tax justice academy 2015 - edgar odari econews africa
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EDGAR ODARIECONEWS AFRICA
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THE CHALLENGE81 countries driven by resources in 2011 accounting for 26 percent of global GDP, up from 58 generating only 18 percent of world GDP in 1995. 69% of people in extreme poverty are in resource-driven countries. Almost 80% of countries whose economies have historically been driven by resources have per capita income levels below the global average, and more than 50% of these are not catching up. Almost 90% of resources investment has historically been in upper-middle-income and high-income countries.
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THE OPPORTUNITY~½ of the world’s known mineral and oil and gas reserves are in non OECD, non OPEC countries. ‑ ‑Up to $17 trillion of cumulative investment in oil and gas, and mineral resources could be needed by 2030—more than double the historical rate of investment. 540 million people in resource-driven countries could be lifted out of poverty by effective development and use of reserves. Opportunities to share much of the $2 trillion of cumulative investment in resource infrastructure in resource-driven countries to 2030. 50%+ improvement in resource sector competitiveness ‑possible through joint government and industry action.
‘Mineral dependence’ in sub-Saharan Africa (2010)
www.icmm.com
30 of 48 countries in Africa
18 primarily minerals
12 primarily oil and gas
‘Mineral dependent’ countries are those where mineral exports account for more than 25% of total exports
Metals and minerals
Oil and gas
Contribution of extractives to exports in Africa (2010)
www.icmm.com
Metals and minerals Oil and gas
Unfair share: Income share of the poorest and richest 10 per cent in resource-rich countries
Africa Progress Report
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Principles of Mineral Policy since the 1980s
“Overall, the main objective of donor intervention in African mining - whether through technical assistance or investment financing - should be to facilitate private investment and help reduce the country and project-related risk for the private investor.”
World Bank, Strategy for African Mining, 1992
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“The recovery of the mining sector in Africa will require a shift in government objectives towards a primary objective of maximizing tax revenues from mining over the long term, rather than pursuing other economic or political objectives such as control of resources or enhancement of employment. This objective will be best achieved by a new policy emphasis whereby governments focus on industry regulation and promotion and private companies take the lead in operating, managing and owning mineral enterprises.”
Strategy for African Mining – World Bank, 1992
Principles of Mineral Policy since 1980s
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Mineral Development Strategy since mid 1980s
• State withdrawal from production and privatization of mining SOEs
• Emphasis on attracting foreign investment into sector– Creating enabling environment for FDI– Passage of laws, Creation of institutions and
processes deemed necessary for development of FDI based export led mineral development strategy
– Overgenerous incentives regime (e.g. tax exemptions and low rates, forex retention)
• Focus on developing minerals with export value• Revenue stream main planned benefit of mining
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Unmet expectations- RevenueBetween 2002 and 2006 average net profits of biggest mining firms increased by more than 1,400%, going up by 64% between 2005 and 2006 alone. (PWC,2007)
2003-2011 profits grew average 20% a yearIn 2010, the financial results for the Top 40
were spectacular:– Revenues increased 32% – breaking $400 billion for
the first time– Net profit was up 156% to $110 billion– Operating cash flows grew 59%, leaving more than
$100 billion cash on hand at year end– Total assets approached $1 trillion
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12Source: PWC –Mine 2012
Net profit & net profit margin top 40 mining firms
From Bryan Land (World Bank) presentation “Taxing the Minerals Industry in Turbulent Times”, 2009
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Mining industry has done well!In 2012
Revenue flat at $731 billion —a 6% increase in production volume offset by softer prices
Net profits down 49% to $68 billion
Market values down, gold miners hit especially hard
Issuance of $108 billion of debt, including $43 billion of bonds, sends gearing from 13% to 24%
Estimated 2013 capex of $110 billion, 21% lower than 2012
In 2010
• Revenues up 32% – breaking $400 billion for the first time
• Net profit up 156% to $110 bn
• Op cash flows grew 59%, with > $100bn cash on hand at year end
• Total assets →$1 trillion
• Net debt down to $46 billion, resulting in gearing of only 8%
Loopholes in benefit sharing
• Windfall gains for developing countries “have been partly offset by increased profit remittances by transnational corporations”
• “Cross country studies have shown that many mining taxation regimes are regressive with governments’ share of mining revenue of falling as the profitability of operations rise”
UNCTAD 2009
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Terms of Trade changes versus actual benefits of price increases (UNCTAD, 2008)
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Tax Avoidance
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Switzerland’s copper imports from Zambia
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Flow of Revenues Kenya
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Flow of Revenues Kenya
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Mechanism Description Number of countries Mining Petroleum
Signature bonus
Up-front payment for acquiring exploration rights. Commonly used as a bid parameter (Notably for petroleum in the US offshore continental shelf)
1 16
Production Bonus
Fixed payment on achieving certain cumulative production or production rate None 10
Royalties
Specific (amount per unit of volume produced) 2 1
Ad-valorem (percentage of product value) 17 31Ad-valorem progressive with price 1 9Ad-valorem progressive with production 8Ad-valorem progressive with operating ratio/profit 3 1
Royalty applied to operating margin (net profits royalty) 2 0
State, provincial, and/or local CIT
Rate of corporate income tax at the state, provincial,or local level in addition to federal level. Common in Canada and the U.S. as a province/state resource charge in addition to federally imposed CIT.
2 5
Variable income taxCIT where the tax rates increase with the ratio of taxable income to revenue, between an upper and lower bound
32 None
Resource rent taxes
Cash flow with accumulation rate/uplift. Can be assessed before or after CIT. 5 5
Cash flow with limited uplift on losses (UK).(surcharge tax on cash flow) None 2
Allowance for Corporate Capital None 13Allowance for Corporate Equity None 14
Other additional income Tax
Other profit taxation mechanisms that do not fall under any of the categories above 1 3
Production sharing
Fixed production share None 5Cumulative production None NoneR-Factor: ratio of cumulative revenues to cumulative costs None 13
Rate of return, pre- or post-tax None 3Production Level None 13
State participation
Free equity: government receives percentage of dividends without payment of any costs 2 None
Carried equity: government contributions met by investor and recovered from dividends with interest 3 8
Paid equity: government pays its share of costs None 19Social investments/ infrastructure
Resource companies build infrastructure or make other social investments (hospitals, schools, etc). 1 6
Number of countries 25 67
Realizing the AMV: AMDC Work Streams
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AMDC work streams Policy and regulatory frameworks
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AMDC work streamsLinkages and Diversification
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Linkages with Sectors of the Economy
DOWNSTREAMValue-additionBeneficiation
Export of resource-based products
DOWNSTREAMValue-additionBeneficiation
Export of resource-based products
UPSTREAMInputs:
Plant, machinery, equipment,
consumables, services, (export)
UPSTREAMInputs:
Plant, machinery, equipment,
consumables, services, (export)
TECHNOLOGICAL Linkages:
“Nursery” for new technology clusters, adaptable to other
sectors
TECHNOLOGICAL Linkages:
“Nursery” for new technology clusters, adaptable to other
sectors
INFRASTRUCTURE:Puts in critical
infrastructure (transport, energy) for other non-
minerals economic potential
Using wasting assets to underpin growth in
sustainable sectors
HRD, R&DHRD, R&D HRD, R&DHRD, R&D
SIDESTREAMResource
knowledge & physical
infrastructure
SIDESTREAMResource
knowledge & physical
infrastructure
Stabilisation Clauses • INTANGIBILITY CLAUSES: These clauses commit the parties not to modify
the contract except with the express consent of the parties. • FREEZING CLAUSES: Such clauses limit the applicability of domestic laws
for the contract to the law that was applicable at the date of the conclusion of the contract. – COTCO-Cameroon Establishment Convention for Chad-Cameroon pipeline
which contained a commitment ‘not to modify the legal, tax, customs and exchange control regime in such a way as to adversely affect the rights and obligations of COTCO.
• CONSISTENCY CLAUSES: These clauses repudiate the applicability of domestic legislation of a host state to the extent that such legislation is inconsistent with the investment contract. Any law found to be inconsistent is inapplicable.
• ECONOMIC EQUILIBRIUM CLAUSES: Any alterations to the terms and conditions of the contract must have renegotiation intended at restoring the original economic balance or in default of that payment of compensation. West African Gas Pipeline Company
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Stabilisation Clauses (Cont..)• International Project Agreement (Benin, Ghana, Nigeria & Togo) – West
African Gas Pipeline; Any regulatory change that “has a material adverse effect on the company” or one which “causes the benefits derived by the company from the project or the value of the company to the shareholders to MATERIALLY DECREASE” would oblige the parties to “restore the company and/or the shareholders to the same or an economically equivalent position it was or they were in prior to such change” or institute “prompt, adequate and effective compensation”.
• ISSUE-SPECIFIC STABILISATION CLAUSES: Investment contracts also contain some clauses that address specific issues such as clauses for the stabilisation of the fiscal regime or those that stabilise regulation of tariff structures in the case of public utility projects.
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