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An Investigation of Tax Payments and Corporate Structures in the Mining Industry of Sierra Leone NOT SHARING the LOOT

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An Investigation of Tax Payments and Corporate Structures in the Mining Industry of Sierra Leone NOT SHARING the LOOT An investigation of tax payments and corporate structures in the mining industry of Sierra Leone NOT SHARING THE LOOT October 2011 Diamond found by artisanal miner in Kono district, Sierra Leone Photo: DanWatch Content RESEARCH: DANWATCH OCTOBER 2011 1. Summary and key findings 3 AUTHOR: SARAH DIECKMANN 2. Recommendations 4 SUMMARY, KEY FINDINGS AND RECOMMENDATIONS: NMJD, AJME AND IBIS 3. Method and sources 5 This is an independent DanWatch study conducted in accordance with Dan- Watch’s ethical guidelines and international principles on the conduct of journal- 4. Introduction 6 ists. DanWatch is fully responsible for the contents of the study, except for the summary, key findings and recommendations. DanWatch is an independent non-profit research center and media that investi- 5. Government revenue from mining 8 gates corporations’ impact on humans and the environment globally. DanWatch provides the public, consumers and policy makers with new information about companies’ global impact and social. 6. Mechanisms to reduce tax 10 The study is commissioned by the Danish development organisation IBIS. 7. Tax incentives and foreign direct investments 12 Based on the content of the report, IBIS, NMJD and AJME have supplied sum- mary, key findings and recommendations. 8. Company profiles 13 Appendices 23 AJME 2 1. Summary Key findings Sierra Leone is ranked among the poorest coun- tries in the world as number 158 out of 169 on In 2010 the mining industry accounted for almost The top five mines in Sierra Leone are part of com- the UN Human Development Index in 2010.I 60% of exports (US$200 million), but only 8% pany structures with exces sive use of low-tax and 70% of the population lives below the poverty (US$24 million) of government revenue came from high-secrecy countries, also known as tax havens, lineII and there are huge needs for investments the mining sector. Government revenue from min- which are particularly useful for moving profits out of in education, health, infrastructure and devel- ing accounted for only 1.1% of GDP. countries of operation and reduce corporate income opment. tax payments. Sierra Leone is rich in minerals which could Indirect taxes are the largest contributor to govern- contribute significantly to the development of ment revenue, while corporate income tax, lease and Four of the five reviewed mines in Sierra Leone, the country. This report clearly illustrates that licenses and royalties constitutes less than half of Koidu Holdings, African Minerals, Sierra Mineral this is not sufficiently the case. Government rev- total government revenue. Holding 1 and Sierra Rutile, are owned through enue from the mining industry in Sierra Leone intermediaries based in tax havens such as Bermuda is limited compared to the importance of the in- dustry to the country. Particularly are revenues and British Virgin Islands. The biggest exporter of minerals, Sierra Rutile, pay from corporate income tax and royalties low, which is surprising as the prices of the miner- as little as 2.2 percent of the export value to the gov- als exported from Sierra Leone have more than ernment of Sierra Leone. Despite increasing minerals prices, mining compa- doubled over the last five years and therefore nies in Sierra Leone hardly declare any profits and companies are expected to generate profits that therefore corporate income tax revenues are only should be taxed. Royalties are potentially the biggest source of gov- US$ 2.4 million or 10% of total government revenue ernment revenue from the mining com panies. How- from the mining sector. The limited tax contribution from the mining ever, Sierra Rutile has reduced its royalty rate from companies has huge implications for poor peo- 3% to 0,5%. ple in Sierra Leone. Only one of the top five mines, Sierra Rutile, is pay- ing corporate income tax. Mining companies in Sierra Leone have negotiated advantageous agreements with the government, to I UNDP, Human development index, 2010. http:// hdrstats.undp.org/en/indicators/49806.html keep their payments to the government of Sierra Besides the limited economic contribution mining II World Bank, Sierra Leone, 2011. http://web. Le one low. Contracts are not in accordance with the entails adverse effects on local communities and worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRI- newly established Mines and Minerals Act. environment in mining areas. CAEXT/SIERRALEONEEXTN/0,,menuPK:367829~page PK:141159~piPK:141110~theSitePK:367809,00.html 3 THE GOVERNMENT OF SIERRA THE MINING COMPANIES INTERNATIONAL REGULATORS LEONE SHOULD: SHOULD: SHOULD: 2. Recommen- • Ensure that all contracts are in accordance • Disclose accounts on a country by country • As a first step make it mandatory for ex- with the Mines and Minerals Act and and project by project level in order to en- tractive industries to follow the principles dations other laws with no exemptions or special able for citizens and governments to scru- of EITI of disclosing payments to govern- concessions allowed. tinise the accounts, including details on ments from each project in a country. USA • Review The Mines and Minerals Act in trade and investments between subsidiar- has taken the first step, now EU and other The government of Sierra Leone order for Sierra Leone to harvest a larger ies, tax payments, profits. These accounts areas should follow suit. and the mining companies should share of the value of exported minerals, should include subsidiaries in tax havens. • Further demand full country by country take action to uncover and un- particularly in the wave of increasing • Pay a fair tax according to the spirit of the reporting from multinational companies leash the lost potential for devel- prices. laws and avoid tax planning and exemp- in order to make it transparent for the opment from the mining sector. • Ensure full transparency into the sec- tions to reduce taxes in Sierra Leone. revenue authorities and the public for tor through complying with the EITI • Invest directly in Sierra Leone and avoid each subsidiary of multinationals (also tax standards, make all contracts public and the use of tax havens. havens based) relevant information for But also international regulation provide updated and validated informa- • Increase procurement of goods and assessing tax payments. This include the is needed to strengthen transpar- tion on tax and other contributions from services from Sierra Leone to strengthen beneficial owner of the company, financial ency into the corporate structure the mining sector to the government. trickle-down effects from the mining performance, sales and purchases, num- • Ensure good and transparent governance sector. ber of employees, finance costs, pre-tax and accounts of multinational of the mining sector in order to harvest • Perform due diligence in relation to com- profits and tax payments. mining companies. potential and invest in development for pliance with national laws, international • Crack down on tax havens through poor people. Critical is capacity develop- best practice, international labour and demanding automatic exchange of tax ment in geological, mining economics and human rights laws, especially where the information for all countries. engineering areas; tax and revenue collec- national laws and standards are weak. • Demand the full implementation of the tion; transparent allocation of revenues UN Human Rights Councils Guiding for development. Principles on Business and Human Rights • Develop adequate and appropriate to implement the United Nations “Protect, regulations relating to resettlement, Respect and Remedy” Framework environmental management, compensa- NMJD, AJME & IBIS; FREETOWN & tion, underground mining, community COPENHAGEN, OCTOBER 2011 relations, etc. and the effective monitoring of the sector work. • 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 of not in any location and for any mineral 4 This report presents the results of an investiga- The financial analysis is based on information A convertion rate of Le 3,385.7 = US$ 1 has been tion of tax contribution from mining in Sierra from several sources: applied to the 2010 figures. This is the yearend 3. Method Leone, with particular focus on the five biggest rate for 2009 as stated in the annual report from mining companies. The investigation has in- • Government revenue from mining is from Bank of Sierra Leone. and Sources cluded desk-research, interviews and field stud- a table provided by the National Revenue ies in Sierra Leone. Authority (NRA) of Sierra Leone. The Throughout the report the term tax planning table is attached as annex 1. is used to denote companies' efforts to reduce The report looks at mining legislation and indi- • Government reported revenue from the their tax, consequently also their tax to develop- vidual mining agreements, as well as actual tax individual mining companies in 2010 are ing countries. This report does not distinguish payments from companies. It looks at mecha- from a table presented in the Sierra Leone between legal and illegal forms of tax planning, nisms of tax planning through subsidiaries, and Poverty Reduction Strategy Paper, Prog- because both lead to tax losses in South which is compares these with actual corporate struc- ress Report 2008—10 (PRSP) from the the focus of the report - not the issue of legality. tures. government of Sierra Leone.II As far as we are informed, these figures are also from There is no generally accepted definition of a tax The review of the mining legislation and mining the National Revenue Authority. The table haven. This report uses OECD’s definition: agreements is based on the Mines and Miner- is attached as annex 2. als Act, the Income Tax Act, and the Goods and For some companies differences in timing 1. No or nominal tax on the relevant income Services Tax Act of Sierra Leone, reports from between sales, payments from companies NGOs and interviews with state authorities and and government reporting occurs.
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