Publication: Malawi loses USD 43 million from its largest mining project according to ActionAid report

Taken from ActionAid's report "An Extractive Affair" on Malawi's largest mining project

Taken from ActionAid’s report “An Extractive Affair” on Malawi’s largest mining project

According to ActionAid report launched last month, Malawi lost USD 43 million in revenue over the last six years from Australian mining company Paladin through government tax incentives and international tax rules. The report suggests that this money could have paid for 431,000 annual HIV/AIDS treatments, 17,000 annual nurses’ salaries, 8,500 annual doctors’ salaries, or 39,000 annual teachers’ salaries.

An Extractive Affair: How one Australian mining company’s tax dealings are costing the world’s poorest country millions argues that the reason for the lost revenue was because of tax incentives negotiated by Paladin and the company’s tax planning.

Paladin managed to negotiate a tax break which saw them lower some tax rates in Malawi and exempt them from paying some taxes altogether.

This included a lowering of the so-called ‘royalty rate’ that Paladin pays for the right to extract uranium. […] This rate was lowered from the normal 5% of sales to 1.5% of sales for the first three years and then 3% in all subsequent years.11 So far, this tax break – which was negotiated in secret without public scrutiny – has cost Malawi US$15.635 million.

This tax break was, however, not enough for Paladin, who found other ways to lower their tax contributions in Malawi. Normally companies have to pay a so-called withholding tax when they pay e.g. interest payments or management fees from Malawi to another country. Until 2014, however, Malawi did have a tax treaty with the Netherlands which meant that companies did not have to pay the 15% withholding tax normally applicable to interest payments and management fees transferred abroad.

So Paladin set up another subsidiary in the Netherlands, which had no employees. The Dutch company received a total of US$183.5 million between 2009 and 2014 in interest payments and management fees,13 money which was then sent on to Australia without being taxed in the Netherlands. One of the reasons the payments were so large was that the Malawian subsidiary was financed with a very large loan (80% of its total capital) from an intra-company loan which in turn required it to make very large interest payments.

By routing its loan from Malawi to Australia via the Netherlands, Paladin lowered its withholding taxes in Malawi by more than US$27.5 million over six years. Between the lowered royalty rates and the avoided withholding taxes, Paladin lowered its tax contributions to Malawi by more than US$43 million.

Prior to the release of the report, ActionAid International sent a letter to John Borshoff Managing Director of Paladin Energy asking the company to respond to a summary of its findings. Four days later, on 12 June, Paladin responded (the full chain of correspondence between Paladin and ActionAid can be viewed here) about the royalty rate and the withholding tax payments. The Malawian incorporated subsidiary company of Paladin Energy Group of Companies, Paladin Africa Limited, in which the GoM has a 15% equity stake, operates Kayelekera Uranium Mine.

Paladin explains that if the 5% royalty rate had been applied, the mine would not have been developed, and the rate of 3% is not uncommon in the region.

If a 5% royalty had applied, the Project would not have proceeded. Such a royalty rate was an economic disincentive to investment and was recognised as such by the government of the day. Unless the royalty had been reduced to 3%, the Project would not have reached an economic threshhold for investment. The royalty rate was reduced and, as a result, Malawi enjoyed the economic benefits arising from this significant investment – the first such major investment in the country’s resources sector and the only one to date.

It is a fact that when Paladin invested in Malawi, no other company had contemplated a level of investment on this scale – in the resource sector or any other. It has entered Malawi mythology that the negotiation with Paladin was asymmetrical and thus unfair.

Had Paladin not invested in Kayelekera Uranium Mine, the company argues that

[…] revenue loss to the GoM would have been US$10,479,717, which is the total amount paid in royalties by PAL to the GoM in the period 01 April 2009 to 30 April 2015. The GoM would also have foregone some US$38,170,424 in payroll tax, withholding tax and non-residence tax during this period.

ActionAid argues that the set up of Paladin Netherlands BV (PNBV) enabled Paladin to legally minimise taxes in Malawi, Borshoff explains

The establishment and operations of PNBV were driven by commercial rationale and, while interest and management fee charges from PNBV to PAL were not subject to Malawi withholding tax, this was a direct consequence of the ordinary application of the long standing Dutch-Malawi Double Tax Agreement to the group’s operations.

The international non-governmental organisation, ActionAid, is campaigning for tax justice to ensure that developing countries are able to raise their domestic revenue. It recommends that

Rich countries need to review their tax treaties and agree to the removal of provisions which prevent poorer countries from applying rates of withholding tax which are set out in their domestic law. They also need to review their domestic tax law and treaties to identify, then reform, any laws which have harmful effects on the ability of developing countries to raise revenue.

However, it concludes that international tax reforms to date are not going far enough to address this,

This case also shows that the current wave of international tax reforms – including the G20 mandated and OECD led process on Base Erosion and Profit Shifting (the so-called ‘BEPS process’) – is unlikely to fundamentally solve the problems that prevent developing countries such as Malawi from collecting the tax that it needs. The BEPS process will tackle neither tax incentives nor the balance between taxing rights between source and residence countries – the two issues highlighted by this case.

Read the report An Extractive Affair here.

The report was covered online both in Malawi and across the world:

Anders Dahlbeck, Policy Advisor at ActionAid UK for the ActionAid Tax Justice Campaign, talks about the research in the video below.

ActionAid across the world tweeted a number of inforgraphics from the report:

Note: Malawi is described as the world’s poorest country in the report Malawi as it had the lowest GDP per capita in the world in 2013, which was the most recent year that the World Bank’s World Development Indicators covered when the ActionAid report went to print.

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2 responses to “Publication: Malawi loses USD 43 million from its largest mining project according to ActionAid report

  1. Pingback: No to tax holiday for mining investors, civil society urges – Mining Review (July 2015) | Mining in Malawi·

  2. Pingback: Link Roundup for Extractive Industries in Malawi: July 2015 | Mining in Malawi·

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