Sierra Leone’s dodgy mining deals – Someone is sharing the loot

Sierra Leone Telegraph: 27 July 2012

In the wake of allegations and counter-allegations of corruption involving the vice president of Sierra Leone, a renewed focus is being turned on to the manner with which the government has been entering into agreement, with foreign companies to exploit the country’s mineral resources.

Sierra Leone’s rich natural resources have the potential to net the country, an estimated annual revenue of more than $600 million. But today, the reality is that ‘declared’ annual government revenue from mining companies is less than $25 million.

Poor governance, corruption and the lack of human capacity to monitor and evaluate the operations and performance of foreign companies operating in the country, are making it easier for companies to succeed in avoiding or evading their obligations to the people of Sierra Leone.

Last December, a damning Report, exposing dodgy mining agreements signed by the government – allowing mining companies to get away with paying little or no taxes to the detriment of the poor people of Sierra Leone, was published.

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

Since the publication of that Report, very little has changed in the government’s modus operandi. Someone, a few powerful men, are indeed sharing the loot.

Two months ago, one person was shot dead by riot police and many others wounded, when workers of the iron ore mining company – African minerals, took an industrial action in protest against poor wages and unacceptable working conditions. 

It may be business as usual in Sierra Leone, but the poor are feeling the pinch, while a handful of people in government are sacrificing hundreds of millions of dollars in unpaid taxes, in return for cash kickbacks from mining companies. 

Sierra Leone is ranked among the poorest countries in the world, with over 70% of the population living on less than one dollar a day.

International humanitarian organisations working in the country, say that more than 90 children are dying every single day, while medicines necessary for the survival of those children and vulnerable groups, are being sold on the black market by corrupt officials.

The government continues to struggle to meet its obligations, as national debt mounts.

Public sector workers and procurement contractors are not being paid. Efforts to clear up tons of debris and refuse washed down into the capital city by the heavy rains, are being hampered by the lack of resources. 

Mountains of rubbish seen ten years ago on major roads in the capital Freetown, have made a return. The government says, it has no money to purchase sufficient number of waste collection vehicles and pay workers.

Widespread intermittent supply of electricity and water, continues to add to a general feeling of misery and impoverishment in the country, despite the heavy rains, which are needed to fill the water reservoirs and turn the hydro-electricity turbines.

The Bumbuna hydro-electricity power plant has been almost dysfunctional since its commissioning two years ago, generating just 25% of its potential capacity of 80 megawatts. 

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.

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.

As presidential and general elections loom closer, the two main political parties are fine tuning their manifestos. But many in Sierra Leone are justly cynical about politics in the country today. They have heard it all before. 

And while almost everyone agrees, that the management of the country’s vast mineral resources, which are yet to benefit the people of Sierra Leone, is a key priority, action – not words, is lacking.

The DanWatch ‘Not Sharing the Loot’ Report makes this recommendation:

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.

Has the government taken any notice of this recommendation?

While ministers may be quick to answer in the affirmative, the evidence on the ground suggests otherwise. 

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