Namibia: Cabinet Intervenes in Mining Royalties Tussle

CABINET has directed the finance ministry to consider suspending the non-deductibility of royalties for one year to establish its possible impact on the mining sector.

The decision to suspend talks around the non-deductibility of royalties is a response to a chain of policy recommendations made by the high-level panel on the Namibian economy at the just-ended economic growth summit.

The panel had listed policies which were repelling investments, among them the non-deductibility of royalties from taxable income by non-diamond mining companies.

Finance minister Calle Schlettwein earlier this year announced that the tax code will be amended to disallow the non-deductibility of royalties for non-diamond entities - a proposal that was not well-received by the mining sector.

Chamber of Mines president Zebra Kasete in May this year had said such changes to the tax code would be detrimental to the sector and cause unintended consequences, like making most mines unprofitable.

"While the diamond industry is excluded from this clause, the negative long-term impact on non-diamond mining operations will far outweigh the immediate revenue gains for the government," he said then.

Kasete added that the 10% royalty tax and a 55% corporate tax rate on diamonds were too high, and diamond operations would thus not be sustainable in the long run.

According to data received from the Ministry of Mines and Energy, non-diamond mining companies paid N$2,3 billion, or about N$300 million per year in royalties between 2010 and 2017.

Taking an average of the 2% royalty rate, that would mean sales revenue for such mining companies was about N$116 billion.

The diamond mining and other precious stones' sector paid N$7,1 billion as royalties at a 10% rate between 2010 and 2017.

Analysts had come out strongly against the disallowance of an average of N$300 million royalties per year, saying such would cause the sector to collapse, or cause an investment divorce from the multibillion-dollar industry.

The low corporate tax collection from the mining sector and the desire to widen the tax net were the main reasons why the government had decided to disallow the royalties paid by the non-diamond mining sector.

In April this year, The Namibian reported that many local mining entities who made overall revenue of over N$85 billion only paid N$1 billion as corporate tax, and incurred tax-deductible expenses of over N$80 billion, while the diamond sector, mainly consisting of Namdeb Holdings and subsidiaries, paid N$10 billion as corporate tax from a N$61 billion revenue.

While the non-diamond mining sector's corporate tax bill was only 1,17% of revenue between 2012 and 2017, the sector overall is responsible for over 50% of Namibia's exports every year.

The sector also employs over 16 000 people and had a wage bill of N$6,1 billion in 2018, according to the Chamber of Mines.

Data from the central bank also shows that the mining and quarrying sectors make up more than 60% of all foreign direct investments in Namibia.

THE NORM

The norm in countries where mining operations exist, is that royalties on all minerals are tax-deductible. That is true for countries such as South Africa, Botswana, Zambia, DR Congo, Tanzania, Australia, Canada and Peru.

Zimbabwe is the only southern African country which disallows the deductibility of royalties from the mining sector. Namibia's royalty rates range from 2%-10% of the sales value.

According to the Inter-governmental Forum on Mining, Minerals, Metals and Sustainable Development's assessment on the Namibian mining sector conducted last year, the rates applied for taxes and royalties are largely perceived as fair among private sector actors, and competitive with other Southern African Development Community jurisdictions.

The Ministry of Mines and Energy is responsible for the collection of royalties from the mining sector, transferring the money to treasury.

Email: lazarus@namibian.com.na

Twitter: @Lasarus_A

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