Ghana’s mining and minerals industry is one of its most important. It is reported that mining accounts for approximately 5 per cent of Ghana’s GDP and minerals make up 37 per cent of total exports.
There have been recent pronouncements in Ghana each of which has the potential to have a significant impact on foreign investors. In this briefing we provide summaries of the same and highlight what we believe are possible implications.
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The widely reported introduction of windfall tax and increased corporate tax have recently become hot political topics in Ghana, as well as issues of major concern for developers of Ghanaian mining projects.
The key proposals in the Budget 2012 include:
- increasing the corporate tax rate from 25 per cent to 35 per cent for mining companies;
- introducing a windfall profit tax of 10 per cent on mining companies;
- introducing a capital gains tax (CGT) to apply to appreciations in value resulting from business takeovers and acquisitions;
- ring fencing project costs relating to natural resources for mining (petroleum and mining); and
- abolishing the current capital allowance regime applicable on mining companies and replacing it with a 20 per cent rate on a straight line basis.
In addition to the new windfall tax and increase in corporate tax, there are a few other suggested changes to the tax regime in Ghana in the Budget 2012 discussed below which will affect mining companies and their investors.
The first is an indirect CGT on the sale of companies that derive value from Ghanaian assets including non-Ghanaian resident holding companies which own Ghanaian assets or shares in a Ghanaian company. Ordinarily, a non-Ghanaian resident company which sells shares in a Ghanaian company (or its parent company) would not expect to pay Ghanaian CGT on the sale of those shares. The proposed indirect CGT is likely to present an exception to this and could be levied on non-Ghanaian resident companies on the sale of Ghanaian shares. In effect, the tax arises as a result of the assets being sold indirectly, regardless of the country of residence of either the seller or buyer. It is unknown whether a specific new rate of CGT will be imposed but if it is in line with the current rate imposed on Ghanaian capital gains, this could potentially be 15 per cent.
Where it arises, an indirect CGT is often imposed as an obligation on the buyer of the assets as a withholding tax at a fixed percentage of the purchase price (rather than a percentage of the profit made by the seller) and is usually paid directly to the local tax authority. The amount of CGT payable could be less straightforward to calculate where only part of the assets being transferred are located in Ghana, or (for example) where shares in a non-Ghanaian holding company (which itself either directly or indirectly owns shares in a Ghanaian company) are being sold and it is not easy to determine to what extent the value of the non-Ghanaian shares is reflected by an increase in value (if at all) of the Ghanaian shares.
Whilst details of how the proposed Ghanaian indirect CGT is to be implemented are not yet well known, it may well follow similar taxes introduced by other countries. As in these other jurisdictions, the new tax could affect the structuring of future investments into and out of Ghana and it is important to consider seeking tax advice where there is the possibility of transferring companies or assets into Ghana (or setting up companies there) where it is envisaged that they could be the subject of a sale at a later stage. Those companies already investing or operating in Ghana should consider the impact of an indirect CGT charge arising upon the subsequent sale of their investments. Without planning at an early stage, a subsequent tax could significantly impact the future profits upon the sale of an investment, company or assets. One possibility to bear in mind is structuring transactions so that a double tax treaty could apply to exempt any tax in the first place - generally a double tax treaty will provide that non-residents are not subject to tax in the relevant country unless they have a permanent establishment there (ignoring for these purposes special rules applicable to real estate).
There are a number of other things which the parties might consider in order to minimise the impact of a potential indirect CGT charge arising. For example, in the context of an actual sale, it may be possible to seek advance rulings from the Ghanaian tax authorities as to whether there will be a requirement to withhold, and then allocating the risk in the contract for sale in the form of warranties and indemnities.
In practice, an indirect CGT is likely to be an important issue for any buyer when conducting due diligence on an M&A transaction where one of the assets of the target group is located in Ghana. Depending on the scope of these rules, it may be necessary to take detailed advice as to whether the charge is triggered even if the Ghanaian asset is only a minor part of the group.
It is important to bear in mind that there is currently a question mark over the legality of any jurisdiction being able to impose an indirect CGT on non-residents located in treaty jurisdictions. One of the most high profile challenges being mounted is by Vodafone before the Supreme Court in India, where the decision of the Supreme Court is awaited with interest. The outcomes of these cases will be monitored closely by all countries which already impose or are seeking to impose an indirect CGT.
Other proposals put forward in the Budget 2012 include the ring-fencing of losses arising from one mining contract area or site so that they can only be offset against gains arising from that same contract area or site. This may prevent companies from deducting costs from new projects against profitable ventures yielding taxable income. A similar concept already exists in the UK oil extraction industry where profits from certain oil extraction activities as part of a trade cannot be reduced by any losses or other tax reliefs from other business activities carried on as part of the trade.
Another proposal is to abolish the enhanced current capital allowances regime applicable on mining companies and introducing capital allowances of 20 per cent of expenditure over five years, bringing this in line with the oil and gas sectors.
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Article 181(5) of the Constitution and international arbitration agreements
Article 181(5) of the Ghanaian Constitution provides that Parliamentary approval is required in respect of “international business transactions” to which the state of Ghana is a party.
Following a dispute that has recently arisen (and which has been referred to international arbitration) under a Power Purchase Agreement between Ghana and a Ghanaian subsidiary of Balkan Energy (the PPA), the scope of Article 181(5) has been called into question and is the subject of a forthcoming judgment by the Supreme Court of Ghana. The Supreme Court’s judgment will be of profound importance to international investors who have done or intend to do business in Ghana.
The PPA contained an arbitration clause providing for UNCITRAL arbitration in the Netherlands. Balkan referred the dispute to arbitration accordingly. Thus far the Ghanaian courts have purported to issue a stay of the arbitral proceedings on the basis that only the courts of Ghana have jurisdiction; and the question of interpretation of Article 181(5) of the Constitution has been referred to the Supreme Court. Meanwhile, the stay is being ignored by the arbitral tribunal; it is presumably Balkan’s intention to continue with the arbitration and, if successful, seek to enforce the award against Ghanaian state assets outside Ghana (in reliance on a waiver of sovereign immunity in the PPA and in the expectation that the enforcing courts outside Ghana will ignore the purported stay).
Balkan’s argument is simple: since the contracting Balkan entity was a Ghanaian company, no question of an “international business transaction” arises. Balkan refers to the Ghanaian Companies Act 1979, under which the nationality of a company is to be determined by reference to its place of incorporation.
The state’s arguments in support of the PPA being an “international business transaction” include that:
- contractual negotiations were undertaken by a foreign Balkan entity, which entity also entered into a memorandum of understanding undertaking to execute the project;
- such foreign Balkan entity then nominated the Ghanaian Balkan subsidiary to enter into the contract. The subsidiary was formed a mere 11 days prior to the execution of the PPA; and
- the PPA contains certain indemnities pursuant to which Ghana may incur liabilities in respect of claims brought against the Balkan contacting entity by foreign third parties.
It is also understood that the state will argue that the inclusion of an international arbitration clause in the PPA in itself invokes Article 181(5).
Some of these arguments are specific to the facts of the case in hand, although analogous facts would arise in many transactions. We understand that in addition to these fact-specific matters, the state seeks a ruling that Article 181(5) applies to any business transaction between the state and a Ghanaian company wholly owned by foreigners and capable of enjoying the status of a strategic foreign investment under the Ghana Investment Promotion Center Act 1994.
It remains to be seen whether the Supreme Court adopts a fact-specific approach to the case or seeks to make a more general pronouncement as to the meaning and scope of Article 181(5). So far, the Supreme Court has merely laid down directions at a procedural hearing held on 6 December 2011. The court has asked the parties to address the following two questions in making their submissions in due course:
- whether a contract entered into between the government and a Ghanaian legal person can ever be classified as in international business transaction; and
- if so, how are such contracts to be distinguished from other contracts entered into between the government and Ghanaian legal persons?
In a mining context, it is notable that section 26 of the 2006 Mining Law provides, absent certain other arrangements, for UNCITRAL arbitration as an available method of dispute resolution. It would be somewhat perverse if an agreement providing for UNCITRAL arbitration (as envisaged in the legislation applicable to such agreements) were then of no effect because of its inclusion in an “international business transaction”. All the more so since mining leases are approved by the government, albeit under Article 268 of the Constitution rather than under Article 181(5). Some clarity needs to be brought to the question of how Article 181(5) of the Constitution interacts with the laws that apply to mining specifically and with other provisions of the Constitution. If a contract has already been approved by the government, will the government have waived or become estopped from seeking to undo it in reliance on Article 181(5)? This is a nuance that does not arise in the Balkan case, where there was no formal government/Parliamentary approval at all.
As to the argument that the mere inclusion of an international arbitration agreement invokes Article 181(5):
- Whilst an arbitration agreement is generally regarded to be a contract separate from the underlying contract in which it is contained, it cannot be wholly divorced from that underlying contract. To regard it as a business transaction in its own right that ought to receive Parliamentary approval seems contrary to received wisdom.
- An adverse ruling by the Supreme Court would also seem to create scope for mischief in cases involving Ghana state entities under existing contracts, given that the arbitration agreement will not have been the subject of its own Parliamentary approval even if the underlying contract has. It is important that even if there is a dispute as to the validity of the underlying contract, that dispute be referable to arbitration as agreed between the parties.
- Arbitration agreements are fundamental to the smooth running of international business. An adverse ruling by the Supreme Court would serve to undermine arbitration as a process. It would also run contrary to the progress Ghana has been making in bringing its arbitral laws more in line with international standards, witnessed by its enactment of the Act on Arbitration which came into force on 31 May 2010.
- The state seems to be arguing that the PPA as a whole would be ineffective. However, the question arises whether the arbitration provision could be severed, leaving the remainder of the agreement afoot.
The outcome of this debate will plainly be of great significance to any international entity with existing or future business in Ghana which involves contracting with the state. If any of the state’s various arguments prevail, this will result in Article 181(5) being applicable to (and hence Parliament needing to approve) a wider variety of contracts/transactions than previously understood.
Finally, investors might want to consider how an adverse ruling by the Supreme Court might relate to protections under any applicable bilateral investment treaty with Ghana. This is a complex topic which we will not explore in detail here in the interests of brevity.
For the moment there are more questions than answers. Anyone with current or imminent business in Ghana needs to take stock of their position given the arguments being raised by the state in the Balkan case. Once the judgment is issued, further analysis of the position will be required.
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Forthcoming legislative change in the mining sector
The Minerals and Mining Act 2006 (Act 703), enacted to replace the Minerals and Mining Law 1986 (PNDCL 153), remains the principal legislation relating to mining in Ghana. The responsibility for the overall management of Ghana’s mineral resources and policy-making, including the grant of mineral rights, is vested in the Minister responsible for mining. In carrying out his functions he is assisted by the Minerals Commission set up under the Minerals Commission Act 1993 (Act 450).
However, there have long been discussions regarding the overhauling of the Mining Regulations 1970. In this vein, a number of draft regulations were submitted to the Attorney General’s Department for review some time ago - according to the government, the principal intention of the drafts is to ensure that Ghana maximizes the benefits from mining. The draft regulations include:
- draft Minerals (Royalties) Regulations
- draft Compensation and Resettlement Regulations
- draft Mining Regulations (Health and Safety)
- draft General Regulations
- draft Explosives (Mining and Civil) Regulations
- draft Mineral Licensing Regulations
- draft Mines (Support Services) Regulations
The draft laws remain with the Attorney General’s Department and as such their status is uncertain; indeed it is unclear when, or indeed if, they will be enacted. Over the coming weeks we will continue to follow their progress and provide a further update once there is more certainty.
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