RECENT TRENDS DEVELOPMENTS IN GHANAS MINING FISCAL REGIME

RECENT TRENDS & DEVELOPMENTS IN GHANA’S MINING FISCAL REGIME B. N. A. Aryee Advisor (Mining) Ministry of Lands & Natural Resources, Ghana

PRESENTATION OUTLINE • Background & Introduction • Rationale for Recent Mining Fiscal Regime Reform • Recent Trends in Ghana’s Mining Fiscal Regime • Other Developments • Guidance Questions & Answers

BACKGROUND & INTRODUCTION • Ghana is a significant gold producer in Africa (second after South Africa) and globally, being the 9 th largest producer in the world. • In 2013, Ghana produced about 4. 3 million ounces of gold, only a marginal decline from the 2012 highest ever production in the history of the country,

MINING SECTOR OVERVIEW • Investment inflows for mining from 1983 to 2013 was about US$13. 7 billion • Gold production for 2013 was 4. 3 million ounces.

OVERVIEW: MINERAL PRODUCTION

OVERVIEW: MERCHANDISE EXPORTS

MINING SECTOR OVERVIEW • The significant investment over the years and consequently mineral outputs led to an increased sector contribution to the economy of: § 28% of Government revenue as collected by the Ghana Revenue Authority in 2012 § Export revenues from the mineral sector amounted to US$5. 1 billion in 2013 & accounted for § 42% of total merchandise export in 2012 § Employed 28, 000 for large scale and estimated over 1 million people for small scale mining.

RATIONALE FOR THE RECENT REVIEW OF THE FISCAL REGIME 1 Speaking at the recent World Economic Forum in Davos, Switzerland on challenges in the mining sector, President John Mahama explained that Ghana is having “issues with the big mining companies that have stability agreements that locked in the level of royalties and taxes for us. So when gold prices rose up to a record high we could not earn more. ” • http: //business. peacefmonline. com/pages/news/201401/186799. php

RATIONALE FOR THE RECENT REVIEW OF THE FISCAL REGIME 2 • “During the recent … prices of gold, … reached their peak levels ever. Yet the country did not benefit at all from the price hikes, particularly from gold, ” • economic and social benefits provided by the mining sector did not match government’s expectations, hence its decision to review the industry’s taxes • the issue with mining was … fair and transparent sharing of benefits and windfall gains from the exploitation of the country’s precious and irreplaceable natural resources. Thus, government is taking a bold step to critically review the fiscal regimes and mining agreements, with the view of ensuring that the country benefited adequately and fairly from the gains in the mining sector. - Dr Edward Larbi-Siaw, Tax Policy Advisor of the Ministry of Finance; (May 2013)

RECENT TRENDS IN GHANA’S FISCAL REGIME ITEM SMCD 5, PNDCL 153, 1975 1986 Pre-prdn Cost Capitalization & Capital Allowances 20% initial; then 15% DB Investment Allowance ACT 703, 2006 AMENDMENTS TO PNDCL 153 TO ACT 703 AMENDMENTS 75% initial; then 50% DB 5% 20% SL 5% Loss CF Up to 5 Yrs Forex Retention [25 -80%] [25 -80% -20% Import Duties Exempt (*) 3 -6% 5% {Act 794} 25% 35% [mining] Offshore Royalty 6% 6 -12% Corp Inc Tax 50 -55% 45% APT /WFPT * 25% on 35% IRR Onshore] 35% {10% proposed) plant, machinery and equipment imported exclusively and specifically for Mining

RECENT TRENDS IN GHANA’S FISCAL REGIME ITEM SMCD 5, PNDCL 153, 1986 1975 AMENDMENTS TO PNDCL 153 ACT 703, 2006 AMENDMENTS TO ACT 703 Withholding Tax 10% 15% Capital Gains Tax 10% 15% National 2% of pretax profits(2001) Reconstruction Levy Equity Participation 10% free carried Interest ; + option of 20% shares at mkt price 10% free carried interest Stabilization Deed of Warranty on Ltd Fiscal Terms broad Stability & Devt Agreements

Revised Fiscal Provisions • During 2010 - 2012: – royalty rate increased from a sliding 3 -6 per cent to a fixed 5 per cent rate; – corporate tax rate was increased from 25 to 35 per cent; – Capital gains & Withholding taxes: 15%, up from 10%; – 80%, then 50% Declining Balance Capital Allowance; replaced by uniform 20% for 5 years regime; and – windfall profit tax at a rate of 10 percent for all mining companies was proposed, but shelved

Other Developments • Improving “Arms-length” Dealings Framework – Transfer Pricing Regulations; L. I. 2188, 2012 • Renegotiation of “Stability” Agreements, for simplification, clarity, and equity; • Amendment of Minerals and Mining Act, Act 703 of 2006, under way (& further Amendments being considered); • Formalization of Community Interests – MDF legislation almost ready for Parliament; • Improved Stakeholder Engagement, for transparency and good governance, e. g. EITI ; • Active Involvement in REC (ECOWAS) policy & legislation harmonization drives; also Continental (AU/UNECA) Initiatives; • Ghana’s Application to AMDC to support its adoption of CMV process.

SOME GUIDANCE QUESTIONS & ANSWERS

Which elements of the reform package attracted the strongest reactions from the mining companies & why? • Mining firms blackmail Ghana over windfall profit tax President John Mahama told the World Economic Forum in Davos … that his government has not been able to implement the policy due to threats from the mining companies. • “They threatened to lay off workers if we implemented the windfall tax and because we needed the jobs and you don’t want workers laid off you are coerced to go along. So these are major issues we have, … They will not allow us to implement a windfall tax in our country”, country President Mahama said. • “BAD” TIMING; GOLD PRICE DIPPED SOON AFTER PROPOSAL. http: //sankofaonline. com/mining-firms-blackmail-ghana-over-windfall-tax-4700 -illigal-miners-deported-mahama/

Which elements of the fiscal reforms proved most difficult to implement and why? • Ring-fencing provision • Act 839 (2012) had a provision requiring mining companies to match expenses from one Mining Area to revenue from the same mining area; but Mining Area as defined by the Mineral and Mining Act, 2006 Act 703 was not for tax purposes & impeded implementation. • INADEQUATE CONSULTATION AMONGST AGENCIES

Would you regard the fiscal reform exercise as having met its objectives? Yes, as shown below, Royalty collections rose dramatically between 2010 & 2012 due to the increase in rate, but impact was dampened in 2013 due to the fall in gold prices. Corporate taxes also improved due to the application of new tax rates and capital allowance. YEAR 2013 MINERAL ROYALTY GHC 364, 673, 038 CORPORATE TAX GHC 518, 545, 259 2012 359, 392, 853 893, 773, 828 2011 2010 222, 027, 706 144, 697, 345 649, 902, 536 241, 578, 780

What are the main lessons that you draw from Ghana’s mining fiscal reforms? To achieve and sustain the gains: • Need for adequate stakeholder consultations to have the desired impact • Government should be more proactive and react quickly to the changes in the mining industry, industry e. g. Government would have benefited more from gold price hikes if reforms were undertaken earlier, say btn 2008 -09 • Fiscal reforms should also aim at maximising revenue without necessarily increasing taxes eg. By facilitating (i)Broadening tax base; (ii)Diversifying mineral resource base; (iii)Enhanced value addition, beneficiation and local content & linkages in general. • Need to fashion suitable and sustainable tax system to meet the needs of small scale miners

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