After Babel, a New Common Language Emerges
~Malawi’s Slow March to Reform Mining Industry. The goal is to avoid past mistakes~
Now old and frail, Mr. and Mrs. Mwalwimba are in their late 70s. They have lived all their lives in Mwabulambo a rural community in Malawi’s Northern District of Karonga. This is where their own fathers and the fathers of their fathers lived and are buried. And this is also where some of their children still live.
The Mwalwimba family has two houses built with burnt bricks, cement floors and roofed with iron sheets. They also had access to clean water with a gravity fed piped system.
“I was shocked to see excavators digging a few meters behind my two houses. In the process they vandalised our gravity-fed free and clean piped water system and the community had to go back to drawing water from the Lufilya River,” says Goodson Mwalwimba.
The Mwalwimbas’ are only one case of the wide disruption that the booming mining sector caused in Malawi, where most citizens say there’s little or nothing they get from the recent industry boom. In just under five years, 120 mining licenses have been issued to national and multinational companies after in a shocking country-wide geophysical survey showed that the country has great potential of mineral prospects.
Malawi could become Africa’s Mineral-Rich Awakening Giant if plans to put in place proper measures, policies and tax terms to increase transparency and accountability in the natural resource sector materialize. After years of Babel-like talk on the extractive industry, a new common language is slowly emerging with plans to reform the extractive industry but the country, one of the world’s poorest, continues to lose out millions of dollars because of a poor taxation framework and lack of bargaining power with international investors.
The extractive sector contributes now about 1% of its GDP to public revenue, but the government wants as a national priority to bring that amount to 20% by 2020. A 2017 government report indicates that the country’s total revenue for the extractives was MWK 5,935 million (USD 13.6 million). According to the African Development Bank the extractive industry could contribute over $30bn per year to the African countries’ coffers over the next 20 years.
With a per-capita income of less than a dollar per day, Malawi is one of the world’s poorest country and many are questioning villagers like the Mwalwimbas, will really benefit from these mineral resources without robust policy, sound regulatory and legal frameworks, and transparency in how decisions on the exploitation of these resources are taken, and the revenues distributed.
These concerns are hot on the heels of data released by a Washington DC-based research organization, Global Financial Integrity (GFI). The GFI said in 10 years between 2005 and 2014 around USD 7. 3 billion left Malawi as illicit financial flows (IFF) and tax incentives.
The component of loss of income from under declaration of taxable revenue, foreign currency externalization, trade invoicing, and transfer pricing is already near a billion USD according to Malawi’s central bank. It shows that between 2010 and 2017 Malawi lost $980 million from it.
Action Aid, an international non-governmental organization whose primary aim is to work against poverty and injustice, documented an example of how Malawi lost millions of dollars through a combination of generous tax incentives and international treaties focusing on an Australia mining company, Paladin.
In its 2015 report entitled “An Extractive Affair: How an Australia Mining Company’s Tax Dealing are Costing the World’s Poorest Country Millions”, Action Aid show how between 2009 and 2014 Malawi lost about $43m of tax revenue through the company. Action Aid Malawi’s Governance Officer, Chisomo Manthalu, author of the report, says what happened was not illegal. “Before starting up operations in Malawi, Paladin managed to negotiate a tax break which saw them lower some tax rates in Malawi and exempt them from paying some taxes altogether,” Manthalu says. The deal also included a lower ‘royalty rate’ that Paladin paid for the right to extract uranium.
Royalties are usually a percentage of the value of production and paid as compensation to the government for the depletion of a non-renewable resource. “This rate was lowered from the normal 5% of sales to 1.5% for the first three years and then 3% after. This tax break - which was negotiated in secret without public scrutiny - cost Malawi USD 15.6 billion between 2009 and 2014.
According to Action Aid, this was not enough for Paladin, which found other ways to lower its tax contributions. “Normally companies have to pay a so-called withholding tax when they pay e.g. interest payments or management fees from Malawi to another country. Until 2014, however, Malawi did have a double tax treaty with the Netherlands which meant that companies did not have to pay the 15% withholding tax normally applicable to interest payments and management fees transferred abroad,” Manthalu says adding that Paladin set up a subsidiary in the Netherlands, which allegedly had no employees but was simply created to avoid paying withholding tax to Malawi.
“The Dutch company received a total of USD183.5 million between 2009 and 2014 in interest payments and management fees, money which was then sent on to Australia without being taxed in the Netherlands,” Manthalu says.
According to the Action Aid report, one of the reasons the payments were so large was that the Malawian subsidiary was financed with a very large loan (80% of its total capital) from an intra-company loan which in turn required it to make very large interest payments.
“By routing its loan from Malawi to Australia via the Netherlands, Paladin lowered its withholding taxes in Malawi by more than USD 27.5 million over six years. Between the lowered royalty rates and the avoided withholding taxes, Paladin lowered its tax contributions to Malawi by more than US$43 million,” Manthalu says.
That is equivalent to the total budget of the Christian Health Association of Malawi (CHAM), Malawi’s key health sector partner for one year. Due to its limitations, the Malawi government usually enters into these Service Level Agreements to ensure that certain Essential Health Package (EHP) are made available to the public by CHAM facilities which in turn invoice the Malawi government.
But responding on 18 June 2015 to the Action Aid’s report on issues raised, Paladin said if a 5% royalty had applied, the mining Project would not have proceeded.
Paladin Energy Ltd Managing Director/CEO, John Borshoff, said, “Such a royalty rate was an economic disincentive to investment and was recognized as such by the government of the day. Unless the royalty had been reduced to 3%, the Project would not have reached an economic threshold for investment. The royalty rate was reduced and, as a result, Malawi enjoyed the economic benefits arising from this significant investment – the first such major investment in the country’s resources sector and the only one to date.”
According to Borshoff, when Paladin invested in Malawi, no other company had contemplated a level of investment on this scale – in the resource sector or any other.
Borshoff further said Paladin’s activities in Malawi are totally transparent to the GoM, as evidenced by the provision on a monthly basis of a full reconciliation of physical product movement and revenue flows, supported by copies of the Company’s bank statements during the entire period of production.
“These are provided to the Ministry of Finance, Economic Planning and Development (MFEPD), the Reserve Bank of Malawi (RBM) and the Ministry of Natural Resources, Energy and Mining (MNREM),” he said.
“The Paladin Group is also a supporting company of the Extractive Industries Transparency Initiative (EITI) and publishes details of its royalty and taxation payments to the Governments of Malawi and Namibia.”
Paladin suspended its activities in 2014 because of the decline in the Uranium prices on the international markets and it is now complying with the country’s extractive industry regulations. Since a public outcry, it also made public its activities, including the amount of taxes it pays to the government.
The impact of government’s loss of revenue through tax incentives and illicit funds has a huge impact on Malawi’s lives.
Bernadette O'Hare of University of St Andrews and Mark Curtis, Director of Curtis Research conducted a study on illicit financial flows and tax incentives in Malawi and how this affects the country’s health sector.
In their study called “Health spending, illicit financial flows and tax incentives in Malawi”, the two researchers demonstrated that the government of Malawi spends approximately USD 170 million on health for the population each year, and donors contribute around USD 250 million. This two amounts fall short of the USD 530 million, which is considered the amount needed for the minimal health package, they say.
According to the two researchers, tax incentives have resulted in revenues foregone of at least USD 588 million in the five years 2008–12, or an average of USD 117.6 million a year
“If these flows could be curtailed and tax incentives reduced, the country could pay for the minimal health package with domestically mobilized resources. The revenues foregone would be sufficient to cover the minimal public health package for all Malawians and would help tackle Malawi's disease burden,” the researchers said.
The poorest country in the world, Malawi has only one doctor for every 40,000 people, and the country has one of the world’s highest rates of child mortality, with one in 20 children dying before the age of five.
Ministry of Finance Spokesperson David Saddo says that what happened with Paladin is a big lesson for the future.
“As government, we then had no experience in dealing with such complex issues, being debutants in the mining industry. Some sectors have argued that, for example, as a country, when we were negotiating we should have demanded a bigger stake in terms of shares of the company, but then that would have meant that we had to invest an equivalent amount of shares to have a say in the affairs of the company,” Saddo said.
Malawi had also to give concessions for some of the difficulties that Paladin had to overcome to open in a less-developed country. “For example, government had to reduce some taxes, including corporate taxes, and duties on importation of fuel because the mine had no access to electricity and was located in a remote area,” Saddo says.
He also says another factor that came into play was lack of coordination between concerned government ministries, lack of capacity by officials, lack of information on mining agreements, and outdated Mine and Minerals law.
“One way we are now dealing with this is to make sure that all tax terms for the extractive sector are established in law and not subjected to project-by-project negotiations, which have always resulted in bad agreements,” Saddo says.
“The government will ensure that in the future, mining contracts are properly negotiated to maximise the benefits for the country. In this regard, Government will establish an independent contract negotiating unit in extractive resources,” President Peter Mutharika said during the 45th session of parliament in 2014
Since then the country has taken some steps to better face international corporations and collect more revenues.
“The establishment of a unit within the Malawi Revenue Authority to manage mining related revenue and shifting the responsibility for revenue collection from the Department of Mines to the MRA (Malawi’s revenue authority) through amendments to the Taxation Act in 2016 are steps in the right direction to stop revenue loss,” said Etter-Phoya, Tax Justice Network’s Anglophone Africa researcher.
Etter-Phoya, who also runs a blog called Mininginmalawi.com says that the government needs to focus on the way it sets tax regimes and especially the discretionary approach taken to individual companies or sectors, such as reductions in corporate income tax or tax holidays, to ensure revenue is not lost.
“The argument is made that tax incentives increase foreign direct investment, but research shows, including surveys among investors that there are many more important features than the tax rate, such as infrastructure access. We lose potential revenue if we award incentives to companies that would have done the business without the incentive. The second way is addressing tax avoidance and evasion - which are legal and illegal practices companies employ to reduce their tax base and thereby the taxes owed,” Etter-Phoya says.
While government is offering tax incentives to foreign investors, especially in the extractive industry, to encourage greater amounts of foreign direct investment, the same government is struggling to collect taxes locally.
Presenting his mid-year budget statement in February 2018, Malawi’s Minister of Finance, Economic Planning and Development, Goodall Gondwe, revealed that the country’s tax collection body, the Malawi Revenue Authority (MRA) under-collected by K38.1 billion ($52 million), with non-tax revenue under-collecting by K7.8 billion ($11 million), resulting in a total under-collection of K45.9 billion (($63 million) in the last six months of 2017.
Apart from calls to look into its tax incentive arrangements with some companies, there have been calls that the country should also make some reforms in the mining sector legislation, mainly reviewing the 1981 Mines and Minerals Act.
Established in the country in 2002, Norwegian Church Aid Malawi has a longstanding history in both Malawi and internationally for working with communities.
The organization’s Resource Governance Coordinator Mapemba says the reforms in the mining sector could also be another solution to the current problems the country is facing because, among other things, the new Mines and Minerals Act makes it mandatory that mining companies and local communities sign agreements that would see communities benefitting.
The bill stipulates mining companies wishing to hold a mining agreement will be presented with a standard Mining Agreement where the fiscal and environmental terms will be imposed.
“We would like to see to it that the communities get direct benefits from mining companies and not through the government. And players in the mineral sector have been calling for the amendment of the Act, and once enacted will help reform institutional framework and coordination within the mining sector,” Mapemba says.
Mapempa says that the Norwegian Church Aid is working with communities affected by mining activities so they have access to a simplified version of the Mines and Minerals Act in their mother tongue.
The Director in the Department of Mines, Jalf Salima said “The current Mines and Minerals Act of 1981 does not have provisions for voluntary Corporate Social Responsibility (CSR) or Community Development Agreements (CDA). The new Mines and Minerals Bill has included a provision for any holder of a large-scale mining license to sign a CDA with communities that will be affected by its mining operations in order to assist in the development and enhance the general welfare and the quality of life of the affected communities.”
Salima says the bill also proposes that mandates for royalty collection have be transferred to MRA, while his ministry will continue to collect the rest of the fees.
The main taxes and fees imposed on companies operating in the country’s mining sector include Corporate tax, Dividends Tax, Royalties and Fees. Currently, MRA is the main body responsible for collecting and managing taxes paid to the central government.
“The delay in making amendments to the law was due to the fact that previously mining was not government’s priority sector that could lead to economic sustainable growth, and over time government took time to look into some aspects of the law so it conforms to the current situation and international best practices; hence, the delay,” Salima said.
Salima says the draft bill is currently being vetted by the Ministry of Justice and is expected to be tabled before Parliament in May 2018.
There have also been calls for government to re-negotiate its tax treaties with some countries as they are said to be affecting withholding taxes paid by foreign companies.
Usually companies have to pay a 15 % withholding tax over interest payments or management fees from Malawi to another country, but because of some tax treaties that Malawi has with some countries it is losing out in revenue.
Finance Ministry’s Saddo says the government is re-negotiating some of these double tax treaties with developed countries. He said that so far the government has concluded talks with the Netherlands.
Malawi has double taxation agreements with 10 countries; Botswana, Denmark, France, Kenya, Mozambique, Netherlands, Sweden, Switzerland, United Kingdom, and the United States of America. The country has also pending double taxation treaties with Egypt, Mauritius, Norway, the Republic of China, Seychelles, Zambia and Zimbabwe.
This will prove to be a tough diplomatic exercise for Malawi. Action Aid Malawi’s Manthalu, who is also the author of Paladin report, says it was not surprising that Malawi lost out to the international tax system. “Our government never got a say in shaping global tax rules. Instead the system has been created by the richest and most powerful countries, and as a result it represents their interests and the interests of the multinational companies that are headquartered there,” he said.
There have also been calls that Malawi should join the Extractive Industries Transparency Initiative, a global coalition of governments, companies and civil society working together to improve transparency and accountability in the management of revenues from natural resources.
The African Development Bank has always said that natural resources industries, and especially extractives, have developed into some kind of ‘enclave economies’, generating wealth that is exported rather than shared, or ploughed back into the areas where it is needed most to meet human development challenges and building infrastructure.
Malawi was admitted as an Extractive Industries Transparency Initiative (EITI) candidate country in October 2015, and went on to publish its first EITI Report in April 2017, giving hope of a new era of transparency.
Father Kuppens of the Centre for Social Concern says it was heartening that Malawi is now a member of the EITI. “This will ensure that everyone is aware how much both the government and mining companies are earning as Extractive Industries Transparency Initiative publishes all this data on its website, and is a requirement for membership,” Kuppens says.
Etter-Phoya says Malawi joining the Extractive Industries Transparency Initiative is positive development that to some extent can reveal challenges with raising revenue and its collection in the sector. “Last year's report showed significant differences between what companies said they paid and government said it collected - these need to be investigated further and steps taken to remedy systems. We need to plug the leaky bucket,” she said.