3 December 2013

Mozambique: Little Benefit to Mozambique From Moma Heavy Sands

Maputo — Mozambique is deriving very little benefit from the titanium-bearing heavy mineral sands deposits in the northern province of Nampula, thanks to the excessively favourable terms granted to the operator, the Irish company, Kenmare Resources.

According to a damning report entitled “Mining without Development”, published by the Mozambican anti-corruption NGO, the Centre for Public Integrity (CIP) and the European Network on Debt and Development (Eurodad), Kenmare's deal with the government includes “contract secrecy, no corporate taxes for one part of the company group, and a halving of corporate taxes for ten years for the other part, no payment of value added tax (VAT) for several goods, and no import or export taxes”.

Outside of Mozambique, most people have never heard of Kenmare - which is hardly surprising, since its sole significant asset is the dredge mine at Moma, on the Nampula coast, which extracts the minerals ilmenite (titanium iron oxide), rutile (titanium dioxide) and zircon (zirconium silicate). The most significant of these ores is ilmenite, which is used as a base pigment in paint, paper and plastics.

Although it only operates one mine, Kenmare has established a complex company structure. There are eight fully owned Kenmare subsidiaries, mostly registered in Mauritius and the British tax haven of Jersey. These are jurisdictions noted for their financial secrecy and low tax rates. They are, the report notes, “safe places for anyone who wants to hide their profits”. Nobody who works for Kenmare actually lives in either Jersey or Mauritius.

Just two of these subsidiaries, Kenmare Moma Mining and Kenmare Moma Processing, are productive bodies. A web of company subsidiaries should set off alarm bells: as the report puts it, “the company group structure raises red flags as regards tax minimizing practices”.

In the first years of production, the Moma mine reported losses, but it went into profit in 2011. Pre-tax profits that year were 18.22 million US dollars, and in 2012 the figure almost tripled, to 52.79 million dollars.

The mine's revenues had greatly increased thanks to a quadrupling in the world market price of ilmenite. Lesser increases were recorded in the prices of rutile and zircon. But this was not reflected in tax payments to the Mozambican state.

From 2008 to 2011, the period for which figures are available, Kenmare paid just 104 million meticais (about 3.5 million US dollars) in aggregate tax payments. 90 per cent of this was royalties, and the rest was the surface tax paid on Kenmare's concession area, and the concession fee itself. No corporate income tax at all was paid.

The report works out that “for each dollar that Kenmare earned by exporting minerals, Mozambique received only one cent in tax payments”.

The revenues have increased steadily, from 25.3 million dollars in 2008, to 167.5 million in 2011, and 234.6 million in 2012. As for pre-tax profits, these were negative in 2010 - when the company claimed a loss of 16.3 million dollars. But it shifted into the black the following year, with profits of 18.22 million dollars. None of the revenue and profit data were reflected in tax payments, which only rose by 7.5 per cent between 2010 and 2011 (from 133 to 143 million meticais).

A further calculation shows that, while Kenmare's revenue increased from an average of 93 dollars to 229 dollars per tonne of minerals exported, tax payments lagged, rising from 1.2 to two dollars per tonne (in other words, while the revenue from the minerals has risen by 146 per cent, tax payments have risen by only 67 per cent).

As for corporation tax, Kenmare Moma Mining has been allowed to offset the initial losses from the start up phase against tax liabilities. So to date no tax at all has been paid on the profits.

The second subsidiary, Kenmare Moma Processing broke even earlier than Kenmare Moma Mining, but still didn't pay any tax, because it is based in an industrial free zone which exempts it from almost all corporate taxes, as well as from VAT and customs duties.

Mining is not accepted as an industrial free zone activity - hence Kenmare's decision to divide one and the same operation into two subsidiaries, one of which can take advantage of the free zone.

Kenmare Moma Processing pays a revenue tax of just one per cent after six years of operation. Kenmare Moma Mining pays rather more - a three per cent royalty based on the heavy mineral concentrate sold to Kenmare Moma Processing. Even after corporation tax kicks in, it will enjoy a 50 per cent reduction for ten years (which brings the rate down from 35 to 17.5 per cent).

Like the processing company it claims full exemption from all import and export duties and from VAT.

The royalty is charged on the price that one part of Kenmare (the processing company) pays to the other (the mining company). The lower this price is, the lower the royalty will be. It is quite possible for that price to be artificial, bearing no relation to world market prices.

This seems to be what has happened. The report suggests that, in 2010, the sales price on which the royalty was paid was only a third of the final price at which the processed minerals were sold.

A good way of putting Kenmare's tax payments into perspective is to compare them with the personal income tax paid by Kenmare employees. In the 2009-2011 period, Kenmare employees paid 235 million meticais in income tax - this was two and a half times greater than the total tax payments by Kenmare itself.

The report notes that more than 80 per cent of the loans on which Kenmare depended came from development finance institutions, including the African Development Bank (ADB) and the European Investment Bank (EIB).

This seems a clear abuse of their funds. As the report put it, “it is difficult to see why development institutions should invest in a European company with subsidiaries in tax havens and with a fiscal regime so generous that it allows shipping resources abroad with a strongly reduced tax bill”.

The CIP/Eurodad report urges an end to contract secrecy, and calls on the Mozambican government to establish a public registry where the agreements between the government and investors in the extractive industries can be accessed.

It calls for a renegotiation of the contracts with early mining investors such as Kenmare. The renegotiation “should be on terms that are beneficial to the citizens of Mozambique, and should put an end to special tax treatment”.

In addition, the government could consider one-off windfall taxes “where surging commodity prices have led to unexpected profits for corporate taxpayers”.

Without such measures, the Moma mine could run for its expected life span (of perhaps140 years), with only minimal benefits to Mozambique.

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