Abstract

Mining projects attract investment if the country’s incentives and fiscal regime are more favourable than alternative investments. Malawi risks chasing away mining investment if its fiscal regime is enacted into law and does not give flexibility in terms of making projects financially and economically viable. There is need always to refer to what is trending in the region around us in order to be competitive. Care should be undertaken in order to exercise reasonable benefit sharing arising from mining projects without giving away too much. This paper looks at issues that need to be considered in order to attract investment in the mining sector.

The government of Malawi has set its development priorities into three sectors of Agriculture, Tourism and Mining (ATM). These are also well expounded in the Malawi 2063 Vision document. Agriculture and Tourism have specific investment incentives. The mining sector has no amalgamated investment incentives and reliance is put on window shopping all over general incentives. The Ministry of Mining needs to come up with a investment incentive package that will be used in concluding mining agreements.  It takes too long to conclude Mining agreements because of the diverse nature, institutional interest and availability of the government negotiating team. This must be attended to because it frustrates investors and more often leads to rent seeling behaviour and geopolitical influences. This paper looks at available general incentives and fiscal incentives that must be considered in order to consolidate Malawi’s readiness in attracting mining investment.

1.0             General Incentives

1.1         Geological Prospectivity

Recent geophysical survey (around 2013) and selected geological mapping has improved availability of geological and geophysical data for mineral, oil and gas exploration. This is a plus for the country although recent mineralpermits acquisition has been infiltrated with permit speculators with no adequate risk money for grassroot exploration. Strict monitoring of permit conditions need to be followed in order to clean up the mining cadastre platform.

1.2         Enabling Infrastructure

There is no doubt that good road infrastructure, easy access to sea ports, excellent telecommunication and reliable banking system are conducive to mining investment. The current situation puts a plus to telecommunication.

Road access to mining projects is fair but not ideal for transportation of mineral commodities. Access to sea ports (Nacala, Beira and Dar es Salaam) have a fair amount of logistical problems. There are efforts to improve on rail access and to solve handling logistics to improve turn around time.

The banking system does not have enough capital to finance mining projects. This has favoured off shore capital markets and creation of opportunities for lines of credit for local banks. Foreign exchange regulations and repatriation of initial capital, dividends and interest should be granteed in order to attract investment capital. Double taxation treaties are necessary with countries such as United States of America, the European Union, Britain, South Africa, India, Australia, China and Canada.

1.3         Rule of Law

Investor confidence is mixed in terms of upholding rule of law in Malawi. It takes too long to solve investment disputes. The recent establishment of Commercial and Industrial Dispute Court may improve delivery of justice. The justice system needs to earn lost confidence.

1.4         Political stability

Political stability brings a sense of a stable investment environment. Malawi is one of the few countries that is known for political stability. There has been stable and fair transfer of political leadership. This is good for long term investment projects such as mining with over 10 years of  project life.

1.5         Sense of security

Individual security in Malawi is granted. Police works tirelessly in securing public and private property. Crime busting system works well and community policing works well too. Invetsors are assured of personal security and their assets are secured too.

1.6         Security of Tenure

Malawi is signatory to various international investment guarantee protocols such as membership in International Court of Justice and Multilateral Investment Guarantee Agency. This offers confidence in settlement of international investment disputes. Recent geopolitical risks have emerged that could polarise security of tenure in country alignment. Political leadership should guard against this emergent geopolitical risk and temptation of rent seeking behaviour among political leaders. The executive arm of government needs to be guided and motivated accordingly in order to avoid actions that may lead to breakdown of security of tenure for mining projects.

1.7         Policy and regulatory certainty

Malawi started its journey of promoting mining investment through the Mines and Minerals Act of 1981. This was replaced by the Mines and Minerals Act of 2018 after a lengthy period of national consultation from 1997. This introduced sustainable development aspects including community benefit sharing and community engangement arrangements. This Act is perceived to have been the best and well consulted by all stakeholders. 5 years later in 2023, another Mines and Minerals Act was enacted with the aim of establishing the Mines and Minerals Regulatory Authority. This act was hurried with no consultation with stakeholders and was passed taking advantage of misinformation related with perceived illegal mining activities and illicit financing flows in the mining sector. This Act has brought institutional disorientation and the need to restructure the Ministry of Mining in terms of the role the Geological Survey and the Department of Mines will play in promoting the Minerals sector.

The National Mining Company and Malawi Development Corporation were incorporated with the aim of spearheading minerals development and development finance respectively. The challenge has been sourcing seed finance. These two institutions are necessary in order to hold government equity in mining and promoting speedy financing of strategic mining projects that will speed up wealth creation and and economic development.

1.8         Smart partnership among stakeholders in the mining sector

There is no doubt that there is mistrust and lack of cordial relationship between government and mining companies. This has been exposed in recent political and advocacy platforms. Government needs to engage its citizens on the activities of mining companies. Mining companies need to engage government more in terms of promoting transparency and accountability in their exploration and mining activities. The Malawi Chamber of Mines and Energy is playing a crucial role in promoting integrity, transparency and accountability in the minerals sector. The Chamber members have put Malawi on the world mining map through discovery of world class critical minerals such as rare earths, niobium, uranium, rutile and graphite. The relationship that exists between government and The Chamber needs to be improved and safe guarded in order to develop effectively the minerals sector.

The above general observations should be taken seriously and addressed where necessary in order to promote good service delivery for facilitating mining investment and building trust among mining investors.

2.0     Fiscal Incentives

Fiscal incentives are sometimes viewed as loss of potential government revenue. Others call them subsidies. How does one lose that he never owned? How do you attract green field investment without a carrot? Can mining investment be easily attracted into a country that has no mining tradition? Fiscal incentives are necessary in order to attract mining investment especially in a country that is trying to develop its mining sector and surrounded by countries with a mining history and well established.

2.1     Exploration Expenditure

Exploration activities are risky undertaking. Exploration capital can be recovered when an economic mineral deposit has been discovered. Exploration finance can not be recovered where no mineral deposit has been found. In order to attract exploration expenditure the government should guarantee recoupment of exploration finance against taxes in the iniatial years of production.

2.2     Expatriation of Capital Expenditure

Initial Capital expenditure is usually sourced through capital markets and equity holders. These look for returns on their investments and look for alternatives where they can earn more dividends and interest. Recoupment of this capital must be easy and in the shortest period. The Central bank should be able to guarantee this.

2.3     Value Added Tax Claim   

Exploration companies should be allowed to register for VAT and be able to claim input VAT without unnecessary hussles.

2.4     Royalties and Export Levies

Government should acknowledge that royalties and export levies are a form of tax and therefore should be tax deductible. The Mode of calculation for royalties and export levies should be clearly explained. It may be agreed on gross revenue or ex-mine mineral value.

2.5     Corporate Tax

Mining projects are capital intensive. In order to reduce debt service burden, it is recommended that apart from loss carry forward for a certain period, there is need to reduce corporate tax during the period of debt servicing from 30% to 25%.

2.6     Resource Rent Tax

Resource rent tax applicability is complex and difficult to implement. Any taxes of super profits are a captured through royalties therefore there is no need to apply this tax. Most countries in the region scrapped this tax.

2.7     Effective tax rate

An effective tax rate is the total tax revenue that goes to government from a mining project. A reasonable effective tax rate that a government should benefit from a mining project mostly financed by a mining company should be between 51 and 60%.  This will attract the private sector into investing in the mining sector. It must also be understood that a mineral is of value once it is out of the ground.

3.0     Conclusion

The mining sector requires an incentive package under ATM. This will attract investment in the mining sector and reduce hurdles and speculations of outwitting each other when undertaking mining agreement consultations. With this investment package in place, it is easy to train the negotiation team to effectively hurdle mining agreements and reduce consultation period.

It must be understood that no any amount of money will buy trust because trust has to be earned.  Mining projects promote local content and increase local revenue through provision of goods and services. Government benefits from Pay as you earn (PAYE) and VAT to fill revenue gaps. Mining benefits economic growth and development. One mining project can not transform an economy of a country. Several projects will create more wealth and sovereign fund that will benefit future generations.

Let us be wise and investor friendly in order to create wealth for agricultural productivity, industrialization and urbanisation.

Stakeholders in the extractive sector have expressed concern over continued underfunding to the Ministry of Mining describing it as a clear indication of government’s lack of interest towards the minerals sector.

For instance, in the previous financial budget, Ministry of Finance allocated to the Ministry of Mining a provision of about MK3,6-billion which was later revised to about K3,9-billion due to 44 percent devaluation of the Kwacha, which stakeholders has described as inadequate for the Ministry to efficiently conduct its duties.

The Ministry of Mining’s provision in the budget was much lower compared to other Ministries of Energy and Natural Resources which were allocated about MK18, 3-billion and MK12, 3-billion respectively.

Coordinator for Natural Resources Justice Network (NRJN) Kennedy Rashid told Mining & Trade Review that such underfunding to the Ministry of Mining signifies that the Ministry is not a priority in the budget.

Rashid said this is unfortunate as the same Government touts the mining sector as one of the main pillars of the Malawi 2063 economic agenda.

He said: “The challenge we have is prioritization. At times it seems we do not even follow Malawi 2063 in planning.”

“If financed and governed properly the mining sector can finance the social services.  But by neglecting the Ministry, it implies that less focus is put on wealth creation.”

“We are not investing as urgently required in the sector. The Ministry of Finance should be following the priority sectors as per Malawi 2063.”

“We cannot attain our economic goals if we do not invest in our economic programs.”

Rashid said the minerals sector has the capability of generating sufficient funds to uplift the economy only if the government shows interest to invest in it.

The 6th Malawi Extractives Industry Transparency Initiative (MWEITI) report indicates that the mining sector alone generated funds amounting to about MK24, 4-billion from July 2020 to June 2021.  

It is expected that due to continued underfunding, the Ministry of Mining will likely fail to fulfil plans and mandatory duties including; managing the development of mineral resources; monitoring and regulating operations of the mining industry; and monitoring of seismic activities.

The Ministry last year launched the 2023-2027 strategic plan whose implementation largely depends on the availability and efficient utilization of financial resources from the Ministry of Finance through the Program Based Budget covering both Recurrent and Development Expenditure; and funding provided by Donors, Development Partners and other bodies.

The Ministry of Finance has been conducting budget consultation meetings to solicit suggestions for the 2024/25 financial budget to be deliberated in the next sitting of parliament expected to run from February 9 to April 5, 2024.

Commenting on the issue, Coordinator for Chamber of Mines and Energy Grain Malunga agreed with Rashid suggesting that Government gives attention to wealth creation sectors including mining.

Malunga said: “My take on budget consultation is that 100% pro poor budgets promote consumption with minimum private sector growth.”

“Let us think seriously of wealth creation through technical education industry and trade.”

In a separate interview, Programs Coordinator for NRJN Joy Chabwera suggested that the government should develop a budget that will enhance the mining sector’s performance and impact in areas of; infrastructure, capacity building, transparency and accountability mechanism, community development, environmental protection, stakeholder engagement and consultations, research and data collection and, diversification of economy.

Chabwera said: “Allocate resources for capacity building programs aimed at enhancing the skills and knowledge of local communities, government officials and industry stakeholders.”

“They should also allocate funds for the establishment and maintenance of robust transparency and accountability mechanism in the extractive sector which includes supporting initiatives such as the Extractive Industries Transparency Initiative (EITI) implementation, which promotes disclosure of revenue flows and fosters public oversight of extractive activities.”

“On stakeholder engagement and consultations, I think it is good if they allocate a portion for stakeholder engagement and consultations processes to ensure that interests and concerns of all relevant stakeholders including local communities, CSOs, and industry players are adequately addressed in decision making processes related to the extractive sector.”

Chabwera also explained that through prioritization of these areas in budget allocation, the Ministry of Finance can contribute to the sustainable development of the extractive sector in Malawi, promote inclusive growth, and ensure that the sector benefits both present and future generations.  

The Ministry of Mining is expected to undertake a mid-term review of its strategic plan in 2024/2025 financial year to establish progress made, whereby a full review of the plan will be conducted at the end of the implementation period in 2027.

Civil Society Organization (CSO) working in the extractives sector under the umbrella of the Natural Resources Justice Network (NJRN) have expressed concern over Malawi’s delays in embracing strategies specifically focusing on green minerals that are found in the country.

The country has development strategies that focus on the entire mineral sector unlike other African countries that have developed specific strategies bearing themes of the green minerals per African Green Minerals Strategy (AGMS).

AGMS is a continental green mineral strategy with the vision of ‘An Africa that harnesses green mineral value-chains for industrialization and electrification, creating green technologies and sustainable development to enhance the quality of life of its people.’

The Strategy focuses on four themes that support the vision of the strategy namely: advancing mineral development; developing people and technological capability; building Key value-chains; and mineral stewardship.

Coordinator for NRJN Kennedy Rashid said even though the country is doing well in some areas within the sector, there is a lot more that the Ministry can do in order to ensure that Malawi really achieves wealth creation.

Rashid said one of the areas that the country needs to work on is that of beneficiation and value addition of the raw green minerals that are found in Malawi.

He said: “In rating the Ministry of Mining, it would be great to acknowledge the efforts that have been shown this far in capacity building.”

“We have managed to conduct geological mapping and other geological studies as evidenced with the Geological Mapping and Mineral Assessment Project (GEMMAP).”

“But I am not sure that we have done enough on technological enhancement as we still rely on foreign institutions to assist in scientific analysis of the green minerals.”

“Right now, we do not have the required laboratories with international certified standards for industrial testing of samples of these energy minerals.”

Rashid said such a situation manifests that the country seems not to have strategies on how it can beneficiate the green minerals.

Malawi is reach in green minerals including; niobium, are earth elements both heavy and light elements, titanium (rutile), nickel, graphite and some pockets of lithium.

But responding in an emailed questionnaire, Public Relations Officer for the Ministry of Mining, Tiwonge Kampondeni said the Ministry has strategies in place to ensure that the country’s green minerals are protected and contribute to socio economic development.

Kampondeni said the government through the Ministry is promoting value addition within Malawi to ensure that mining activities are benefiting both the government and the country’s citizens.

She said: “Instead of sending samples outside the country and letting the processing of minerals be done outside the country, we want all this done in Malawi.”

“As a government, we need certified laboratories and refinery plants which may take a little longer as it would require huge sums of money but it is where we are going as a Ministry.”

“We are also making sure that local content framework should be emphasised where locals should participate in all levels of the value chain.”

“We are making sure that licences are issued within a short period of time and also taking a collaborative approach in mining where all stakeholders take part in coming up with a sustainable mining sector.”

Kampondeni said that the Ministry is also ensuring that companies are transparent enough in developing and compiling their exploration data.

As one way of ensuring win-win deals between government and companies, Kampondeni said the Ministry is making sure that Mining Development Agreements (MDA) for all minerals including green minerals are properly negotiated for the benefit of Malawians.

Kampondeni also said to underline the Ministry’s commitment in developing green minerals, the Ministry of Mining attended a conference on green minerals in Saud Arabia last month.

The AGMS strategy aims at increasing geological knowledge, conducting feasibility studies to attract investment, establishing infrastructure for an enabling environment and aligning mineral resource management with the African Mining Vision.

The strategy also focuses on developing people and technological capability by identifying skills needed to capitalise on opportunities, and building the institutions to generate them.

AGMS establishment will also build Key Value-Chains to achieve resource-based industrialisation and access wider regional and continental markets through the African Continental Free Trade Area (AfCFTA) following the establishment of battery and electric vehicles value chains, starting with two and three wheeled vehicles and commuter busses.

According to the strategy, mineral stewardship will responsibly guide the environmental, social and governance aspects of green minerals together with material reuse and recycling.

The African green minerals strategy also focusses on minerals critical to energy transition, high tech and defense industries that have few producers and/or supply risks.

It focuses on access to critical minerals becoming an energy security issue, and also Critical Minerals critical to consumer countries seeking to secure their supply chains so often couched in geopolitical/ strategic term.

African green minerals are gaining an upsurge in demand in energy technologies including wind, solar, electric vehicles, switching fuels, grid expansion, hydrogen, low carbon energy sources and many others.

Local firm Akatswiri Mineral Resources says it has completed Phase 1 drilling programme for the Chambe Basin Rare Earths Exploration Project in Mulanje Mountain, Southern Malawi.

Akatswiri Chairman Hilton Banda says in an interview that the Company is now waiting for the drilling results as the samples extracted from the site are being processed at a laboratory in Perth, Australia.

Banda explains that he is confident of coming up with exciting results because rare earth mineralisation is visible in all the samples.

He says: “Chambe is a unique rare earths deposit as it is an ionic clay deposit. These deposits generally have several advantages over hard rock deposits, including lower operating and capital costs and shorter timelines for development.”

“Chambe is one of the few large ionic clay-hosted rare earth elements (REE) deposits outside of China, where currently a significant portion of global REE production is sourced.”

The Chambe basin has a central part that has recessively weathered soils that are up to about 15 m thick containing REE’s of the ionic adsorption.

Banda says such REEs in ion-adsorption deposits can be extracted by simple leaching of common chemicals in contrast to other types of REE deposits, which require complex and expensive processing.

“Rare earth recovery will be by simple mining and processing methods as the thick intercepts near surface means simple low -cost conventional and free -dig open pit mining,” he says.

Since Mulanje Mountain is one of the leading tourist destinations in Malawi, he explains that Akatswiri is pursuing a Sustainable Mining and Tourism approach where by adopting open -pit mining with responsible rehabilitation practices will be essential to conserve the environment while extracting REEs.

“The mining project will prioritise the protection of waterways (tributaries) by strategic geotechnical drainage system and an aerial way to transport the ore from the plateau which is the most reliable way to reduce vibration of ground mode of transport, and also a source of mine tourism attraction,” he says.

Akatswiri has been engaging members of the local community in the area including at District Council level to provide them an opportunity to express their views regarding the project, discuss the environmental and social impacts of the project, and derive mitigation measures of the adverse negative impacts of the project.

The Company organised a tree planting exercise in liaison with members of the community as part of its environmental conservation programme for the area. The Akatswiri management team comprises top notch business executives and professionals including Mr Banda, Mrs Josephine Banda as Executive Managing Director, Mr Ashutosh Srivastava as Board Technical Advisor, Mr. Jason L Greive as Non-Executive Director, Mr. Bilal Mahomed Non-Executive Director, Mr Nathaniel Ferrero Non-Executive Director, Mr Kalekeni Kaphale Company Lawyer, Dr. Joshua Chisambi Chief Geologist, Mr Gavin Beer Consulting Metallurgist, Johnstone Livata Director of Finance and Maston Gondwe Accountant.

Managing Partner for Perekezi ASM Consultants Chikomeni Manda has urged Artisanal and Small Scale Miners (ASMs) in Malawi to manage their finances prudently in order to be able to access loans easily for the growth of their businesses.

Manda, who has experience working in the ASM subsector for years, told Mining & Trade Review that when the ASMs are able to manage their finances properly they easily finance value addition of their products, which helps them realize increased revenue for the growth of their business.

Manda said that proper management of finances will also help the ASMs to have collateral to access loans from banks and invest more and grow their business.

He said: ‘’Most of the ASMs fail to get loans from banks because they do not have collateral. This is a huge setback to the ASMs who fail to to add value to their products due to lack of finances.”

“Consequently, these ASMs sell their products to middle men at a very cheap price.”

Manda observed that most of the ASMs do not take the business seriously as they work on hand to mouth basis instead of properly managing their daily finances to add value to their products and realize more revenue from sales.

Manda also urged ASMs to always acquire information on availability of mineral resources from relevant stakeholders to avoid losing money in following up rumors.

Manda also asked government to increase funding to the Geological Survey Department as this will help it to explore and discover mining sites for ASMs.

He said this will minimize expenses for ASMs accrued in searching for places to mine.

Manda also asked the Ministry of Mines to provide information to the ASMs on the importance of having mining licenses as well as how and where can they get relevant licenses.

Mineral exports in Malawi are dominated by semi-precious and precious stones (gemstones), ornamental (dimension) stones, lime products, rock samples, and soil samples.

The 2022/2023 Annual Economic Report produced by the Ministry of Finance and Economic Affairs indicates that gemstones and dimension stones continue to be exported to Asia (India, China, Thailand, Sri Lanka, Hong Kong, etc.), USA, England, Italy, South Africa, and more. A few gemstone exports are also made to Poland, Netherlands, and Switzerland.

Malawi has one of the most diverse ranges of coloured gemstones in the Southern Africa Development Community region. Most gemstones are mined locally by ASMs, whereas some are introduced into the market through international trade, especially from neighbouring countries such as Zambia and Tanzania.

The Report says that in 2022, higher gemstone production was recorded amounting to 329.45 tonnes reflecting an increase of over 2000 percent compared to the production in 2021. Gemstones produced included aquamarine, amethyst, citrine, garnet, rhodolite and ruby.

It, however, says despite high gemstone production, value addition is still very low implying potential revenues are lost as gemstones fetch lower prices in their rough (unprocessed) form.

ASX-listed Lotus Resources says it is finalising preliminary work programmes to allow an optimal restart of production at its Kayelekera Uranium Mine in Karonga in light of the positive market outlook for the yellow cake which has seen uranium prices rising.

The uranium market continues to improve, with the uranium spot price maintaining levels above US$90/lb U3O8e in recent weeks, and recently rising to US$104/lb.  The spot price has increased by over 100% since January 2023 driven by a shortage of supply in the spot market that has resulted in low traded volumes along with strong demand from financial groups, traders and utilities.

Lotus MD Keith Bowes says in the Company’s quarterly report for the quarter ended December 31, 2023 that the current uranium pricing and potential undersupply in the medium term are driving a revised timeline for the Kayelekera restart.

Bowes explains that Lotus plans to engage a debt adviser shortly to test the market for debt for Kayelekera.

He says: “The Kayelekera work streams have been prioritised to enable that a Final Investment Decision can be made as quickly as possible.”

“Lotus remains focused on restarting the Kayelekera Project as soon as practicable to benefit from the current strong and increasing uranium prices.  As such, Lotus is testing the market for debt and is focused on undertaking the necessary planned activities to prepare Kayelekera for a potential restart of production in late 2025 when the supply gap for the nuclear utilities is forecast.” 

Lotus is looking to meet the growing supply gap in the nuclear utilities’ reported fuel coverage profile which is supported by the increase in enquiries that the Company has received over recent months from the utilities.

This target start date will depend on a number of conditions being met and the successful conclusion of the described programmes including finalising financing and offtake for the project, which will involve appointing a debt advisor to assist in the financing process.

Lotus will also need to sign potential offtake agreements with suitable parties that can strengthen its position and complete negotiations and signing of a Power Supply and Power Implementation Agreement (PSA & PIA) with the Electricity Supply Corporation of Malawi (Escom), which is key to achieving reduced operating costs announced in the Company’s Restart Definitive Feasibility Study (DFS) in August 2021.

Bowes says the Company has planned a Front-end Engineering and Design (FEED) program leading directly into the detailed engineering design phase for the execution of the restart plan.

He explains that these studies will confirm the upfront capital cost estimate for the plant refurbishment and new equipment installations such that a control budget can be prepared for the restart.   

The studies will also validate the 15-month timeline initially determined for the refurbishment programme for the plant, update the operating costs from the Definitive Feasibility Study including incorporating new quotes from suppliers, and determine long lead items and early works programs.

Bowes says: “With regards to offtake, Lotus has received an increased volume of enquiries from North American utilities, with the understanding that a significant, if not all, of the planned production from the major current producers has already been sold and that the utilities now need to approach the next tier of suppliers, such as Lotus, to meet their future demands.”

“The Company plans to complete these activities within the next six months.”

Kayelekera Mine Development Agreement

During the quarter under review, Bowes says Lotus continued negotiations with the Malawi Government on the Mine Development Agreement (MDA) for Kayelekera, which will set the fiscal regime in which the Project will operate and is one of the inputs the Company is seeking prior to making its Final Investment Decision for the restart of Kayelekera.  

He reports that during the quarter, he travelled to Malawi to meet with the Ministers of Mining and Finance, and Attorney-General to progress the MDA, and attended a meeting of the Parliamentary Sub-Committee for Natural Resources and Climate Change.

Bowes says a meeting was also held with international industry heads and representatives of the US State Department, UK, EU and Australian High Commissioner and representatives from the World Bank.

“Good progress was made on several key discussion points, with a small number of elements still requiring further clarification and discussion.  The Malawi Government representatives continue to express eagerness to finalise the MDA as soon as possible, recognising the importance of mining to the future growth of the Malawian economy and the servicing of the International Monetary Fund credit facility,” he says. 

Transfer pricing is the general term for the pricing of cross-border, intra-firm transactions between related parties. “Transfer pricing” therefore refers to the setting of prices at which transactions occur involving the transfer of property or services between associated enterprises. Transfer pricing occurs when one company sells a product or service to another related company. Because these transactions are internal, they are not subject to market pricing and can be used by multinationals to shift profits to low-tax jurisdictions.

                     1. Objectives of Transfer Pricing

Companies use transfer pricing to reduce the overall tax burden of the parent company. Companies charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries.

                    2.  Transfer Pricing and Tax avoidance issues identified

Like other sectors of the economy, profit shifting pose risks in the mining sector.The IGF (Intergovernmental Forum on Mining) and OECD (Organization for Economic Co-operation and Development) has released guidance for source countries on transfer pricing in the mining sector. The transfer pricing and tax avoidance issues identified in the sector are:

                  (a) Abusive Transfer pricing

May occur during the sale of minerals and/or mineral rights to related parties. Under such circumstances, developing countries may require expertise to detect and mitigate transfer mispricing in the mining sector.

                  (b) Undervaluation of Mineral Exports
Profit shifting through the pricing of mineral products sold to related parties is a major concern for many mineral exporting countries. For developing countries, these risks are elevated where government agencies lack the mineral-testing facilities required to verify the grade and quality of mineral exports, as well as technical knowledge of the mining and mineral product pricing.

                  (c) International Tax Treaties
Most developing countries consistently raise concerns about tax treaty abuses. It is envisaged that countries with abundant mineral resources may be assisted in this area, considering how treaty provisions might have a significant impact on taxes imposed in the mining sector.

                 (d) Debt shifting

This is particularly significant for mining projects that require high levels of capital investment not directly obtainable from third parties and this makes substantial related-party borrowing a frequent practice. This creates excessive interest deductions thereby causing profits shifted to offshore via excessive interest payments.

                (e).Tax Stabilisation Clauses and harmful tax incentives.
Fiscal stabilization clauses create problems in terms of taxes because they can freeze the fiscal terms in the contract such that changes in tax law may not be applicable to existing mines. While tax incentives could encourage expansion of the sector, they may also lead to excess transfers of the gains from countries. It is on record that developing countries expect that that they will forego incentives entirely due to the pressures of attracting investment. However, it is important that countries should preposition themselves to understand how mining companies are likely to respond to those incentives.

                (i) Malawi Scenario-Kayelekera Uranium Mine.

In the Development Agreement, one of the tax incentive clauses was 10 year tax holiday.Though the mine life was beyond 10 years, it was unexpectedly put to a halt just after a 5 year production due to uranium price downturn.

The danger here was that the mine could even exhaust its mineral before the life of mine. In this regard it means the company could have mined for 10 years with a tax holiday.In the unforeseen circumstances, the mine could have been at liberty to transfer the profits to overseas so easily which means a 10 year tax holiday was likely able to make huge profits.

               (f) Offshore Indirect Transfers of Mining Assets
Transfers of ownership of company assets can generate significant income, which many countries seek to tax as capital gains. Transactions may be structured to fall outside the mining country’s tax base by selling shares in an offshore company holding the asset, without notifying tax authorities in the country where the asset/company is located.

                 (g). Abusive Hedging Arrangements
Hedging is a legitimate business practice in many commodity markets. It consists of locking in a future-selling price in order for both parties to the transaction to plan their commercial operations with predictability. A problem arises when companies engage in abusive hedging with related parties. They use hedging contracts to set an artificially low sale price for production and therefore record systematic hedging losses, reducing their taxable income.

  (i). Zambia vs Mopani Copper Mines Plc., May 2020, Supreme Court of Zambia, Case No 2017/24

Following an audit of Mopani Copper Mines Plc. the Zambian Revenue Authority found that the price of copper sold to related party Glencore International AG had been significantly lower than the price of copper sold to third parties.

A tax assessment was issued where the ZRA concluded that the internal pricing had not been determined in accordance with the arm’s length principle, and further that one of the main purposes for the mis-pricing had been to reduce tax liabilities.

This form of transfer pricing between multinational corporations and their African subsidiaries is typical of the tax avoidance practices employed by corporate taxpayers primarily to reduce their tax liabilities, as Zambia’s Supreme Court made clear in the opening paragraph of its judgement:

The ruling ordered that Mopani pay a total of 240 million Zambian Kwacha in taxes assessed for the 2006/07, 2007/08 and 2009/10 tax years within 30 days, bringing to an end a dispute that has been running since 2010.

Mopani Copper Mines Plc. first appealed the decision to Zambia’s Tax Appeal Tribunal, and after a decision was handed down by the Tribunal in favor of the ZRA, a new appeal was filed with the Supreme Court.

The Supreme Court dismissed Mopani’s appeal and ruled in favor of the Zambia Revenue Authority.

                   (h). Inadequate Ring-Fencing
It is possible that mining companies will have multiple activities within a country, creating opportunities to use losses incurred in one project (e.g., during exploration for a new mine), to offset profits earned in another project, thereby delaying payment of corporate income tax. Ring-fencing is one way of limiting income consolidation for tax purposes; however, getting the design right is critical to securing tax revenues while attracting further investment

The Ministry of Mining has pledged to continue supporting the Artisanal and Small scale Mining (ASM) sub-sector in the country to ensure that it adequately contributes to social economic development.

In her speech during the ASM Annual Mining Indaba in Lilongwe, Minister of Mining Monica Chang’anamuno said ASMs in the country play a major role of exploiting resources that would otherwise not have been commercially exploited by the medium and large scale mining investors. 

She said Government wants to address the challenges that the ASMs are facing including; low meaningful participation: Illegal mining operations and inadequate financial support.

“As part of the efforts of promoting local participation in the ASM sub sector, my Ministry has and is implementing a number of initiatives including formalisation of the ASMs into cooperatives. This financial year alone, the target is to train six groups and currently we have managed to train four groups out of six in good mining practices.”

“We worked hand in hand with Export Development Fund (EDF) to establish the structured market for buying gold and gemstones from small-scale miners, thereby providing readily available market.”

“We are also facilitating the construction of a salt production facility in Ngabu, Chikwawa district, however, inadequate financing and the recent tropical Cyclone Freddy are the main challenges to this initiative.”

Chang’anamuno said her Ministry is also working with the Technical Entrepreneurial and Vocational Training Authority (TEVETA) to develop a curriculum which will be used to train the ASMs in the country’s technical colleges; and sought technical assistance from the Canadian Government, for development of the ASM policy.

She said the Ministry has also taken a stand in ensuring that there is transparency and accountability in the process of issuing licences.

Chang’anamuno said the Ministry is giving equal opportunities to all Malawians who are interested in investing in the mining sector including the women and youth and also ensuring that the system employs a first come- first serve policy.

She said: “All Malawians are eligible to apply for a licence for mining, exploration or buying and selling of minerals and all the applications for licences are scrutinized by a committee which recommends either to grant or not.

“My Ministry has a web-portal, known as mining cadastral portal, where everyone including all applicants or holders of licences are able to see the category of application, type of mineral(s) being applied for, location of the licence, size of the area of the licence, date of grant and expiry of a licence. This web-portal is accessible by everyone, for free, at any time and any place.”

“You may also wish to know that my Ministry is ascribed to Extractive Industries Transparency Initiative (EITI) standard through the Malawi EITI as a key reporting entity in the extractive sector, and I am proud to indicate that compliance by mining companies in terms of data disclosure on production and revenue has increased.”

“Additionally, the validation score for 2022 for the extractive sector reporting was at 80%. This achievement is an indication that the Ministry of mining is now being recognized as one of the most transparent and accountable Ministries.” 

Meanwhile, ASM licences can be accessed at an application fee ranging from K10,000 to K50,000 for Malawians and as one way of easing long distance traveling, all clients seeking to access payable services can pay their fees for various services through direct bank deposits at their location of convenience. 

However, the Minister expressed concern over the spreading of false information about mining in the country and asked the masses to consult the Ministry for verification of information before dissemination.

She said: “My Ministry has noted with great concern that some people spread only bad news about mining activities in the country.”

“I am not disputing the fact that there are instances where some people are involved in illegal mining operations. However, our concern is that many people do not take their time to ask for and obtain correct information from my Ministry on issues concerning mining operations.”

“Instead they spread false information through various communication platforms especially social media.”

“There have been instances where by my Ministry has come across a lot of information on the media and used public resources to carry out investigations based on what has been circulating in the social media only to find out that it is not true.”

“Surprisingly, many people take pleasure in spreading such false information but do not take an initiative to find out the truth of the matter from my Ministry.”

In his address, Coordinator for Chamber of Mines and Energy, Grain Malunga said the efforts to promote and develop the ASM sub-sector do not only depend on the Ministry but require multi-stakeholder approach.  

Malunga said to put to an end to some challenges being faced in the sub-sector, there is a need for proper coordination between Ministry of Mining, Ministry of Trade, Chamber of Mines and Energy and financial institutions.

The ASMs Mining Indaba was organized under the theme of ‘Promoting Local Participation and Investment in Mining.’

Artisanal and small scale miners (ASMs) have urged authorities to put in place measures that will facilitate that they develop their businesses in order to graduate into mechanized medium or large scale mining.

Mining & Trade Review established in random interviews with ASMs that despite continued discovery of minerals in many parts of the country, local miners are not substantially benefiting because of lack of expertise, proper equipment and start-up capital.

Mylord Jere, a gold miner at Chimbiya Village in Traditional Authority Wimbe’s area in Kasungu, laments that despite that the area has potential for gold mining, he is failing to expand his business due to limited capital.

Jere, who runs a firm called Angoni Mining Company, also urged the Ministry of Mining to expedite processing of mineral licenses so that ASMs are able to easily acquire licences.

Said Jere: “It is through empowerment of local miners that Malawi can develop other than only relying on foreign investors.”

“If we, small scale miners, access capital and develop our operations, we will employ more Malawians hence contribute significantly to the government’s job creation agenda besides generating foreign exchange through the sale of minerals.”

“With the potential that the mineral sector has, it is sad that we are complaining of lack of forex. What is needed is to empower locals through provision of training opportunities and start-up capital to develop their businesses.”

Jere said with adequate capital, gold miners can benefit by procuring gold detectors which can help in identifying the minerals and mine other than just panning ignorantly as is the current scenario where by the process is labour intensive with minimal gains.

He said: “If Malawians can get machines and adequate start-up capital, they can go deeper in search of minerals rather than waiting for the stones to be washed to the surface by water. We are losing a lot because we do not go deep enough. To make matters worse we are not even aware of the real origins of the gold so it is like we are just groping in the dark.”

Administration and Marketing Manager at Maleta Gems and Jewels Ashley Simbeye commented in a separate interview that there is need for government to lobby cooperating partners and the financial sector to support small scale mining activities like it is doing in other economic sectors such as agriculture where by government is implementing the Agricultural Commercialization project to facilitate that small scale subsistence farmers graduate into commercial farmers.

“Many ASMs live a hand to mouth life. This needs to change if the country is to develop with mining as one of the key economic drivers as stipulated in Malawi 2063. If ASMs can get proper financing and expertise, I believe mining can compete with agriculture in raking in forex,” said Simbeye.

Simbeye also advised the ASMs to acquire relevant training on the trade from her institution in order to understand the true value of gemstones so that they are able to sell at a profit. 

“At Maleta Gems, we train artisanal miners on how to cut, polish, grade and know the value of each gemstone just by looking at it. Minerals come in different forms and colours and if you are not careful you can lose precious resources through wrong identification,” she said.

Minister of Mining Monica Changa’namuno said during the opening of the ASM Indaba in Lilongwe in December last year that government is doing all it can to empower ASMs as one way of taking many Malawians out of the poverty.

“The fact that we have minerals all over the country should be good news to all because we cannot just be relying on agriculture to bring in forex. We will continue engaging all stakeholders involved in the mining sector including banks to see how ASMs can get financing easily.” said Chang’anamuno.

Malawian banks shy away from lending money to ASMs because they consider the mining sector as risky.