Unabridged Response to "Mines on tax honey moon" published by the Namibian on 26 April, 2019
In the article published by The Namibian newspaper, titled “Mines on tax honeymoon” on 26 April 2019, The Chamber of Mines has identified a number of a gross contextual and factual misrepresentations. The article can only be deemed as irresponsible journalism with potentially dire consequences to the economy. It is therefore our duty as the Chamber of Mines of Namibia, to correct the multitude of contextual and factual flaws;
1. Firstly, it is neither accurate nor appropriate to compare the amount of corporate tax paid by mining companies with the gross earnings or revenue generated by the industry. Corporate tax is paid on net taxable profits. Any comparison of revenue with corporate tax paid is bound to be misleading, given the capital-intensive nature of mining, and more importantly, the differing levels of maturity and profitability of mining companies. All companies in Namibia, including mining companies, are permitted to write off their development capital expenditure over a period of three years, for tax purposes. This encourages Foreign Direct Investment (FDI) and assists companies to reach bankable feasibility and required return on investment for their projects. This is not an abnormal concession by GRN, it is normal practice throughout the world.
2. Companies such as Namdeb that have been operational for decades, have written off their initial capital expenditure many years ago, and as such, their taxable income is far higher than it would be, for example, for a new mine or a mine that has only been in operation for a few years. In the case of diamonds, not only are our diamond mines and operations mature, but generally diamond mining by nature is far more profitable than low grade precious or base metals mines. A common misperception in Namibia is that we have a rich endowment in mineral resources. Namibia operates some of the lowest grade mines in the world as there are very few high-grade mineral deposits. Namibia is rich in low-grade resources and these resources could only become economically viable given an attractive taxation regime.
3. The journalist uses income (revenue) and profit/loss interchangeably. It is most regrettable that the author of the article refers to the flow of revenue to the state coffers without differentiating between the respective amounts of revenue that are derived from Royalties and Export Levies payable on gross sales on the one hand, and Corporate taxes payable on taxable profits, on the other. This inconsistency provides factually erroneous and misguided information to the reader, pressure groups and policy makers, which could lead to dire and unintended consequences to the national economy.
4. In comparing the revenue derived from the diamond industry and that derived from the non-diamond industry (mainly precious and base metals), the journalist states “Namdeb therefore paid about 95% of the N$11 billion corporate tax paid by all mining companies which had a combined revenue of N$ 146 billion over the same five year period”. The author misleads the reader by implying that corporate tax is based on revenue and not profits, as mentioned in (1) above, the author fails to explain that the 55% statutory corporate tax rate charged to diamond mining operations is in addition to the 10% royalty on gross sales payable by diamond miners. This compares to the 37.5% corporate tax rate and 3% royalties plus 1% export levy on gross sales paid by the non-diamond mining companies. Not only is the diamond industry required to pay far higher taxes, but the revenue to the treasury is also supplemented by the dividends payable to GRN owing to its 50% partnership. The author conveniently ignores this fact.
5. It is clear that the effective taxation rates (including royalties, levies and corporate taxes) of the diamond industry are completely unsustainable in the long term and are likely to bring about the premature closure of Namdeb’s land-based operations with the loss of many thousands of jobs. In comparison to other regional jurisdictions, Namibia’s corporate tax rate for mining is considerably higher. As an example, South Africa has a corporate tax rate for mining companies of 28% (excl. gold) and Zambia has a corporate tax rate of 30%. It is thus incorrect to state that non-diamond mining companies are “raking in billions” as the billions referred to here are gross sales of the industry (revenue) and not the profit/loss of the industry.
6. Should GRN reduce the taxation levels for the diamond industry to more sustainable levels of total effective taxation, the continued employment of thousands of Namibians would be secured and the country would make better use of its mineral endowment for the longer term future of Namibians. The Chamber has pointed out to GRN on many occasions that the total effective taxation rate for the mining industry (at well over 80% for diamonds and over 50% for the non-diamond industry) is at the tipping point of no longer being attractive for FDI into Namibia. Contrary to the opinion of the author of the article, this is more a case of killing the golden goose than a case of “mines on a tax honeymoon”.
7. In the article, the author refers to GRN’s concern that mines are guilty of transfer pricing and tax avoidance schemes. It is most regrettable that the so-called “extractive industry expert” Jaqueline Taquiri, states that “mining companies pay little to no taxes when they use schemes such as overpricing sales, excessive interest deductions, and the under-evaluation of mineral exports”. Our response to this is that the so-called expert clearly does not realise that overpricing sales would in fact lead to more taxation, not less. Furthermore, all large mining companies undergo intensive scrutiny to satisfy the stringent requirements of stock exchanges and the International Financial Reporting Standards, let alone the scrutiny by the local Receiver of Revenue. To effectively state that the large mining companies are being devious and outright dishonest, is grossly ignorant, misinformed and irresponsible, given the damage that this type of statement could cause. Large mining companies strictly abide by all national and international taxation regulations. The Ministry of Finance and its Receiver of Revenue are encouraged to review each of the country’s mines to dispel such harmful rumours for once and for all.
8. To correct the author, according to the Chamber of Mines records, royalties alone (excluding other taxes) paid by non-diamond mining Chamber members for the period 2012 – 2017 amounted to N$1.7 billion, while diamond mining companies contributed N$6.095 billion during this period. The total amount paid by chamber members for this period was N$7.799 billion.
9. Furthermore, in order to place the mining sector’s real impact on the economy into perspective, it is important to understand what happens to mining revenue and where it goes. According to Chamber statistics, on average, 20% of the revenue and well over 50% of the profits generated by the mining sector is paid over to GRN’s coffers. This comprises of corporate tax, royalties and levies on gross sales, dividends to GRN and personal income tax (PAYE) paid by individuals employed by the mining industry. PAYE would not be paid to GRN if the mining company did not exist. In addition, there is the massive local procurement spend by the industry, which is on average 40% of revenue (sales) each year. A further contribution by industry is its enormous voluntary Corporate Social Investment (CSI) spend, far higher than any other sector of the economy. Most of our members have fully-fledged CSI departments contributing many millions each year to the support and development of health, education, livelihoods and the environment. Net wages and salaries paid to Namibians employed by the sector accounts for an average of 13% of mining revenue annually. Expenditure on national utilities accounted for another 6% in 2017, while the industry also makes significant investments into exploration as well as skills development and training. It can thus be factually concluded that over 79% of all mining revenue stays within Namibia’s borders and is not distributed back to the mining companies, as the article incorrectly states. Clearly, the mining industry makes a disproportionate contribution towards the economic growth of our nation.
With a view to the facts and the correct contextual background presented above, the Chamber of Mines would like to stress that GRN has been effective in extracting the maximum value from its mineral endowment to date. Any further taxation demands on the industry would undoubtedly push the industry beyond the brink and result in the untimely demise of the industry, as has been experienced by so many of our neighbours. Let’s grow the cake rather than kill the golden goose.