1. TAX JUSTICE ACADEMY 2015 - EDGAR ODARI ECONEWS AFRICA

2. 2 THE CHALLENGE  81 countries driven by resources in 2011 accounting for 26 percent of global GDP, up from 58 generating only 18 percent of world GDP in 1995.  69% of people in extreme poverty are in resource- driven countries.  Almost 80% of countries whose economies have historically been driven by resources have per capita income levels below the global average, and more than 50% of these are not catching up.  Almost 90% of resources investment has historically been in upper-middle-income and high-income countries.

3. 3 THE OPPORTUNITY  ~½ of the world’s known mineral and oil and gas reserves are in non ‑ OECD, non ‑ OPEC countries.  Up to $17 trillion of cumulative investment in oil and gas, and mineral resources could be needed by 2030—more than double the historical rate of investment.  540 million people in resource-driven countries could be lifted out of poverty by effective development and use of reserves.  Opportunities to share much of the $2 trillion of cumulative investment in resource infrastructure in resource-driven countries to 2030.  50%+ improvement in resource ‑ sector competitiveness possible through joint government and industry action.

4. ‘Mineral dependence’ in sub-Saharan Africa (2010) www.icmm.com  30 of 48 countries in Africa  18 primarily minerals  12 primarily oil and gas ‘Mineral dependent’ countries are those where mineral exports account for more than 25% of total exports Metals and minerals Oil and gas

5. Contribution of extractives to exports in Africa (2010) www.icmm.com Metals and mineralsOil and gas

6. Unfair share: Income share of the poorest and richest 10 per cent in resource-rich countries Africa Progress Report

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8. Principles of Mineral Policy since the 1980s “Overall, the main objective of donor intervention in African mining - whether through technical assistance or investment financing - should be to facilitate private investment and help reduce the country and project-related risk for the private investor.” World Bank, Strategy for African Mining, 1992 8

9. “The recovery of the mining sector in Africa will require a shift in government objectives towards a primary objective of maximizing tax revenues from mining over the long term, rather than pursuing other economic or political objectives such as control of resources or enhancement of employment. This objective will be best achieved by a new policy emphasis whereby governments focus on industry regulation and promotion and private companies take the lead in operating, managing and owning mineral enterprises.” Strategy for African Mining – World Bank, 1992 Principles of Mineral Policy since 1980s 9

10. Mineral Development Strategy since mid 1980s State withdrawal from production and privatization of mining SOEs Emphasis on attracting foreign investment into sector – Creating enabling environment for FDI – Passage of laws, Creation of institutions and processes deemed necessary for development of FDI based export led mineral development strategy – Overgenerous incentives regime (e.g. tax exemptions and low rates, forex retention) Focus on developing minerals with export value Revenue stream main planned benefit of mining 10

11. Unmet expectations- Revenue Between 2002 and 2006 average net profits of biggest mining firms increased by more than 1,400%, going up by 64% between 2005 and 2006 alone. (PWC,2007) 2003-2011 profits grew average 20% a year In 2010, the financial results for the Top 40 were spectacular: – Revenues increased 32% – breaking $400 billion for the first time – Net profit was up 156% to $110 billion – Operating cash flows grew 59%, leaving more than $100 billion cash on hand at year end – Total assets approached $1 trillion 11

12. 12 Source: PWC –Mine 2012 Net profit & net profit margin top 40 mining firms

13. From Bryan Land (World Bank) presentation “Taxing the Minerals Industry in Turbulent Times”, 2009

14. 14 Mining industry has done well! In 2012 Revenue flat at $731 billion —a 6% increase in production volume offset by softer prices Net profits down 49% to $68 billion Market values down, gold miners hit especially hard Issuance of $108 billion of debt, including $43 billion of bonds, sends gearing from 13% to 24% Estimated 2013 capex of $110 billion, 21% lower than 2012 In 2010 Revenues up 32% – breaking $400 billion for the first time Net profit up 156% to $110 bn Op cash flows grew 59%, with > $100bn cash on hand at year end Total assets → $1 trillion Net debt down to $46 billion, resulting in gearing of only 8%

15. Loopholes in benefit sharing Windfall gains for developing countries “have been partly offset by increased profit remittances by transnational corporations” “Cross country studies have shown that many mining taxation regimes are regressive with governments’ share of mining revenue of falling as the profitability of operations rise” UNCTAD 2009 15

16. Terms of Trade changes versus actual benefits of price increases (UNCTAD, 2008) 16

17. Tax Avoidance 17

18. Switzerland’s copper imports from Zambia 18

19. Flow of Revenues Kenya 19

20. Flow of Revenues Kenya 20

21. MechanismDescriptionNumber of countries MiningPetroleum Signature bonus Up-front payment for acquiring exploration rights. Commonly used as a bid parameter (Notably for petroleum in the US offshore continental shelf) 116 Production Bonus Fixed payment on achieving certain cumulative production or production rate None10 Royalties Specific (amount per unit of volume produced) 21 Ad-valorem (percentage of product value)1731 Ad-valorem progressive with price19 Ad-valorem progressive with production8 Ad-valorem progressive with operating ratio/profit 31 Royalty applied to operating margin (net profits royalty) 20

22. State, provincial, and/or local CIT Rate of corporate income tax at the state, provincial,or local level in addition to federal level. Common in Canada and the U.S. as a province/state resource charge in addition to federally imposed CIT. 25 Variable income tax CIT where the tax rates increase with the ratio of taxable income to revenue, between an upper and lower bound 32None Resource rent taxes Cash flow with accumulation rate/uplift. Can be assessed before or after CIT. 55 Cash flow with limited uplift on losses (UK).(surcharge tax on cash flow) None2 Allowance for Corporate CapitalNone13 Allowance for Corporate EquityNone14

23. Other additional income Tax Other profit taxation mechanisms that do not fall under any of the categories above 13 Production sharing Fixed production shareNone5 Cumulative productionNone R-Factor: ratio of cumulative revenues to cumulative costs None13 Rate of return, pre- or post-taxNone3 Production LevelNone13 State participation Free equity: government receives percentage of dividends without payment of any costs 2None Carried equity: government contributions met by investor and recovered from dividends with interest 38 Paid equity: government pays its share of costsNone19 Social investments/ infrastructure Resource companies build infrastructure or make other social investments (hospitals, schools, etc). 16 Number of countries 2567

24. Realizing the AMV: AMDC Work Streams 24 Linkages, investment and diversification Governance and Participation Geological and Mining Information Systems Policy and Licensing Artisanal and Small Scale Mining Capacity Building & Communication and Advocacy Linkages, investment and diversification Governance and Participation Geological and Mining Information Systems Policy and Regulatory Frameworks Artisanal and Small Scale Mining Capacity Building & Communication and Advocacy

25. AMDC work streams Policy and regulatory frameworks Development Goal – The mining sector in Africa supports a broader share of social and economic development objectives Mineral policies lack dev. objectives –focus is on tax & equity participation Fiscal terms are poorly designed Transfer pricing is common – Africa losing $50 bn per year! Embed dev objectives in policy & legal frwks Optimise NPV of resource rents Legislate against transfer pricing Build value chain analysis capacity Establish SWFs Explore infrastructure funds Establish long term community dev funds Invest in broader national capacity building 25 NowMedium termLong Term

26. AMDC work streams Linkages and Diversification Development Goal - Mining sector makes a significant contribution to African resource-based industrialisation and social economic development Sector is poorly linked to other economic and social sectors There is little R & D into new processes and creation of mineral value added Poor infrastructure limit opportunities Need policies that encourage innovation and beneficiation Local content policy Link beneficiation with industrial dev and other sector strategies Explore collateral infrastructure & mining investment eg SDIs Greater diversification of national economies Improved economic linkages within the national economy Improved availability of infrastructure for collateral economic and social use 26

27. Linkages with Sectors of the Economy DOWNSTREAM Value-addition Beneficiation Export of resource- based products DOWNSTREAM Value-addition Beneficiation Export of resource- based products UPSTREAM Inputs: Plant, machinery, equipment, consumables, services, (export) UPSTREAM Inputs: Plant, machinery, equipment, consumables, services, (export) TECHNOLOGICAL Linkages: “ Nursery ” for new technology clusters, adaptable to other sectors TECHNOLOGICAL Linkages: “ Nursery ” for new technology clusters, adaptable to other sectors INFRASTRUCTURE: Puts in critical infrastructure (transport, energy) for other non- minerals economic potential Using wasting assets to underpin growth in sustainable sectors HRD, R&D SIDESTREAM Resource knowledge & physical infrastructure SIDESTREAM Resource knowledge & physical infrastructure

28. Stabilisation Clauses INTANGIBILITY CLAUSES: These clauses commit the parties not to modify the contract except with the express consent of the parties. FREEZING CLAUSES: Such clauses limit the applicability of domestic laws for the contract to the law that was applicable at the date of the conclusion of the contract. – COTCO-Cameroon Establishment Convention for Chad-Cameroon pipeline which contained a commitment ‘not to modify the legal, tax, customs and exchange control regime in such a way as to adversely affect the rights and obligations of COTCO. CONSISTENCY CLAUSES: These clauses repudiate the applicability of domestic legislation of a host state to the extent that such legislation is inconsistent with the investment contract. Any law found to be inconsistent is inapplicable. ECONOMIC EQUILIBRIUM CLAUSES: Any alterations to the terms and conditions of the contract must have renegotiation intended at restoring the original economic balance or in default of that payment of compensation. West African Gas Pipeline Company 28

29. Stabilisation Clauses (Cont..) International Project Agreement (Benin, Ghana, Nigeria & Togo) – West African Gas Pipeline; Any regulatory change that “has a material adverse effect on the company” or one which “causes the benefits derived by the company from the project or the value of the company to the shareholders to MATERIALLY DECREASE” would oblige the parties to “restore the company and/or the shareholders to the same or an economically equivalent position it was or they were in prior to such change” or institute “prompt, adequate and effective compensation”. ISSUE-SPECIFIC STABILISATION CLAUSES: Investment contracts also contain some clauses that address specific issues such as clauses for the stabilisation of the fiscal regime or those that stabilise regulation of tariff structures in the case of public utility projects. 29