Congo, Mining Companies Heading for Clash over Tax Hikes

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By Wachira Kigotho

Mining companies are heading for a clash which could include international arbitration with the Democratic Republic of Congo’s government over imminent tax hikes , including a 50 percent super-profit tax, that await the signature of its president, Joseph Kabila.

But the new tax measures are being resisted principally by Glencore Plc, the Swiss-based natural resource commodities trader, Randgold Resources Limited, and Ivanhoe Mines Limited.

“It is therefore very disappointing to see that none of our proposals and comments are reflected in the legislation, which is in fact more draconian in its final form than earlier drafts,” Randgold’s chief executive, Mark Bristow said in a Feb. 4 statement. “If this fails, however, we shall seek to enforce our rights including those which provide for international abitration.”

However, in a final effort before they decide whether to petition the International Court of Arbitration in Paris, several companies have asked Kabila not to sign the new law.

Lawmakers in the senate approved changes Jan. 27 for a 50 percent super-profit tax, defined as income realized when commodity prices rise to 25 percent more than than noted in a mining project’s bank feasibility study, characteristic of second-phase mining.

The changes would also allow the government to classify cobalt as a “strategic substance” and raise royalties on cobalt—in demand for its use in rechargeable lithium-ion batteries—to 10 percent from 2 percent. The mineral’s price is likely to go up if the new tax measures are anchored into law.

According to Bristow, the new draft mining code takes no account of the industry’s concerns about the negative impact it will have on investment in DRC.

“I appeal again to the government to engage with the industry in the formulation of a code that will stimulate this key component of the DRC’s economy instead of crippling it,” Bristow said in a statement Feb. 3.

Economic Patriotism

So far, it is not clear as to whether Kabila, heavily embroiled in an election date stand-off with the opposition, will stay signing of the new mining tax proposals into law.

As the election draws near later this year, a new resurgent economic patriotism in DRC is raising the stakes to have taxation sections of the current mining code, Law No. 007/2002 of July 11, 2002, revised quickly.

“The new mining code will make mines a true motor of the development of this country,” DRC mining minister Martin Kabwelulu told senators Jan. 2 when addressing the upper house in capital Kinshasa.

Such views are also held by Henri Muhiya, the secretary general of the Episcopal Commission on Natural Resources, which had petitioned parliament for broadening of the mining tax base to raise more revenue for the country.

“We have realized that the investors indeed came, but the profits were not shared out in a fair way between them and the country,” Muhiya said in December, when parliament enacted tax hikes proposals.

Cobalt in Demand

The global demand for smart phones and electric car batteries has pushed up the price of cobalt, a windfall the DRC cash-strapped government can’t ignore. The price of cobalt currently stands at $80,382 per ton from $22,000 two years ago.

Nevertheless, although the DRC is the world’s largest producer of cobalt, as it has about two-thirds of the global deposits, the vast revenue from the mining of cobalt, copper and other minerals in the country is lost in grand corruption, tax holidays and inefficient tax collection measures.

“Most of DRC’s 80 million people are steeped in poverty as there is no money to improve the lives of the people,” said London-based Global Witness, anon-governmental organization that investigates corruption, tax injustice and environmental abuse.

Its report, Regime Cash Machine, highlights how more than $750 million in mining revenue paid by companies to state bodies in DRC was lost to the treasury between 2013-15.

“Instead, the money disappeared into a dysfunctional state-owned mining company and opaque national tax agencies. There is no clarity on what this money was spent on or where it ended up,” the report states.

However, the impact of hiked taxes will likely mean the increase will be passed to customers.

“It will affect the miners’ bottom line and it will be passed on to the consumer,” said George Heppel, an analyst at London-based CRU Consulting.

As Kabila ponders whether to sign the new amendments into law or to allow further negotiations with the mining companies, the question he will have to consider is whether the existing mining code favors foreign investors at the expense of the Congolese.

To contact the reporter on this story: Wachira Kigotho in Nairobi at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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