Mining companies raise issues over unfavourable tax regime

MINING companies in Ghana have highlighted the Growth and Sustainability Levy, some elements in the price build-up of diesel supplied to them, issues with Income Tax Act, 2015 (Act 896) and the VAT flat rate scheme as the main fiscal issues affecting their operations in the country.

The Minister of Finance in the 2023 Budget announced the introduction of a Growth and Sustainability Levy (GSL), which is a non-deductible expenditure and pegged at 1 per cent of production on extractive sector companies. 

In his state of Mining Industry report, the President of the Ghana Chamber of Mines, Michael Edem Akafia, said the non-deductibility of the GSL implied that the burden of the impost would be borne solely by mining firms.

He said since the impost was levied on production rather than profit-before-tax (PBT), as in the case of other sectors of the economy, it could be inferred that the government insulated itself from the risks that confronted mining operations. 

“This is a violation of the principle of fairness, which is a canon of taxation,” he stated.

With the fiscal regime being an incentive for attracting investments into the sector, he said the government must adopt a fiscal framework that attempts to share risk optimally between equity-contributing investors and the government. 

He said while the Chamber appreciates the need for the government to generate additional revenue to address the grave fiscal imbalance in the economy, the introduction of GSL could have a pyrrhic effect on the state’s revenue objectives. 

He added that the non-deductible nature of GSL could be described as an aberration from global practices as it effectively increases the risk borne by investors in Ghana’s mining sector without a complementary compensation measure from the government. 

More so, he said the levy imperils the continuous operations of some mines and risks curtailing the expected cash flows associated with the impost. 

“Such an outcome would not only hurt the state’s revenue objectives but also threaten the security of employment, businesses of mining support service firms, as well as mining firms’ continued investment in their host communities,” he explained.

Price build-up of fuel 

Mr Akafia, who is the Vice-President in charge of External Affairs at Gold Fields West Africa, said the Chamber was also of the view that some of the elements in the price build-up of diesel supplied to the mines have little or no bearing on the cost of supplying the fuel to the mines. 

He said the specific elements include the ex-refinery price; energy debt recovery levy; price stabilisation and recovery levy; primary distribution margin; bulk oil storage and transportation company margin; and fuel marking margin.

The President of the Chamber said unlike the retail market, the ex-refinery price of diesel supplied to the mines was largely determined by the National Petroleum Authority (NPA). 

In a sense, he said the mining industry, and other consumers in the export segment of the petroleum market did not benefit from the gains associated with deregulation. 

He said the Chamber acknowledged the debilitating impact of the legacy debts on the sustainability and viability of the energy sector as well as commended the government for its efforts to retire them through the Energy Sector Levy Act, 2015 (Act 899). 

However, he said the mining sector has historically paid a fair market tariff for electricity supplied to it by the Volta River Authority (VRA) or Electricity Company of Ghana (ECG). 

“Indeed, the tariffs are typically above the fair value in the case of the latter as the Public Utilities Regulatory Commission (PURC) pricing formula for the mining industry is based on ability-to-pay rather than the cost of service,” he said.

He said the inclusion of the Price Stabilisation and Recovery Levy (PSRL) in the price build-up of petroleum products serves the purpose of neutralising the adverse effects of movements in the exchange rate on the price of fuel. 

Issues with income tax law

The government passed the Income Tax Act, 2015 (Act 896) with the overriding objective of expanding its tax base and enhancing tax payments as well as revenue collection. 

Following the passage of the Act, Mr Akafia said the Chamber identified some concerns and raised them directly with the Minister of Finance. 

He said the specific concerns include ring fencing; limitations on deductibility of payment for services to non-residents; thin capitalisation among others.

“Under the erstwhile tax laws, non-resident persons were effectively taxed under the withholding tax system. However, the new income tax appears to deny a deduction for expenditure where the income for the service provider is not sourced from Ghana and the chamber believes this should not be the case,” he noted.

He said the new income tax Act extended thin capitalisation provisions to restriction of deductions for interest and foreign exchange losses incurred by a foreign-controlled company to all debt from any source. 

“This is a clear departure from the familiar practice of associating thin capitalisation with related party transactions. In its current form, the Act raises several practical questions,” he pointed out.

He also added that unlike the earlier Value Added Tax (VAT) policy, which was applicable to suppliers within a defined threshold, the new 3% VAT flat rate scheme applies to all suppliers, including companies within the Large Taxpayers Unit. 

“Since all suppliers to the mining companies have been classified as wholesalers or retailers, the law will impact the mining sector directly,” he said.