Ministry of Mining refutes rumours of raw deal involving Sovereign Metals Limited

The Ministry of Mining says there is no existing mining development agreement between the Malawi Government and foreign investor, Sovereign Metals Limited over rutile mineral extraction project at Kasiya in Lilongwe.

This is in response to concerns raised by some “sections of the society” through social media that indicate that “government is negotiating a raw deal with Sovereign Metals Limited, a company which is exploring for rutile at Kasiya”.

A statement from Secretary for Mining, Dr. J.C.N. Mkandawire dated July 25, 2022, says “the discovery of the biggest deposit of rutile in Malawi at Kasiya has excited many Malawians, especially looking at the anticipated revenue, going by the heated discussions currently circulating in the social media”.

Mkandawire explains that Sovereign Metals Limited “does not hold any mining licence but rather a mineral exploration licence, hence no actual mining is taking place at this site since studies are still on-going”.

“Once the feasibility studies are conducted and completed, and environmental & social impact assessment is conducted and approved by the Malawi Environmental Protection Authority, the Ministry will review and approve the company’s application for the Mining Licence, if all technical and financial requirements under the licence conditions are met.”

Mkandawire further says relevant government institutions, including Ministries of Finance and Justice, would then commence negotiations for the Mining Development Agreement where amongst other issues, fiscal matters will be dealt with.

“The public is further informed that any mining company joins the sector with full understanding that there will be benefits sharing guided by several existing laws that ensure mutual benefits from such projects

“The tools used to capture revenue in Malawi’s existing legislation from mining projects are well structured in the fiscal regime as stipulated under Section 260 of the Mines and Minerals Act (Act No. 8 of 2019), the Taxation (Amendment) Act (2016) and other relevant laws of Malawi responsible for administration of tax, among other issues.”

Mkandawire goes further to clarify on royalties, whose rate of 5% has been provided for under the Taxation Act (2016) and are payable on production of minerals — whose “rate was arrived at following extensive studies within the region and beyond” and that the 5% “is relatively competitive in the region if we are to attract investors in the mining sector in Malawi”.

He also tackled resource rent tax as requirement, which is at minimum of 15% of profits and is paid to government if the project’s rate of return exceeds 20% as well as equity participation of 10% as prescribed under the Mines and Minerals Act (No. 8 of 2019).

Mkandawire assured Malawians that the Ministry of Mining is in the process of spearheading the establishment and operationalization of a state-owned mining investment company — whose mandate shall be the promotion of the optimal development of the mineral sector and maximization of the national mineral revenue and social benefits.

“Currently, we are waiting capitalization of the company from the Ministry of Finance to the tune of K5 billion,” he said. “Additionally, the Ministry of Mining has resolutely been working hand in hand with the Ministry of Justice in the drafting of the Bill for establishing the Mining Regulatory Authority.”

Mkandawire thus assures Malawians that “mineral revenues and mining contract information for any mining project will always be made accessible to the stakeholders in order to bring transparency, accountability and mitigation of mistrust from the citizens of Malawi”.

The rumours on the alleged raw deal with Sovereign Metals Limited probably surfaced taking into account of the massive irregularities that involved Australian mining company, Paladin Kayelekera uranium mine in Karonga.

In 2015, ActionAid, the global federation working for a world-free-from poverty and injustice, exposed these irregularities, saying Malawi, “the poorest country in the world, lost out on US$43 million in revenue from 2009 to 2015 from a single company, Paladin”.

The report raised serious red flags then, saying the money was lost through a combination of harmful tax incentives from the Malawi government, and tax planning using treaty shopping by Paladin.

From its survey, ActionAid maintained that the report showed how governments and international tax rules allow foreign companies to dodge tax.

In the case of Paladin, the Australian company “got away with dodging tax because the Malawian government and the international tax system let them”.

“Before starting up operations in Malawi, 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. Royalties can be thought of as a one off payment for the natural resources being removed from the country rather than as a tax on economic activity.

“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. 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.”

The report further exposed that Paladin set up another subsidiary in the Netherlands, “which had no employees” but received a total of US$183.5 million between 2009 and 2014 in interest payments and management fees — 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.

ActionAid stressed that “this is clearly not how things should work”, saying: “The Malawi government, therefore, needs to make sure that it doesn’t hand out tax breaks that prevent it from raising the revenues it needs to fund public services and development plans.

“One way of doing this is to ensure that any tax incentives are subject to Parliamentary and public scrutiny before being signed; but also to continuously monitor whether any tax incentives given are actually beneficial to the Malawian people.

“Malawi should also review its network of tax treaties to ensure that companies cannot do what Paladin did and shift money around the globe to pay less tax in Malawi.

“The process of negotiating tax treaties should be subject to public scrutiny before signature. The Malawi government should also publish the details of all new and existing mining agreements.

“The responsibility for this does, however, go beyond Malawi. 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.

“Paladin and other multinational companies operating in poor countries should avoid asking for discretionary tax breaks when negotiating future mining deals with governments. They should also stop shifting payments and profits around the globe thereby reducing their taxes in developing countries.”

This is probably what made Malawi to consider establishing state-owned mining investment company — whose mandate shall be the promotion of the optimal development of the mineral sector and maximization of the national mineral revenue and social benefits.

Meanwhile, Malawi Government has written Columbia Gem House of Vancouver, USA demanding US$309.6 billion as claim for unpaid tax revenue in respect of ruby and sapphire minerals extracted from Chimwadzulu Mine in Ntcheu District by the US company’s subsidiary, Nyala Mines Limited.

The Malawi Government also claims interest at the commercial lending rate from the date the said taxes and royalties fell due to the date of payment within 30 days from the date the notice of claim was issued on July 26, 2022.

There will also be a claim of 15% collection costs on the same US$309.6 billion and failure to pay or to indicate how the US company intends to settle the said sum, “the State of Malawi reserves the right to institute criminal proceedings on money laundering and tax evasion charges against Columbia Gem House and Nyala Mines Limited — and all persons involved in the evasion of the taxes”.