SARW’s RESPONSE TO THE CHAMBER OF MINES NAMIBIA MEDIA RELEASE OF 18 MARCH 2021
Re: Namibian Chamber of Mines observations on inaccuracies, faulty assumptions and allegations in the SARW Report.
INTRODUCTION AND BACKGROUND:
This document serves as the official Southern Africa Resource Watch (SARW) response to the 18 March 2021 Chamber of Mines of Namibia Media release, responding to what it called inaccurate and serious allegations made in SARW’s research report entitled “The Mineral Sector of Namibia: A Nuanced Overview of Selected key Aspects”. What does the Chamber wish to achieve with such a media release?
In its media release, the Chamber of Mines raises two main issues in an attempt to dismiss the findings of the SARW report:
- firstly, it accuses SARW of having failed to consult the Chamber during the course of conducting the research;
- secondly, the Chamber claims that the report contains inaccurate and serious allegations regarding key aspects of Namibia’s mineral sector.
The Chamber’s media release came as a surprise to SARW as the parties had made initial contact with a view to preparing for an all-stakeholders dialogue (including the Chamber of Mines of Namibia, the Ministry of Mines and Energy, civil society organisations, and mining communities) to discuss the issues raised in the report, and SARW had advised the Chamber of its willingness to engage openly on the issues emanating from the report. Also, the Chamber participated in a Webinar which discussed the report. All the issues raised were answered during the Webinar.
SARW has decided to respond to the Chamber’s media release, to expose inaccuracies and selective interpretation of the content of the SARW report. SARW would like to make it clear that the organisation supports the findings in the report.
1. The claim that SARW failed to consult the Chamber
The Chamber’s claim that it was not consulted is blatantly untrue.
SARW consulted the Chamber through its Chief Executive Officer (CEO), Mr Veston Malango. He was contacted telephonically on 17 August 2020, and he directed SARW researchers to Ms Lauren Davidson, an economist at the Chamber for assistance. Subsequent consultation took place through Ms Davidson. When the issue of non-consultation was raised by the Chamber’s CEO in a Webinar hosted by SARW to discuss the report on 16 February 2021, the CEO (who was among the panellists) was reminded that the Chamber had been consulted during the inception and drafting of the report, which he conceded.
All those who were consulted during the collection of data were invited to participate in the Webinar, which had 56 participants. The Chamber participated in the Webinar as one of the institutions that had been consulted.
SARW researchers also consulted with the Ministry of Mines and Energy through the office of the Executive Director, who directed SARW to the Mining Commissioner as head of the Mining Division to assist with data required for the research.
The Chamber’s efforts to dismiss the research findings by discrediting SARW‘s methodology do not accord with the facts.
2. The Chamber’s dismissal of the research findings
The Chamber is concerned mostly with only one aspect of the study, the taxation regime (Section 8.0, and specifically sub-section 8.2), which deals with illicit financial flows (IFF) and transfer pricing in the mining sector in Namibia. The Chamber suggests that SARW’s researchers do not understand IFF
The specific issues that the Chamber raises relate to:
- the existence of illicit financial flows in the mining sector;
- the allegation of tax policy inefficiencies in Namibia;
- the high corporate tax rates;
- low royalties and export levies;
- the windfall tax.
2.1 On illicit financial flows
The SARW report argues that (i) “there is a high risk of transfer pricing manipulation by mining companies in the country”; (ii) “Price manipulation is widespread in the mineral sector in Namibia and is carried out in many different ways; (iii) “Mining companies inflate their investment expenditure, in order to offset profits and avoid paying corporate taxes. This tax avoidance practice is rampant throughout the entire extractive sector.”
The Chamber’s position
The Chamber regards this as “a very serious allegation and most damaging to the Namibian mining industry, for which there has been no evidence provided in the report” (Chamber media release Section 4, p.7,). The Chamber “entirely refutes the defamatory allegation and reserves its rights in this connection”. The Chamber also accuses SARW of failing to present such evidence to the Chamber in a face-to-face meeting.
SARW’s report is clear on what it means by transfer pricing, and provides clear examples. SARW also took time to explain to the Chamber during a face-to-face meeting on the research report what transfer pricing and illicit financial flow is. The Chamber is oblivious to the fact that IFF results from both illegal and legal but unethical practices, and in the mining sector transfer pricing occurs mainly via tax avoidance and tax evasion practices, and corruption. The research also found that in Namibia IFF might be facilitated by technical incompetence on the part of the regulator.
Section 8, subsection 8.2 (pg 34) of the SARW report, from which the statement is developed, states that “there is a strong suspicion that, because of the high corporate tax levied on their profits, there is a high risk of transfer pricing manipulation by mining companies in Namibia. High corporate tax rates are a disincentive to mining companies operating in the country”.
Contrary to what the Chamber now claims, this suspicion is supported by evidence which is provided in the SARW report, based on information received from the Chamber of Mines annual review reports. The researchers found that, of the total corporate tax paid by mining companies in Namibia of N$1.437 billion in 2019, N$1.707 billion in 2018, and N$2.130 billion in 2017, 93 per cent of the total corporate tax paid by the entire sector in 2019, 92 per cent in 2018, and 90 per cent in 2017 was paid by one company, Namdeb Holdings (SARW 2021:35). From the interviews conducted, the high corporate tax rates were singled out as the taxes that imposed the largest burden on the mining companies’ profitability. The regulator pointed out that the high corporation taxes levied on mining companies’ profits were used by the companies to butt off any attempt by the regulator to change certain aspects of the taxation regime because the rates are too high.
It is not surprising that SARW’s research found practices by some mining companies that resulted in a reduction of their tax liabilities, or that would reduce the liability when tax becomes due in future. The study found both illegal and legal but unethical behaviours by some mining companies that resulted in a reduction of their corporation tax liabilities. Examples include:
- Paladin Energy avoided paying N$219 million corporation tax to the Namibian government when it sold 25 per cent of shares in its Langer Heinrich mine in Namibia for N$665 million to a Chinese company using a shelf company registered in Mauritius, a jurisdiction with a much lower (15 per cent) corporate tax rate (The Namibian of 2018-12-13).
- UraMin, whose anchor project was the Trekkopje Uranium Project in Namibia, avoided paying tax to the Namibian government when it was sold to Areva for US$2.4 billion in Ontario, Canada, a jurisdiction with a much lower (26.5 per cent) corporate tax rate.
iii. A base metal company currently operating in the country made sure that the company that owned the processing plant is granted Export Processing Zone (EPZ) status as a condition for investing in the project. EPZ status exempts the company from paying corporation tax, yet the same company uses an unauthorised formula to calculate the value of the ore from its mining operation that is required to pay royalties. The net effect of this formula is that the company pays lower royalties in addition to other tax exemptions that it got through the EPZ status. From 2013 to the end of 2019, this company has avoided paying a total of N$455 million, and if penalties are added, the company is supposed to pay the government of Namibia N$2.9 billion as of 31 March 2021. This is excessive leveraging and unethical practice.
- A nuclear fuel company currently operating in the country has doubled its cost of producing a pound of uranium by adding costs of unrelated goods (such as rice for example), yet the uranium is sold to a sister company overseas at a price below the operational cost. The net effect of the inflated production cost is that, the operation in Namibia is run at a loss, and thus avoids paying corporation tax. What is disturbing is that at the end of the value chain, the sister company that is producing electricity from Namibian uranium is making obscene profits. A pound of enriched uranium produces about 10 400 000 kWh of electricity, and each kWh is sold at US$0.0183 to domestic consumers and US$0.103 to businesses in China. The yellowcake from operations in Namibia produces on average 960 000 pounds of enriched uranium per year for the overseas sister company that generates electricity. This gives a total average annual energy production of 9 984 000 000 000 KWh from the operation. If this is multiplied by US$0.0183 per KWh (the price at which the electricity is sold to domestic consumers), the uranium from the Namibian operation is generating US$182.71 billion revenue per annum for the overseas sister company. Had the government participated and ensured that the benefits are accrued at the electricity fabrication stage of the value chain, the government would be realising (on behalf of its citizens) US$18.3 billion per year from its 10 per cent stake in the operation.
- After getting obscene profits from the sale of electricity generated from the enriched uranium from the Namibian operation, the sister company advances loans at a high cost to the operation in Namibia. The net effect of these high-cost loans is that the operation will have to service the loans before corporate tax is paid, thus the operation in Namibia’s tax liability is substantially reduced now, and if prices of uranium remain at the current level this operation may never pay corporate tax, especially considering that the life of mine is up until 2032/3.
- The research found legal but unethical practice by exploration companies that raise a substantial amount of money on stock exchanges anchored on a Namibian project, and retain the bulk of this money in jurisdictions with low corporation tax rates, depriving Namibian citizens. This practice is now referred to as “stock mining” by some people in the industry. An example was given of Reefton, a company that was listed on the ASX, that went to the length of announcing the discovery of uranium in an exploration license where it did not have the rights to the mineral.
vii. A precious metal company overstated the price of a grader that contributed to it getting N$1 billion tax credit.
The above examples, show clearly the high risk of transfer pricing manipulation by mining companies in the country. Does the Chamber consider this insufficient evidence of a phenomenon widespread in the mineral sector in Namibia, especially considering that such practices are carried out subtly and are very difficult to investigate, and that it is difficult to quantify the amounts lost through the practice?
If these examples in the report are not enough to persuade the Chamber that something is wrong, then nothing will. This raises serious questions as to which side the Chamber is on: the people of Nambia or the interests of foreign companies.
The Chamber must understand that an effective rate is just a tax that should be paid, but that is not necessarily what is being paid. The James Otto study on which the Chamber bases its argument is flawed because it is based on the assumption that all mining companies religiously pay all due taxes to the state. Unfortunately, this is not the case; the majority of mining companies are not paying corporate tax, yet corporate tax constitutes the bulk of the baseline tax regime. For the past four years, the sector contributed to Treasury only a third of what they are expected to contribute as per the International Monetary Fund benchmark (30 per cent of total sector annual revenue).
2.2 On allegations of tax policy inefficiency
The SARW report states that “There are no mechanisms or provisions in place in the tax code or other legislation to address commodity price volatility. The mineral legal and policy framework does not have windfall tax that enables the government to mobilise optimal resources commensurate with production on the ground when world commodity prices are high” (page 4).
The Chamber’s position
The Chamber argues that the fact that metals and minerals are taxed at a rate of 3 per cent +1 per cent (export levy and royalty rate) = 4 per cent on gross sales, this is the very mechanism that provides for price volatility and windfall taxation applied to any particular mining company. In its reasoning, the Chamber argues that, because this mechanism is in place, when prices are high revenues are high and government benefits accordingly, regardless of the profitability of the operation.
SARW authors stand by the report’s findings. The Chamber in its response fails to explain what windfalls are and the rationale behind levying a windfall tax on these resource rents. The indisputable fact about the mining projects is that they can generate huge profits (windfalls or resource rents). These huge profits (windfalls or rents) are the financial returns over and above the profits that a company requires to make the investment profitable. Windfall taxes or resource rent taxes are special taxes designed to capture part of the extra profits created when international prices of commodities boom. The rationale for windfall taxes is that mineral resources from which the super-profits are generated are finite, and once they have been mined out (depleted) they cannot be replaced. Thus, when world commodity prices are high, an opportunity exists for the state to share those extra benefits with the company, on behalf of its citizens (present and future), to mobilise financial resources for its socio-economic development programmes.
Royalties are payments made to the owner of reserves (in this case the citizens of Namibia through their government) for the right to extract those reserves on a per-unit basis. Royalties are paid whether a company makes a profit or not. Royalties rates are usually very low, about 5 per cent or less, and cannot be used as an instrument for mobilising financial resources from super-profits whose rate is usually around about 25 per cent or applied on a sliding scale. Surely there ought to be mechanisms in place within the Mining Code to measure and tax a share of these windfalls to enhance state returns in times of high profits, and adjusted to allow for adequate company returns during times of low profits.
The Chamber is being selective in its citing of Professor James Otto to advance its argument. Professor Otto said, “Any increase in taxation, other than a well-crafted excess profits tax, could shift the fiscal system into a ‘high tax’ jurisdiction which over the longer run, could result in lower government revenues as companies seek to invest their capital elsewhere”. Clearly, the professor advised against increases of any other taxes except for windfalls, as long as the tax is well-crafted.
Based on our studies on the current minerals tax regime, there is a compelling case for the introduction of a windfall tax in Namibia’s mineral sector. We contend that windfall taxes are neutral and do not affect a company’s normal profits from which it should create a future financial buffer. It is worth noting that companies do not set out to create buffers from windfalls because they do not know whether they will come or not. Given the potential that mining projects have to generate huge profits (windfalls), surely there ought to be mechanisms in the mining code to measure and tax a share of these windfalls to enhance state returns in times of high profits, adjusted to allow for adequate company returns during times of low profits.
In other jurisdictions where windfall taxes are levied on super-profits, the government and the mining companies agree on what in that particular jurisdiction constitutes a normal profit that creates a return on investment. This agreed level is subjected to normal tax deductions. However, once the level is exceeded, windfall taxes are deducted on a sliding scale as agreed between the two parties.
2.3 On tax deductibility
The Chamber’s position
The Chamber argues that the authors of the SARW report do not understand the concept of non-deductibility royalties. The Chamber argues that, because royalties are taxed on revenue, to then reintroduce the same tax after the company’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) amounts to double taxation.
SARW is of the view that the Chamber is wrong in its argument that disallowing the tax deductibility of royalties is unfavourable. This argument is self-serving because currently royalty, export levy and corporate tax as tools for resource mobilisation for the government from non-diamond mining companies are inefficient (as clearly demonstrated in the SARW report pages 18 – 19).
SARW researchers are alive to the double taxation introduced by the non-deductibility of taxes. SARW researchers are instead asking a moral question, given that some of the mining companies are not duly paying corporate income tax (for whatever reason), and that the royalties paid by mining companies are low (at 3 per cent) compared to other mining jurisdictions (such as South Africa, at 7 per cent for non-processed minerals, and 5 per cent for processed minerals). Is it morally reprehensible for the Chamber to start a debate on the non-deductibility of the royalties before these major issues are resolved? Is it morally reprehensible to levy a 3 per cent royalty on high-value minerals such as gold while the diamond subsector is levied 10 per cent? Is it morally correct for the Chamber to even start a debate on the non-deductibility of royalties while a high-value mineral such as gold is levied at 3 per cent compared to other countries such as Canada and Chile, where gold royalties are 16 per cent and 14 per cent respectively, and there are no deductible levies and charges in those jurisdictions? In neighbouring Zambia, the royalty for gold is 9 per cent, in Zimbabwe it is 5 per cent for production above 0.5kg, in Argentina 8.17 per cent, in Russia 7.7 per cent, in Ghana 5 per cent, and in Tanzania 5 per cent.
Is it just, equitable and fair for the Chamber to complain about the non-deductibility of a measly 3 per cent royalty while some of the mining companies have EPZ status and are exempted from paying certain taxes (including corporate tax)? Corporate tax constitutes the bulk of the baseline taxes. EPZ in the mineral sector in Namibia set up competing for fiscal regimes in the sector that deprived the state of substantial financial resources through tax exemptions. Generally, EPZ’s may set up competing for fiscal regimes which lead to transfer pricing abuse. This seems to be confirmed by one example given in the SARW report. Given this discrepancy, is it not self-serving for the Chamber to worry about the non-deductibility of royalties before this discrepancy is resolved? SARW authors strongly believe that the reasons why the government wants to make royalties non-deductible should be understood. These are matters that should be openly debated. There is no doubt an underlying reason exists why the government would want to disallow the deductibility of royalties. It cannot only be about corporations’ bottom-line when many Namibians continue to live in abject poverty.
2.3 On the diamond sector being highly taxed: a clear example of tax inefficiency
The SARW Report (on pages 34 and 35) provides evidence that the diamond mining sector is the major contributor to government revenue, as compared to the non-diamond sector. It uses this finding as a basis to argue that the tax policy for mining in Namibia is inefficient.
The Chamber’s position
The Chamber argues that because the “government realised that diamond mining was far more profitable than non-diamond mining and as such, it was able to afford a higher level of royalties and Corporate taxes” and “if non-diamond mining companies were to be taxed at the same rate as diamond companies (10% royalty and 55% Corporate tax), there would be no non-diamond mining operations in Namibia”. The Chamber further argues that the “non-diamond mining taxation regime is considered to be at the higher end of the total effective taxation rates for mining jurisdictions globally”, and that, “any attempt to increase that would results in a reduction of revenue to the treasury, as stated by James Otto (2011)”.
The mere fact that the government realised that diamond mining was more profitable than non-diamond mining, and could therefore afford higher tax rates, does not make the tax policy efficient. From our study, evidence on the ground suggests that only one company in the diamond subsector (Namdeb Holdings) can afford to pay high taxes. A mature and efficient mineral sector tax policy does not place the burden of paying taxes on one subsector (let alone one company as is the case in Namibia). Namdeb Holdings is burdened with paying over 90 per cent of the corporate tax of the entire mining sector. Other diamond mining companies in the subsector are not realising the same level of profits. In fact, from our study, these companies are struggling because of capitalisation issues. Higher corporation taxes increase the cost of capital, and negatively affect the decision to invest especially in smaller and marginal mining projects that would otherwise be financially feasible if the corporation tax rate was low. A lower corporation tax rate for the non-diamond mining sector in Namibia would potentially make it financially feasible for projects such as the Elbe, Joumbira, Messoppotami, Okohongo, Ontiomire, and Swartmooder to be brought into production. Bringing these projects into production would increase the government tax base and thus increase revenues to the Treasury, creating more jobs, especially given that small-scale mining employs 2.4 people per job compared to big operations where mechanisation is high.
Therefore, we contend that, high corporate taxes levied on both diamond and non-diamond mining companies in Namibia makes the tax policy inefficient firstly because it places the burden of paying the corporation taxes on one company. Secondly, it is inefficient because it makes smaller and marginal mining projects financially unfeasible, yet these have the potential to increase the financial resources to the treasury, create more employment, and contribute to poverty reduction in the country. Thirdly, a higher corporate tax rate frustrates direct domestic investment that normally targets smaller projects that are not appealing to larger multi-national corporations. Fourthly, high corporation tax rates encourage illicit financial practices, as the SARW study found – some companies were selling shares in operations in Namibia in jurisdictions that have lower corporate tax rates. For example, Paladin Energy, an Australian company, sold 25 per cent shares in its Langer Heinrich mine in Namibia to a Chinese Nuclear Energy company using a shelf company registered in Mauritius, a jurisdiction with a 15 per cent corporate tax rate. The shares were sold for N$665 million, and Paladin Energy avoided paying N$219 million in Namibia. In, 2007, UraMin, whose anchor project was the Trekkopje Uranium Project in Namibia, was sold to Areva for US$2.4 billion in Ontario Canada, a jurisdiction with a combined tax rate of 26.5 per cent (11.5 per cent Federal, and 15 per cent provincial rates). The Namibian government did not get a single cent on behalf of its citizens from this transaction.
2.4 On corporate tax rates being too high
The SARW report argues that “The mining industry considers the corporate tax levied on their profits too high; 55 per cent for diamond mining companies and 37.5 per cent for companies mining other minerals, compared to an average of 20.8 per cent in Asia. As a result of the high corporate tax, there is a high risk of transfer pricing manipulation by mining companies in the country. The country is not collecting enough revenue from the extractive sector due to possible illicit financial flows, tax evasion, and avoidance practices” (page 5).
The Chamber’s position
The Chamber argues that the taxation rate of 37.5 per cent for non-diamond mining operations was considered to be high, but reasonable when the total effective tax rate is calculated (including other taxes such as royalties and export levies), given Namibia’s low-risk profile. The Chamber further argues that the total effective taxation rate for mines in Namibia was seen to derive maximum benefit to government by establishing the optimum level of taxation.
Firstly, the effective taxation rate is the tax that should be paid but that is not necessarily being paid. Evidence on the ground suggests that only one company is paying 90 per cent of the corporation tax of the entire mining sector, 75 per cent of the royalties, and about 60 per cent of the export levies, yet its total revenue is only 37 per cent of the total sector revenue. Prof James Otto’s effective tax rate for mine operations in Namibia (the position on which the Chamber of Mines bases its argument) is based on the wrong assumption that all companies in the sector would religiously honour their tax obligations.
Secondly, evidence on the ground demonstrates that the current tax regime is not equitable because it is not mobilising optimal resources for government socio-economic development needs. According to a cross-country study by the International Monetary Fund (Fiscal Regimes for Extractive Industries: Design and Implementation, 2012), fiscal regimes that raise less than one-third of the total revenue from mining operations may be a cause of concern. The table below shows that the funds raised for (by) government from the extractive sector in Namibia, expressed as a percentage of the sector’s total revenue for years 2016 to 2019, is way below the IMF benchmark.
Funds raised through mining taxation regime expressed as a percentage of total mining industry revenue: 2016-2019
It is fallacious to suggest that the total effective taxation rate for mines in Namibia yields maximum benefit to the government by establishing the optimum level of taxation. What the Chamber is referring to as an effective rate for mine operations in Namibia only applies to bigger international companies in the sector. If you consider the smaller players, it is a marginal effective tax rate because it is taxing their last taxable dollar.
Furthermore, Precept 4 of the Natural Resource Charter suggests that revenues must be shared between the project sponsor and the state in a manner that allows the government to realise the full value of its non-renewable resources while encouraging private investment and allowing the private company to recover its operational costs. Currently, this seems not to be the case in Namibia.
2.5 On corporate tax
The SARW report suggests that, due to the high corporate tax rate in Namibia, tax avoidance and illicit financial flows (IFF) are taking place. It also states that price manipulation is taking place. This statement is supported by examples (some of which have been mentioned above).
The Chamber’s position
The Chamber argues that, because the major companies are subject to external auditing, there is no chance of tax avoidance and price manipulation.
The Chamber’s position is surprising when we know that tax avoidance and IFF are phenomena that affect even developed countries. SARW’s study found practices by some of the mining companies in Namibia that resulted in a reduction of their current and future tax liabilities. The study found illicit flows that are carried out through legal but unethical practices that seek to avoid paying corporation tax, or reduce the corporation tax liability. While legal, the study found the sale of the Trekkopje Uranium by the Canadian company UraMin to Areva for US$2.4 billion in a jurisdiction with a lower corporation tax rate to be unethical practice that deprived Namibian citizens a share of the value of their resources.
The research found it legal but unethical practice by exploration companies that raise a substantial amount of money on stock exchanges anchored on a Namibian project, and retain the bulk of this money in jurisdictions with low corporation tax rate, depriving Namibia citizens (a practice sometimes referred to as “stock mining”). The example was given of Reefton, a company that was listed on the ASX that went to the extent of announcing the discovery of Uranium in an exploration license where it did not have the rights to the mineral.
In 2014, Paladin Energy, owners of Langer Heinrich mine, bought an old company in Mauritius and used it to avoid a N$219 million tax bill in Namibia. While the company denied any wrongdoing, the matter was later the subject of an investigation by the Ministry of Finance.
The large taxpayer’s department at the Ministry of Finance at that time stated that some mining companies used schemes that reduce their taxable income. This observation led the office to initiate transfer pricing audits to determine whether arms-length principles were applied between inter-company dealings to curb tax avoidance generally. This same department uses a high thin capitalisation of 3:1 that is self-destructing. The Namibian observed that there are no rules on how long back the taxman can demand answers on tax avoiders, even if companies go free and exploit tax loopholes.
The SARW report gives details of a precious metals company that overstated the price of a grader; a nuclear energy company producing yellowcake at a loss but getting loans from a sister company at inflated prices to fund operations in Namibia, thus accumulating debt that will lower its future tax liability; a base metal company that lowers the value of its ore to its sister company that owns the processing plant and has an EPZ status, which exempts it from paying corporate and other taxes. Does this not constitute a widespread occurrence of illicit practice in the sector?
2.6 On lower commodity prices
The Chamber’s position
The Chamber argues that the SARW “report does not acknowledge that most mines in the non-diamond mining sector have at times declared losses in recent years, due to lower commodity prices and other economic factors”. It argues, “thus, owing to the cyclic nature of metals and minerals, many operations in the non-diamond mining sector have, at times, have not been in a position to pay corporate tax but continue to pay royalties and export levies even when they are in a loss-making position”.
Our study found that mines in both non-diamond and diamond mining subsectors suffered losses due to lower commodity prices. For example, Sakawe and Diamond Fields International (both diamond mining companies) suffered losses due to the 2008 fall in global commodity prices. What is disturbing is that it is only non-diamond mining companies that have been accused of engaging in unethical and illegal practices that lower their tax liabilities.
Mining companies do continue paying royalties and export levies. Royalties are paid regardless of whether the company is making a profit or not. The underlying reason for levying royalties is to pay the owner for extracting the resources and has nothing to do with profitability or commodity prices. The export levy rates in Namibia are extremely low (1-2 per cent), and cannot cover the loss that results from avoiding paying corporate tax.
SARW agrees with the Chamber that new mines are not in tax-paying position for the first few years, as provided for by the Income Tax Act. New mines need to recoup their initial capital and exploration expenditure during the early years. To our knowledge, and based on the provisions of the Income Tax Act, no Namibian mining company was not in a tax-paying position at the time of the study except for Gecko-IMERYS’s who operate the Okanjande Graphite mine. Thus, we assume that all development costs were already deducted as part of capital allowance after the commencement of commercial production in 2014 for the newest operations in the sector.
SARW agrees with the Chamber on supporting a reasonable revenue-based taxation rate (royalties, export levies). However, in our view it is not reasonable to have high corporate tax rates that the majority of companies are not paying. A lower corporate tax rate enables smaller and marginal mining projects to come into production and to contribute sizeable financial resources to the Treasury.
As for uranium operations, we disagree with the Chamber. Indisputable evidence shows that some operations are run at production costs that are double what appears in the project’s feasibility study and over-priced, and they are selling the yellowcake to sister companies overseas. The same company paid royalties at 0.47 per cent in 2017, 0.75 per cent in 2018 and 0.075 per cent in 2019, which is consistently below the legal rate of 3 per cent.
2.7 On royalties and export levies being too low
The SARW report suggests that “Royalties paid by mining companies (3 per cent) are way too low compared to other mining jurisdictions, such as South Africa, Canada, and Australia. Export levies charged by the Namibian government are way too low, at less than 2 per cent average for the 18 different mineral commodities its exports” (page 5).
The Chamber’s position
The Chamber argues that the SARW report ignores the entire taxation regime and not just the royalties, which should be viewed in terms of its attractiveness to foreign direct investment (FDI) by serious exploration companies. The Chamber also accuses the report of not mentioning anything regarding the prevailing total effective taxation rates in those jurisdictions and gave South Africa a rate of 26 per cent vs Namibia’s 37.5 per cent. The attractiveness to the investor is a function of the total effective tax rate, which as explained earlier, is high by international standards. It is noteworthy that minerals exported with little local value addition, such as dimension stone, attract a much higher export levy, of 15 per cent, to destinations outside the European Union, compared to those with higher levels of local value addition (0 – 2 per cent).
The SARW report focuses on the baseline taxation regime whose main components in Namibia are corporate income tax, royalties, and export levies. The Chamber would have wanted us to include value-added tax (VAT), import duty, and pay-as-you-earn (PAYE), which are not part of the baseline tax regime. According to IMF, the baseline tax regime of a country is supposed to collect 30 per cent of its entire mineral sector revenue.
We argue that the entire taxation regime of a country’s mineral sector should be attractive to FDI, DDI and, most importantly, mobilise optimal financial resources for the country’s socio-economic development needs. Our study incontrovertibly found that 90 per cent of corporation tax is paid by one company, 75 per cent of royalties by one company, and 60 per cent of export levies by one company. The study found that the entire sector is not contributing to the treasury as per the IMF standard (as indicated in the table on page 10 above “Funds raised by mining taxation…”).
The SARW report does not mention the effective taxation rates in other countries (such as South Africa) because the effective tax rate to which the rates in those countries are supposed to be compared is meaningless. Companies in Namibia are not paying their taxes as envisaged in the effective taxation rates. The taxation rate is just a rate that very few companies are fully paying. While the attractiveness to the investor is a function of the total effective taxation rate, this is considered high by international standards according to the Chamber. For the citizens, through their government, the attractiveness of the effective taxation rate is its ability to mobilise optimal financial resources for poverty reduction development needs, and at the moment this is not the case (as shown throughout the SARW report).
We agree with the Chamber that the corporation rates levied on mining companies in Namibia are too high. Unprocessed dimension stone is a low-value mineral and generates very little revenue for the government. Dimension stone is regarded as one of those low-hanging fruits available for direct domestic investment (DDI), and levying such a high rate, amounts to frustrating DDI. This is against the letter and the spirit of Namibia’s Mineral Policy, which seeks to promote the participation of Namibians in the exploitation of their mineral resources.
3. Further specific issues raised by the Chamber
3.1 On exported yellowcake and transfer pricing
The SARW report refers to a vertically integrated nuclear fuels company, which is mining uranium for sale to its overseas sister company at a loss. This means that the revenue from further value addition and sales of the value-added product in another country is forfeited by Namibia.
The Chamber’s position
The Chamber argues that:
- firstly, the SARW’s findings are not factual as the same entity enriches the uranium produced from its mine in Namibia and uses it to generate electricity in their home country, and not to sell it on for a value 30 times greater than the value for which it was sold in Namibia. The Chamber argues that the report uses baseless references to potential value addition of 30 times (uranium) and 1000 times (diamonds), which further undermines the findings and the credibility of SARW. The Chamber’s real concern is the 30-fold value added to the yellowcake from the Namibia operation overseas.
- Secondly, it is not economically viable to enrich uranium in Namibia, and thus local value addition is not an issue in this context. And
- thirdly there is no transfer pricing or illicit financial flow in Namibia.
Yes, we advocate for profit-sharing right at the end of the value chain. The same practice is working well in the oil industry where crude oil is refined overseas and the end value is shared between project sponsors and the government. Uranium generates huge profits at the end of the value chain. The Chamber is not correct in this regard, since the numbers are data-driven. A pound of yellowcake produced on the operation in Namibia contains 12 per cent uranium used in enrichment. That 12 per cent enriched uranium produces energy equivalent to 30.7 barrels of oil, which costs US$1535, at an average of US$50 per barrel. A pound of the yellowcake from the Namibia operation is sold to the sister company overseas for US$48. If you divide US$1535 by US$48, it gives about 31.9, and we conservatively put the figure at 30.
The argument presented in the SARW report is that the deal on the operation is poorly structured and does not benefit Namibians. It would have been much more beneficial had it been agreed that the partners share profits pro-rata at the various stages of the uranium value-chain where there is a maximum value, for example, after the enrichment where the Namibian government through its company would be getting revenues of US$1535 per pound of its yellowcake – or better still, at the very end where electricity is produced.
We agree with the Chamber that it is not economically viable to enrich uranium in Namibia. However, there is nothing that prevents the government from entering into an agreement that will ensure a pro-rata profit sharing at the end of the uranium value-chain where electricity is produced. Namibia will get its share of the electricity in cash. It does not make economic and business sense for Namibia that it only benefits from royalties and export levies on less valuable yellowcake, while a pound of enriched uranium in China is fetching revenues of about US$2 million when it is converted to electricity.
SARW disagrees with the Chamber’s position that there is not an illicit practice here. This company is producing a pound of uranium at a loss in Namibia, then selling it to its sister company overseas where it makes huge profits from producing electricity. The overseas sister company then gives expensive loans to the operations in Namibia, ensuring that they will remain unprofitable.
The cost of producing a pound of the yellowcake that the company is using is double the cost in the project feasibility study. As a result, the company is operating at a loss and avoiding corporation tax in Namibia. The huge debt the project is accumulating due to expensive loans from the overseas sister company means that the Namibian operation will avoid paying corporation tax even if the price of uranium improves to above its current production costs, as it will be servicing this debt well into the future.
3.2 On traceability of revenues
The Chamber’s position
The Chamber disputes SARW’s contention that “While mining companies publish their financials in the annual Chamber of Mines review reports, traceability of revenues generated from the sector stop once the funds enter the national coffers.” (Page 6)
We commend the Chamber for taking the initiative to publish the annual report of their finances. However, there is no traceability of the funds once they are paid over to the government.
4. The Chamber’s efforts to mobilise other parties against SARW
Despite calls by SARW for an open dialogue, the Chamber has been engaged in efforts to mobilise other stakeholders against SARW.
On 15 March 2021, the SARW authors learnt that the Chamber had proceeded to engage the Minister of Mines and Energy to discuss the contents of the SARW report. The authors are not sure whether the Chamber wanted to solicit the support of the Minister in denouncing the report or whether it was preparing for an inclusive and constructive dialogue on the issues raised in the report.
On 12 April 2021, the Chamber held another meeting with the Minister of Mines and Energy and other stakeholders in the mining sector to discuss illicit financial flows referred to in the SARW report. SARW was not invited. SARW was alerted of this meeting by some players in the industry, and was informed that participants could join. SARW researchers joined the meeting as observers, but when it was time to discuss the SARW report, the Chamber (the meeting host) removed SARW’s researchers from the meeting. The Chamber found it proper not to invite SARW but extended the invitation to the Fraser Institute from Canada, who had to wake up at 04:00 am to attend and contribute to the meeting that was discussing the SARW report.
In conclusion, SARW would like to address issues the Chamber find as libelous. The Chamber finds libelous the SARW report observations that;
- a) “Price manipulation is widespread in the mineral sector in Namibia and is carried out in many different ways. Mining companies inflate their investment expenditure, in order to offset profits and avoid paying corporate taxes. This tax avoidance practice is rampant throughout the entire extractive sector.”
- b) “Companies that pay taxes may continually record losses because they are selling unprocessed ore to sister companies at a discount.” And
- c) A precious metals company inflated investment expenditure to receive a tax credit of N$1 billion, and a grader that was purchased at a market value of N$2 million was valued at N$10 million.
The Chamber is citing the first statement from pages 5-6 of the executive summary. It wants to give the impression that the statement is categorical. This statement is developed from subsection 8.2 (page 34) of the report, which states that “there is a strong suspicion that, because of the high corporate tax levied on their profits, there is a high risk of transfer pricing manipulation by mining companies in Namibia. High corporate tax rates are a disincentive to mining companies operating in the country”. As the authors investigated this suspicion, evidence was obtained to be able to make the statement above. This evidence is given in the report.
The research found that, for the years 2017, 2018, and 2019, over 90 per cent of the total corporate tax paid by the entire mining sector was paid by one company, Namdeb Holdings (SARW 2021:35). This trend can be traced back six years. Our study found practices by some of the mining companies that resulted in a reduction of their tax liabilities, and reduction of such liability when it becomes due in the future. The study found illicit flows that are carried out through legal but unethical practices that seek to avoid paying corporation tax and reduce the corporation tax liability. These cases include the sale of the Trekkopje uranium project of Paladin Energy cited above, the overstated price of a grader that contributed to a N$1 billion tax credit, and a nuclear fuel company that produces yellowcake.
A key finding of the study is that technical incompetence on the part of the regulator is aiding illicit financial flows. From our study, the Mining Commissioner’s department does not use the project feasibility reports at its disposal to assist in its policing role. It is up to the Namibian government to strengthen the capacity of its institutions.
The various irregular activities undertaken by a number of companies expose the regulator’s serious technical incompetencies.
SARW does not consider its observations on IFF or tax evasion to be libellous. Instead, we strongly believe that these are good grounds for a constructive dialogue that includes all the stakeholders. The issues raised in the SARW report require an ethical approach and the Chamber must show a human face when dealing with these issues, and not only push for companies’ bottom line. We strongly believe that the issues raised in the SARW report are of public interest, not libellous, and require critical engagement and reflection by all stakeholders: the Chamber, the regulating bodies, the government, civil society organisations, and mining communities.
Namibia, in real terms, is not an upper-middle-income country, as it has been classified using outdated indices. The country has one of the worst wealth distributions in the world. If you remove the top 10 per cent of the richest people, Namibia falls back among its peers, who are lower-income countries. It is in fact a poor country. The government needs to mobilise all financial resources due to it for its poverty-reducing activities.
Contact for Enquiries:
SARW Communications Officer
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