percent of total value of mine output be used. 3. The current fiscal provisions have no clear mechanisms for communities’ participation in revenue sharing. Thus while mining communities bare the heavy brunt of the negative impacts of mining activities, they seldom have opportunities to benefit from mining revenue. Efforts at re-engineering these fiscal regimes should have clear provisions for communities’ direct participation in minerals revenues. 4. The study shows that the implementation of Extractive Industry Review Imitative (EITI) in Ghana has helped to highlight some of the major challenges to the maximization of government revenue from the sector. Although the EITI has its own challenges, it should be encouraged. It has particularly identified the problem of information access in the mining sector as a major challenge to transparency and accountability in the sector. It should be important for the country to have in place an EITI law that will give legal backing to the process. The law should facilitate citizens’ access to information on contracts, revenue, production data, etc. It should mandate the publication of extractive resources related contracts and should require disclosure and public access to all contracts relating to the participation of the state or any enterprise or entity owned or controlled in whole or in part by the state. Making contracts public ensures the integrity of negotiations, which in turn ensures that contract adequately accommodate national and citizens’ interest.

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5.

The variation of prices used by mining companies in their refinery contracts and in the computation of royalty should be a cause for worry and echoes the need for standardisation of the sector. The problem of standardization could be ensured if the Minister who has the power to grant licenses for exports or sale of the mineral produced, exercises these powers on terms that allow for a designated Government institution with appropriate expertise to verify that these agreements contain arms-length terms. In the case of minerals such as diamonds, bauxite and manganese, without published prices, there must be transparent agreement on the terms of sales of these commodities using international best practices. In addition, standardised accounting format should be used in the sector to minimise these distortions.

6. Given the tendency for mining companies to compare fiscal regimes of mining codes in the individual countries, provoking competition and “a race to the bottom” among these mineral producers, efforts should be made to ensure harmonisation of mining codes, especially the fiscal provisions of these codes. These harmonisation processes should have strong citizens’ participation and should be aimed at ensuring maximization of national and communities’ take from the extraction of the continent’s resources. There are currently such harmonisation efforts at ECOWAS, SADC and ECA, the AMP under NEPAD levels, these should be encouraged and efforts made to ensure effective citizens’ participation. 7. Political opportunities exist that serve as good conduits to advocate for these changes. Currently regional and sub-regional initiatives are engaged in debating the extractive sector and its role in the economic development of the continent with strong emphasise on revaluation of mining codes. At the individual country level, some countries have processes in place to reexamine exiting mining contracts. These present opportunities for invention.

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References African Peer Review Mechanism (PRM), 2004. Report of the Ghana process: African Peer Review Mechanism. Akabzaa T. (2004). African mining codes, a race to the bottom. African Agenda Vol.7 No. 3, p62-63. Akabzaa, T., & Dariamani, A., (2001). A study of impacts of mining sector investment in Ghana on mining communities. Report prepared for the Technical Committee on Structural Adjustment Participatory Review Initiative (SAPRI) on Ghana. 65p Akabzaa, T.M. (2000) Boom and Dislocation, Environmental and Social Impacts of Mining in the Wassa West District of the Western Region of Ghana, Accra: Third World Network-Africa Publication Aryee, B.N.A. (2001). Ghana’s mining sector: its contribution to the national economy. Resources Policy 27, p61-75. Baah, A., (2005). Assessing labour and environmental standards in South African multinational comapnies in the mining industry in africa: the case of Goldfields South Africa. (In Pillay, D (ed) Mining Africa, comprehensive report on south African MNCs labour and soical performance) p176-179. BOAS and ASSOCIATES (2006). Ghana EITI Inception Report BOAS and ASSOCIATES (2007), Ghana EITI First aggregated Report Centre for Democracy and Development, (2005). Government expenditure budget is a façade –CCD, Chronicle Newspaper, December, 19, 2005. Daily Graphic, (2006). MP Expresses concern about expatriates in mining sector. Saturday June 10. p14. E. Aryeetey, B. Osei, and D.K. Twerefou, 2004. Globalization, employment and livelihoods in the mining sector of Ghana. ESSER Occasional Paper, 46p. Economic Commission For Africa, 2002. Managing Mineral Wealth. Training materials on “management of mineral wealth and the role of mineral wealth in socio-economic development”. . p15-25

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Economic Commission for Africa, 2002. Managing mineral wealth: Training material on “management of mineral wealth and the role of mineral wealth in socio-economic development. Economic Commission for Africa, 2005. Improving public participation in the sustainable development of mineral resources in Africa p12-15 G.J. Coakley, 1999. The minerals Industry of Ghana. In the U.S. Geological Survey Minerals Year Book. Area report International, 1007 Africa and Middle East, Vol. III. The U.S. Department of Interior. Ghana Living Standard Survey (GLSS) (2000). Ghana Statistical Service (GSS). (2000). Population and Housing Census. Internal Revenue Service (IRS) (2000). Internal Revenue Act 2000, Act 592. Newmont Investment Agreement (2005). Newmont Agreement for the development of the Ahafo Project.

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