Variances in gold export declarations by the Ministry of Energy and Mineral Development (MEMD) and the Uganda Revenue Authority (URA) continue to stress a missed opportunity in Uganda’s mineral resources. The Office of the Auditor General’s 2016/17 report highlights an 8,674.719kgs variance between the MEMD declaration (16.281kgs) and the URA record (8,691kgs). Similarly, the 2015/16 financial year highlighted a variance of 5,223kgs of Gold exports between the 93kgs of gold awarded export permits by MEMD and the 5,316 kgs of gold recorded to have been exported by URA.
Looking at the figures in kilograms, one may not realise the magnitude of loss we are in as a country. However, basing on the assumption that no royalties were paid on the gold export permits issued by URA, Uganda lost about USD 3.39m basing on the 1% applicable rate for imported gold or USD 16.95m in case the gold was locally mined. The dollar rate probably does not bring out the magnitude of loss quite well, Uganda lost between UGX 12.795billion to UGX 63.977billion.
What the law says
According to Section 98 (1) of the Mining Act 2003, all minerals obtained or mined in the course of prospecting, exploration, mining or mineral processing operations shall be subject to the payment of royalties. Despite this being clearly stated in the law, a number of people have evaded payment of royalties on the basis that they hold prospecting licenses and are merely on a mission to check whether the minerals actually exist and in what quantities and or grades. More than ever, Local Governments have noted the existence of companies prospecting year in, year out. Could this be a loophole being used to evade payment of royalties?
Section 104 (1) of the Mining Act, 2003 provides for penalties on royalty defaulters ranging from barring the culprits from conducting any business in relation to mining until all outstanding fees are paid or until an agreement for payment of royalties acceptable to the Commissioner has been made. However, just like 2015/16 OAG report, the current report depicts no evidence of serious measures being taken to recover the losses from uncollected royalties.
Important to note is the nature of the mining sector in Uganda which is largely informal and dominated by Artisanal and Small scale Miners. Because of this, it is extremely difficult to track output from the mines to determine and verify royalties. More to this, the Department of Geological Survey and Mines (DGSM) the body responsible for inspecting mines is understaffed and currently incapable of effectively delivering on its mandate reason for which many such cases of unpaid royalties, under declarations by mining companies and default on payment of annual mineral rents are going unpunished. In this regard, the report of the Auditor General notes a sum of unpaid royalties amounting to UGX. 679,694,100 by HIMA Cement caused by the failure of DGSM to enforce payments.
In the recently launched second annual mineral development scorecard by National Planning Authority (NPA) in partnership with Africa Centre for Energy and Mineral Policy (ACEMP), mineral production, revenue collection and management scored an average of 19.7% categorised as inadequately addressed. In simple terms to mean, there are a number of issues yet to be addressed to enable Uganda earn from her mineral wealth. The indicators assessed under revenue collection and management included; revenue collection which scored 18.8%, revenue payments by mining companies which scored 32.2%, reporting on transfer of royalties scored at 27.7% and utilisation of royalties which scored 0%. All the indicators assessed scored below 50% which is symbolic of the fact that despite existence of mineral resources in various communities in Uganda, the mineral host communities still have high levels of poverty because of inefficient revenue collection and management systems.
Exemptions for what?
In the past, Africa grappled to attract investors. Referred to as the dark continent, no one was willing to invest sums of money in a place characterised by war, disease and hostility. For this reason, governments all-over Africa gave tax holidays to companies and tax exemptions to attract Foreign Direct Investment (FDI). However, today, this is all in the past and for this reason, companies and countries are literally scrambling to get into Africa for among other things her natural resources.
Unlike other African countries like Tanzania and Zambia who have set out to seize bigger slices of the mining pie, Uganda seems to be moving the opposite direction. The 2016/17 OAG report highlights the issue of uncollected royalties from Africa Gold Refinery (AGR) which does not make any declarations on gold exports on the basis that they were given a tax waiver by the Ministry of Finance Planning and Economic Development (MoFPED). Because of such poorly thought decisions by government, the mineral sector continues to contribute less than 0.5% to GDP.
On the other hand, Zambia, the second biggest copper producer in Africa is moving to increase mining royalties in order to reduce on the country’s budget deficit. In order earn more from mining, the Zambian government also plans to replace Value Added Tax with a non-refundable sales tax. By so doing, there will be no cases of VAT refunds which were being used by companies as working capital reason for which the Zambian Kwacha has depreciated. Mr. Joseph Nonde the Director Direct Taxes at the Zambian Revenue Authority noted that “mineral royalties will no longer be claimed against profits but have become a resource rent that sticks to the mining company.”
It is not about attracting foreign investment anymore, natural resources are finite in nature and are getting depleted in many countries. With the growing automobile industry, companies are seeking to source these minerals from Africa where a number of reserves are still virgin. However, if tax exemptions become the order of the day, how will Africa benefit from her natural resource wealth? Uganda needs to borrow a leaf from her neighbors who have realized the potential of the mineral sector and are reworking laws and policies day after day to see to it that they benefit from their natural resources.