Sierra Leoneans are impoverished by dodgy mining agreements

Sierra Leone Telegraph: 12 December 2011

The Timbergate dust is yet to settle, after the political fracas caused by a TV documentary, exposing the country’s vice president colluding to defraud the state. Two of the culprits in the corruption scandal, acting as agents for the vice president have evaded justice, with the help of the good offices of those running the country.

But few in Sierra Leone believe that justice will be served. The Anti-Corruption Commission is presently busy indicting the Mayor of Freetown, along with senior officers of the capital city’s local authority, after investigations revealed serious fraud and corruption at the city council.

Meanwhile, another Report, exposing dodgy mining agreements signed by the government – allowing mining companies to exploit the country’s vast mineral wealth, with very little return to the people of Sierra Leone has been published.

The Report – ‘Not Sharing the Loot’ is published by the Danish Development organisation – DanWatch, in association with Sierra Leone’s civil society group – Network Movement for Justice and Development (NMJD).

Whilst this new Report may be excruciatingly embarrassing for former British Prime Minister – Tony Blair, who is not only said to be a close friend of the president of Sierra Leone – Ernest Bai Koroma, but a champion of good governance in Africa, for the people of the country this is just another nail on the coffin of their battle against poverty.

Sierra Leone is ranked among the poorest countries in the world – at 158 out of 169 on the UN Human Development Index in 2010. Over 70% of the population lives on less than one dollar a day.

Government’s debt to public sector workers, which is estimated at hundreds of millions of Leones in unpaid salaries and benefits, is growing rapidly. Refuse collection and street cleaning in the capital Freetown is once again becoming a major health risk.

Mountains of rubbish seen ten years ago on major roads in the capital Freetown, are fast returning. Widespread intermittent supply of electricity and water, is adding to a general feeling of misery and impoverishment in the country.

Yet the government says there is no money. In 2002, the bulk of the country’s debt was written off by the international community and IMF. Today, the country’s debt is well over $800 Million and rising. Poverty is on the increase despite vast natural resources.

According to the DanWatch Report; “Government revenue from the mining industry in Sierra Leone is limited compared to the importance of the industry to the country.”

“Particularly, revenues from corporate income tax and royalties are low, which is surprising as the prices of the minerals exported from Sierra Leone have more than doubled over the last five years, and therefore companies are expected to generate profits that should be taxed.”

“The limited tax contribution from the mining companies has huge implications for poor people in Sierra Leone.”

The Report found that:

In 2010 the mining industry accounted for almost 60% of exports (US$200 million), but only 8% (US$24 million) of government revenue came from the mining sector.

Government revenue from mining accounted for only 1.1% of GDP.

Indirect taxes are the largest contributor to government revenue, while corporate income tax, lease and licenses and royalties constitute less than half of total government revenue.

The biggest exporter of minerals – Sierra Rutile pays as little as 2.2% of its export value to the government of Sierra Leone.

Royalties are potentially the biggest source of government revenue from the mining companies. However, Sierra Rutile has reduced its royalty rate from 3% to 0.5%.

Mining companies in Sierra Leone have negotiated advantageous agreements with the government, to keep their payments to the government of Sierra Leone low.

 

Contracts are not in accordance with the newly established Mines and Minerals Act. The top five mines in Sierra Leone are part of company structures with excessive use of low-tax and high-secrecy countries, also known as tax havens, which are particularly useful for moving profits out of countries of operation and reduce corporate income tax payments.

Four of the five reviewed mines in Sierra Leone, Koidu Holdings, African Minerals, Sierra Mineral Holding and Sierra Rutile, are owned through intermediaries based in tax havens – such as Bermuda and British Virgin Islands.

Despite increasing global mineral prices, mining companies in Sierra Leone hardly declare any profits, and therefore corporate income tax revenues are only US$ 2.4 million or 10% of total government revenue from the mining sector.

Only one of the top five mines – Sierra Rutile, is paying corporate income tax.

Besides the limited economic contribution, mining impacts adversely on local communities and the environment.

In order to ensure objectivity, transparency and fairness in conducting their research, DanWatch obtained data and information from several credible sources, including; the National Revenue Authority (NRA) of Sierra Leone; the Government’s Poverty Reduction Strategy Paper: Progress Report 2008—10 (PRSP); sales and export figures reported in the annual reports of companies; trade statistics from International Trade Centre (ITC) – a joint agency of the World Trade Organisation and the United Nations; press releases and media articles.

DanWatch also notes that; “The report is conducted and published in accordance with international standards for the conduct of journalists, which includes the right of fair comment and criticism. The analysis of each company has been sent to the company in order to check facts and hear their comments. African Minerals, Sierra Rutile and Vimetco (owner of Sierra Minerals Holding Ltd) have been helpful in this regard.”

The most serious indictment made by the Report is with respect to the poor levels of revenue generated by the government from mining.

The Report says that:

Government revenue from mining is collected through various payments of royalties, taxes and levies. The payments and rates are stipulated in the Mines and Minerals Act of 2009 and the Income Tax Act of 2000. These Acts constitute the fiscal and legislative framework for mining in Sierra Leone.

However, some of the companies have negotiated special agreements with the government, granting them tax concessions or other benefits. The most important sources of government revenue from mining are:

LEASES AND LICENSES

To explore and mine an area a company needs to hold a mining license and a lease, for which a fee has to be paid to the government. In 2010 mining leases and licenses accounted for US$4.4 Million or 19% of government revenue from mining.

ROYALTIES

Royalties are charged by the following percentages on the market value of minerals:

• Precious stones (diamonds): 6.5 % for large scale miners and 3% for small-scale miners. For special stones, which are defined as those with a market value above US$ 500,000 – the rate is 15%.
• Precious metals (gold): 5%
• All other minerals: 3%

Royalties from rutile, bauxite, diamond, and gold accounted for US$3 Million or 13 % of government revenue from mining.

In contrast to profit-based income taxes, royalties are generally considered difficult to evade and easy to administer. But Sierra Leone has difficulties monitoring the production and exports of mining companies. In this regard, diamond-smuggling is a particular challenge.

CORPORATE INCOME TAX

According to the Income Tax Act of Sierra Leone, corporate income tax rate for mining companies is 37.5%, while the general company tax rate is 30%. However, London Mining Ltd only recently had their tax rate revised from 6% to 25%. The agreement with African Minerals also sets the rate to 25%.

If the chargeable income of a company is below 7% of turnover, the mining company shall pay a minimum income tax of 3.5 % of turnover. Sierra Rutile has negotiated a minimum turnover tax of only 0.5%, while African Minerals is totally exempt from it.

Corporate income tax in 2010 accounted for only US$2.4 Million or 10% of total mining revenue.

This might include payments of US$1.5 Million from London Mining, erroneously booked as corporate income tax. If these are deducted, total corporate income tax from mining would only account for 4% of government revenue.

WITHHOLDING TAXES

Withholding tax obliges the payer to withhold a certain percentage of that payment as taxes to the government. For example, when a mining company pays interest on a loan, it is to withhold 15% of the amount as taxes. A range of withholding taxes applies to the mining sector:

• on interest 15%
• on dividends 10%
• on rents (e.g. on machinery) 10%
• on payments to resident contractors 5%
• on payments to non-resident contractors 10%

Withholding tax on payments to non-resident contractors is the largest source of government income from mining companies. This accounts for US$7.8 Million or 33% of total mines revenue.

Since the publication of this Report in October 2011, there has been no official response from the government as was the case in the alarming ‘Land Grab Report’, which shows that foreign investors are not only exploiting precious land belonging to poor communities, but with very little or no return to those communities.

Sierra Leone has been an independent nation for 50 years with very little human progress and development to show for its independence.

With a population of almost 6 million and an average adult mortality rate of 47 years, rising poverty caused by corruption and poor governance must be urgently addressed.

The management of the country’s vast mineral resources, which are yet to benefit the people of Sierra Leone, is a key priority, if the fight against poverty is to be won.

The DanWatch ‘Not Sharing the Loot’ Report makes the following recommendations:

The government of Sierra Leone and the mining companies should take action to uncover and unleash the lost potential for development from the mining sector. But also international regulation is needed to strengthen transparency into the corporate structure and accounts of multinational mining companies.

THE GOVERNMENT OF SIERRA LEONE SHOULD:

• Ensure that all contracts are in accordance with the Mines and Minerals Act and other laws – with no exemptions or special concessions allowed.
• Review the Mines and Minerals Act in order for Sierra Leone to harvest a larger share of the value of exported minerals, particularly in the wave of increasing global prices.
• Ensure full transparency into the sector, through complying with the Extractive Industries Transparency International Standards (EITI); make all contracts public, and provide updated and validated information on tax and other contributions from the mining sector to the government.
• Ensure good and transparent governance of the mining sector in order to harvest potential and invest in development for poor people. Critical is capacity development in geological, mining economics and engineering areas; tax and revenue collection; transparent allocation of revenues for development.
• Develop adequate and appropriate regulations relating to resettlement, environmental management, compensation, underground mining, community relations, etc. and the effective monitoring of the sector.
• Link mining to the national development agenda by establishing a cost-benefit analysis (economic, environmental, socio-cultural and political) prior to deciding whether to mine or not in any location and for any mineral.

INTERNATIONAL REGULATORS SHOULD:

• As a first step make it mandatory for extractive industries to follow the principles of EITI – disclosing payments to governments from each project in a country. USA has taken the first step, now EU and other areas should follow suit.
• Further demand full country by country reporting from multinational companies in order to make it transparent for the revenue authorities and the public, for each subsidiary of multinationals (also tax havens based) relevant information for assessing tax payments.
  This must include the beneficial owner of the company, financial performance, sales and purchases, number of employees, finance costs, pre-tax profits and tax payments.
• Crack down on tax havens through demanding automatic exchange of tax information for all countries.
• Demand the full implementation of the UN Human Rights Council’s Guiding Principles on Business and Human Rights to implement the United Nations “Protect, Respect and Remedy” Framework

THE MINING COMPANIES SHOULD:

• Disclose accounts on a country by country and project by project level in order to enable for citizens and governments to scrutinise the accounts, including details on trade and investments between subsidiaries, tax payments, profits. These accounts should include subsidiaries in tax havens.
• Pay a fair tax according to the spirit of the laws and avoid tax planning and exemptions aimed at reducing taxes in Sierra Leone.
• Invest directly in Sierra Leone and avoid the use of tax havens.
• Increase procurement of goods and services from Sierra Leone to strengthen trickle-down effects from the mining sector.
• Perform due diligence in relation to compliance with national laws, international best practice, international labour and human rights laws, especially where the national laws and standards are weak.

The Parliament of Sierra Leone is currently debating president Koroma’s 2012 Budget and Financial Report. The government’s finances have come under massive strain due to misguided borrowing and spending, which has left the government unable to balance its books.

The government needs to find over Le1 Trillion to cover its budget deficit by the end of 2011. Over-ambitious infrastructure projects are suffering due to cost over-run and insufficient funds to complete the work.

Corruption and malfeasance is estimated to be costing the country Billions of Dollars annually.

Hospitals and community health centres are struggling to implement the government’s free health care programme, which has been criticised as poorly implemented and woefully mis-managed. Desperately needed drugs, staff and equipment are in short supply.

The government’s free health care programme costs over $100 Million to run, yet revenue from mining which could pay the costs of running the entire public sector, is a miserly US$24 million.

Less than 40% of children under 3 years old live to see their fifth birthday, due to poverty, whiles only one in three families go to bed on more than one square meal a day.

Will president Koroma, Tony Blair’s Africa Governance Initiative and the international community act on this ‘Not sharing the Loot’ Report before it’s too late?