Mining tax should be handled with care

African states should consider renegotiation of unfavourable contracts with multinationals to ensure they get a fair return on their natural resources, concludes a joint study by the Organisation for Economic Co-operation and Development and the African Development Bank (ADB) which was released last week. Judged by the outcry and negative consequences in Australia on the announcement of a super mining tax, African governments would do well to handle the OECD/ADB advice with great care.

The report states that the growing presence of companies from China and other emerging contries on the continent gives governments the opportunity to reap higher rewards from mineral, energy and other resources by putting them to competitive bidding.

“Where multinational firms fail to abide by minimal corporate governance standards in terms of tax contributions, governments should consider renegotiation concessions,” the report reads.

“African states are entitled to receive a fair deal for the exploitation of their natural resources,” the report argues as part of its proposals aimed at gradually weaning the continent off foreign aid by boosting tax and other domestic revenues.

The report claims that some African governments were often hesitant to revisit unfavourable contracts and tax arrangements for fear of scaring off investors. This, however, was unlikely to happen, it says. “Multinational enterprises may threaten to leave, but they are unlikely to actually abandon the exploitation of mines because of a reasonable rise in taxes and royalties,” the report states.

As the Australian experience is showing at present, the perceptions of what is “reasonable” could differ very substantially between governments and mining houses.

On Australia’s planned new 40% tax on mining profits, announced in early May and scheduled for implementation by mid-2012, the OECD described it as “justified, and unlikely to adversely affect investment in the long term."

OECD secretary-general Angel Gurría said that Australia’s mining “bonanza” should be shared and used as a buffer against future potential economic problems. “Whenever there is a bonanza, whenever there is a period in which there is a price spike or a price hike, then it is legitimate for a sharing of the bonanza and that benefit, especially if there are ways in which that can be used to stabalise markets in the future,” he was reported by Reuters.

Uncertainty over the tax proposals, however, has wiped billions of dollars off the market value of mining companies and added to pressure on the Australian dollar; and up to AUS$40 billion worth of mining projects in South Australia alone could be abandoned because of the new tax.

Some projects have already gone on hold for re-evaluation and by the end of last week, there were signs that the Australian government might be backing down somewhat and be willing to water down the proposed tax.