Lithium fiscal regime advantages but, potential risks to revenue exists

A recent assessment by the Natural Resource Governance Institute (NRGI) has highlighted both the benefits and potential risks of Ghana’s fiscal regime for its first lithium agreement. According to the report authored by Dennis Gyeyir, Africa Senior Programme Officer, and Thomas Scurfield, Africa Senior Economic Analyst of NRGI, Ghana’s share of revenue from the Ewoyaa mine is higher than the legislated fiscal regime and those of other countries such as Australia, the Democratic Republic of Congo, and Zimbabwe.
However, several potential risks could impact the expected revenues.
The government has negotiated a fiscal regime for the Ewoyaa mine that ensures a higher share of revenue for the country.
One key aspect is a 10% royalty on gross sales, compared to the existing legislation of 5% on gross sales revenue for other mineral mines.
Additionally, Barari, the company involved, will contribute 1% of its revenue to a community development fund, a provision absent in the current legislation.
Furthermore, the loss carry forward period is reduced to four years, compared to the five-year allowance in the existing laws.
Despite these higher taxes, the NRGI report notes that the Ewoyaa fiscal regime does not adequately capture a larger share of windfall profits.
The report suggests replacing the fixed-rate royalty with a variable-rate royalty that would exceed 10% at higher prices, establishing a fiscal regime that is more responsive to the mine’s profitability while still generating reliable revenue.
The report also emphasizes the importance of ensuring that prices for tax purposes are based on a pricing benchmark to prevent under-pricing.
Additionally, it suggests placing limits on the amount of interest the mining company can deduct from taxable income, regardless of the debt-to-equity ratio, to curb profit shifting.
Furthermore, the report recommends that the mining lease agreement should include provisions to make the government’s equity non-dilutable to protect against share dilution by Barari or Atlantic Lithium.
Establishing clear rules in the shareholders’ agreement and ensuring its disclosure will help prevent the underpayment of state dividends.
The report also emphasizes the need for continued capacity building among tax and regulatory authorities to effectively audit costs.
Regarding Ghana’s ambitions of constructing a lithium refinery, the report suggests that parliament consider the implications of higher taxes, arguing that if the mining company makes less profit, it might be less inclined or able to finance a refinery.
To effectively assess the broader impact of the Ewoyaa fiscal regime and the potential development of a lithium refinery, the report calls for a rigorous and public feasibility study.
The report further points out that the Ewoyaa fiscal regime’s higher taxes during periods of low profits should not threaten the mine’s viability.
However, the taxes in the Ewoyaa regime that are not linked to profitability are higher than in other regimes, making it more “regressive.”
This means that even when profits are low, the mine is still subject to higher taxes, a concern that needs careful consideration.
To protect against tax avoidance, the report recommends that the government specify in the mining lease agreement that prices will be based on a pricing benchmark such as the Spodumene Concentrate Index (CIF China).
Additionally, limits on debt financing should be considered, including rules that limit the amount of interest companies can deduct based on measures of operating profit, such as earnings before interest, taxes, depreciation, and amortization (EBITDA).
The report also raises concerns that the government may face challenges in collecting the expected revenues from its equity in the Ewoyaa project.
To address this, the report recommends including provisions in the mining lease agreement to prevent the dilution of government equity.
It also notes that even if equity is not diluted, dividends may disappoint, as seen with several of Ghana’s mature gold projects. The government’s ability to benefit from state equity will depend on the rules in the shareholders’ agreement and its capacity to implement them effectively.
“By taking these steps, the government will have a better chance of generating the benefits that it expects from the Ewoyaa mine and the wider sector,” the report concludes.