Mining Taxes in Namibia – losers, fools and thieves!
In late April the investigative team at The Namibian stirred the hornets’ nest which is their function and started a very important public debate on whether the country’s mining companies are paying their fair share of taxes. If you look at the company taxes paid by Namibia’s non-diamond mining, their contribution in 2017/18 was a mere N$256 million of approximately $17 billion in non-diamond exports in 2017. In other words Namibian non-diamond mining firms i.e. outside of Namdeb paid roughly 1.5% of revenue to the state in the form of company taxes. One can understand why Minister Schlettwein considers such a contribution as utterly inadequate and thinks there needs to be a review.
The question is why the non-diamond mining firms pay this negligible amount of company tax. Namdeb and Debmarine of course pay much more. Is this figure of 1.5% of exports so low because the mining firms make no profits or because we are fools in the way we administer our mining tax regime or is it because the mining companies are criminals and evade taxes? These are three lines of argument that have been heard in the discussion of Namibia’s mining taxes.
First, mining is a peculiar business and few people understand it well. In fact if you are a mining company what you do when you invest in a mine is you take an almost religious act of faith in the distant future. You put a great deal of money today to discover the ore body and then even more to develop it in the first years and you will not make a penny because you are paying off the massive injection for capital but then you will make money once this is paid off. The most ‘legitimate’ explanation for the very low tax take of the mining companies is that three of the biggest mines are new Husab uranium mine, the B2 gold mine, Otjikoto Gold Mine in Otavi and the Tschudi Copper Mine near Tsumeb and may not be earning a profit yet.
But there is a second explanation and that is we have been very foolish in the way we have given out tax concessions to some firms including Scorpion Zinc, Trekopje Uranium Mine (currently under care and maintenance) and Weatherly copper smelter. They were all given tax holidays by government. This means that they pay no company tax because that was government policy. Much of these tax breaks have now been eliminated but it is too late. The tax take is in effect the price the people of Namibia receive for allowing mining companies to take away our minerals.
The third possible explanation is that sometimes one finds that mining companies never make a profit, at least on any piece of paper our tax authorities ever get to see. When you mine and make almost no profit year in year out then people begin to think that perhaps the great transnational mining companies are not here for their health but are hiding their profits in tax havens through what is known as transfer price manipulation. This means they either inflate their local costs or deflate their apparent revenues by selling to related companies at low prices. If tax inspectors are doing their job then catching and stopping the under-valuation of exports is relatively easy as there is a London price for zinc lead and copper but catching the mining companies blowing out their costs is much more difficult to detect. Some, maybe even many mining companies cheat the tax authorities by shifting their profits to off-shore tax havens. In the last few years many simple minded studies of the value of cheating by mining companies have been done by the UN, and the Economic Commission for Africa and most are at the level of economic rubbish, not worth the paper they are written on.This is not suggest that many companies do not cheat but the so called scholarly work that has been done has generally been very poor.
But company tax is not all that government earns from the mining companies. The government also gets what are called royalties and now since 2017 it is starting to get export tax revenue as well. In other countries where governments own a share of the mines, governments also get dividends. The standard measure of what is the contribution of the mining companies is the company tax, plus royalties plus export tax plus dividends divided by exports. In the case of Namibia the figure was 4% in 2017, up from 3% the year before when there were no export taxes. In South Africa the mining industry contributed 8% of exports to government coffers. In Zambia the contrition of its mines was a huge 17% export earnings in 2016.
The real deal though is in Botswana where the government got 39% of its diamond exports in the form of government revenue in 2017. Why? Because Botswana, owns 50% of Debswana (the local equivalent of Namdeb). What really makes the difference in terms of contribution to revenue is that Botswana not only owns 50% of Debswana, it also owns 15% of the parent company De Beers and the dividends are counted as part of the contribution to revenue. There are only two places on earth where government ownership of the mines has brought a huge dividend to the government and that is Botswana and Chile. In Zambia the nationalization of the copper mines was a complete commercial disaster. Chile and Botswana have owned a very large chunk of their resources and profited handsomely for some 50 years. Why were they a success and yet brought Zambia to its knees? Chile and Botswana have respectively had the biggest resources of copper and diamonds in the world. This is the first condition - having a world class resource. But the Zambian Copperbelt was also a world class resource when Kaunda nationalized the mines in 1973. The second condition for profitability that was not fulfilled in Zambia, which is that the resource must be managed in an otherwise commercial manner, irrespective of who owns it. In Chile and in Botswana business was allowed to get on with making a profit which was not the case in Zambia under KK where the mines became a political football that devastated the nation.
Mr. Schlettwein is right, the evidence suggests strongly, though it does not yet prove, that the people of Namibia are not getting a fair share of their mineral resources. Namibia needs to undertake a formal review of its mining tax regime. However, this must be done delicately and the way it is done is just as important as the outcome. Our politicians love bashing the private sector and foreign mining companies in particular rather than trying to make them genuine development partners and this has harmed the country greatly. A public inquiry needs to be held and the Chamber of Mines needs to be directly involved and it must be based on the facts. It is the facts and not rhetoric and ideology or the short term interests of the mining houses that should determine an appropriate tax regime for Namibia.
These are the views of Professor Roman Grynberg and Mr. Fwasa Singogo (research fellow) and not necessarily those of UNAM.
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