â€¦LRA says government will save M2billion Mine VAT tax erosion
â€¦mining sector shuns VAT amendment Bill, fearing accelerated mines closure
The mining industry under the auspices of the Lesotho Chamber of Mines (LCM) and the Lesotho Revenue Authority (LRA) the national tax collecting entity, have squired-off on the new tax bill which could determine the difference between the countryâ€™s continued up to M 2 Billion tax erosion, and massive loss of employment to thousands of mine-workers in the different mining companies.
At the heart of the terse huff is the Value Added Tax (Amendment) Bill of 2021, which is almost at the verge of becoming law since it has been already passed by both houses of Parliament; the National Assembly and the Senate and only awaiting the Royal ascent.
According to the LRA, the country has been losing at least M2 billion annually worth of tax to the registered and currently operating mines through the annual VAT refunds.
The LRA which advised the finance ministry to amend the VAT Act, says the money lost to the mining companies would at the behest of the new law, now be saved and retained into the government purse.
Some of the amendments included in the VAT Bill is to recharacterise the supply of diamonds outside Lesotho from zero-rated to exempt supplies.
â€œThe Authority refunded around M1.790 billion input VAT to the operating mines, meaning the country losses about M2billion in VAT returns to the mining companies operating in the country every year. With the new VAT Amendment Bill, LRA is going to close that leakage,â€ Mosuoe Mapetla, Commissioner Operation Support with LRA told Newsday.
â€œThere is an outcry by the mining sector on the move from Zero-rate to exemption which is confusing. We are saying, through the bill, the diamond exports should not be taxed at all. The only bitter fact is that the move to exempt the export takes away the tax refund â€˜rightâ€™ away from the mines, meaning LRA will no longer refund the mines the input VAT of up to M2 billion a year. The mines will now have to ensure their sales cover all their costs.â€
He added, â€œTheir outcry that the cost of operations will increase makes no sense to us because if a business model is strategic, it should not rely on what the tax man does, but should be able to put in place strategies which will see the cost of production and operations duly recovered.â€
However, despite the LRAâ€™s confidence in the Bill, the mining sector through the LCM has labelled it a threat to the future prospects of current existing mines, as it contends that for instance, the Mothae and Liqhobong diamond mines would be the first to immediately feel the pinch of the new law.
LCM revealed that the Liqhobong Mine, which needs around M300 million to resume its operations following a fiscal knock on the back of the Covid-19 induced lockdowns, would not have enough operational funding. This, the Chamber indicates translates to at least 600 jobs lost and over 50 sub-contractors cancelled, while Mothae is currently extremely marginal in the inflationary environment.
Job loss scare vs sound strategic business operation
According to presentations made by the LCM to the Senate earlier this year, and to the Cabinetâ€™s economy sub-committee a fortnight ago, seen by this publication, the VAT Bill threatens the future of the mining industry in Lesotho.
â€œThe impact to Liqhobong should the VAT Amendment Bill come into force equals to loss of more than 600 job opportunities, loss of compensation and community development projects, loss of royalties and direct and indirect taxes of about M1 billion,â€ the Chamber in its presentation said.
It revealed that Liqhobong Mine is heavily indebted and wonâ€™t get its agreed debt restructuring away with Absa Bank, a South African Bank.
â€œLiqhobong wonâ€™t get access to the full restart funding worth M150 million, a facility provided for by Absa bank and the Export Credit Insurance Corporation of South Africa which was granted on 13 May 2022. Liqhobong wonâ€™t get access to the Absa approved M150 million working capital facility which is required by the time production is expected to resume,â€ The chamber said stressing that Liqhobong is a marginal operation and cannot afford further cost increases and may be forced to shut down.
It further suggested that the Storm Mountain Diamond, also known as Kao Mine which was planning on expanding, and for which it needed some M700 million would not be able to renew its operating license after its current 6-year run.
â€œThe Current Life of Mine (LoM) is significantly reduced; Mothae is currently extremely marginal in inflationary environment and likely to be placed on care and maintenance, Kao Mine is marginal and remaining with LoM of 6 years which will not be extended by 10 years as anticipated,â€ the Chamberâ€™s presentation indicated, adding that the future expansion and investment projects would be cancelled.
It continued that the Kao project Nala worth M700 million, Liqhobongâ€™s recommencement funding of M300 million and LetÅ¡eng underground development would be directly impacted by the passing of the Bill.
â€œAt least 2 500 employment opportunities are at immediate risk, while the Foreign Direct Investment (FDI) will likely be reconsidered and lost as goalposts changed. This decision will have Investor confidence and returns severely eroded resulting in FDIâ€™s will to write-off significant investments made into Lesotho,â€ the Chamber warned adding that the prospecting operators would not be able to secure further project financing and investment, further suggesting that the countryâ€™s dividends from the mines are at risk.
â€œThe government will suffer huge losses,â€ the Chamber warned.
But Setsoto Ranthocha, LRA Deputy Commissioner Tax Advisory Services, says that per their study tour at the different mines, the mines can afford an estimated value of the diamonds extracted.
â€œThere is an opportunity for the mines to choose not to sell if buyers are offering a low price. I also know that with every diamond extracted, they already have an estimate value of the diamond according to how many carats the stone is worth.
â€œThere is also what they call stock piling, a system they use to collecting enough diamonds and delay selling. So, we know that there is an opportunity for them to sell and recover their operating costs as well as make profit,â€ Ranthocha said.
International best practices
But the LCM argued that the LRAâ€™s advice to the government is moving Lesotho away from the international taxation, particularly the VAT treatment norm.
â€œThe effect of the bill will be disastrous for the Lesotho diamond mining and prospecting industry. It is not only the commercial effect upon the diamond miners and prospectors, but the effect on offshore investor perceptions which have been disregarded by the LRA.
â€œThis Bill represents a fundamental â€œshifting of the goalpostsâ€ for investors in the diamond industry in Lesotho â€“ and done with no consultation or interaction,â€ the Chamber charged.
Although the Chairperson of the Lesotho Chamber of Mines, Mohale Ralikariki refused to give this publication audience to clarify the presentations, he didnâ€™t deny that the presentations indeed belonged to the Chamber.
He declined confirming the dates on which they the Senate and the Cabinetâ€™s sub-committee, and also declined giving clarity in the Chamberâ€™s presentation to the cabinetâ€™s economy sub-committee.
â€œI cannot give a comment on this matter because relevant stakeholders are still on the talking table. I will again not respond to your question on the presentation because you are not supposed to be in possession of the document,â€ Ralikariki said.
Meanwhile, Mapetla further told Newsday that the LRAâ€™s advice to have the amendment Bill was informed by a lengthy interaction with their African counterparts.
â€œAs African countries, we have been engaging through the African Tax Administratorâ€™s forum (ATAF) on how we can review, update and modernise taxation of extractive industries.
â€œLesotho is blessed with high quality diamonds and other minerals. They are also finite to stress, meaning one day they will be extinct; now we looked at how then do we ensure that the country and its people alongside the companies extracting the minerals are able to share the wealth in an equitable and fair manner,â€ he said.
He pointed out the reality that the government could not go into the mining business, however can only then be a shareholder, â€œâ€¦but that alone is not enough hence the taxation systems. The system balances the equitable sharing for countries to not only get breadcrumbs,â€ Mapetla explained saying under the ATAF engagements, tax administrators look to assist countries benefit from the extractive industries.
He further pointed out that while in other countries, governments have majority ownership of mines, Lesotho is a minority owner thus the LRA looked at ways to position the country to receive an equitable portion of the mining emoluments.
â€œCompanies are allowed to make accounting profit and economic profit, however, the economic profit is not supposed to sky-rocket only benefiting one side. The mineral worth is that of Lesotho therefore it is expected for the companies to cover their costs and a fair return, but ensure that the owners of the minerals also get a fair share, something which is not a reality at present,â€ Mapetla said.
Picking another hole onto the Bill, LCM said the LRA did not even conduct an impact assessment on the pros and cons of the BILL.
â€œThe LRA is proposing this VAT Bill – which will have a fundamental and disastrous effect on the Lesotho mining industry and economy – without having conducted a single impact assessment study, nor any trade-off studies nor held any consultations with the Governmentsâ€™ own Ministry of Mining â€“ let alone the Chamber of Mines and each of its members.
â€œThe impact assessment and consultative process should have also included the approximately ten small Lesotho companies who are holders of diamond prospecting licenses and mining leases and who strongly oppose this Bill too. There has been no impact assessment into the fragile nature of the Lesotho diamond mining industry and the marginal nature of the individual mining and prospecting companies and their different cost bases inside Lesotho which will be impacted by this Billâ€.
On the other hand, the LRA indicates that consultations do not mean consensus or understanding that will lead to policy position change.
â€œWe had a lot of encounters with the mining sector players through the Lesotho Chamber of Mines and individual mines on the amendment Bill, however, it doesnâ€™t mean our encounters would result in a policy position change. We heard them yet we were not convinced,â€ Mapetla said.
VAT taxation circle
Ranthocha explained that the VAT circle isnâ€™t supposed to be broken yet with the mining sector, there is a gap.
â€œOur assessment of the diamond mining sector indicated that there is no point where the end user, being the buyer of Lesothoâ€™s diamond, is paying VAT, that cannot be right. If it said that diamonds are taxable and not exempted, it means that the different role players will collect VAT which will be given to governments, whether Lesotho or any country.
â€œWhen we looked at the VAT circle of diamonds, there is a breakage on the circle when the extracted diamonds are sold. We see an input VAT refunded to the mining companies, yet there is no output VAT paid to any country upon sale, that circle is not complete and through the Bill, the gap will be closed,â€ he explained.
He added that the extractive minerals sector was previously zero-rated, however, with the new law, the sector moves from a zero-rated zone to being exempted, meaning the mines will no more receive VAT tax refund from LRA because there is no output VAT on the auctions.
Addressing the chain of diamond sale in Belgium whose tax laws have exempted diamonds, the LRA stressed that the mines need to ensure they sell the diamonds at prices that will cover their operating costs.
â€œWe donâ€™t know what happens to the precious stones after they are purchased by the said buyer in Belgium, but our expectation is that we zero-rated our diamonds with an expectation that a VAT treatment will be administered where a country will then charge an import VAT, but that is not the case with Belgium hence the broken VAT circle. Belgium alongside Russia, United Arab Emirates and India have a mandate of breaking the VAT system for their own benefit.
â€œThe mentioned countries apart from Russia donâ€™t have diamonds, yet they are benefiting from the diamond sector by breaking the VAT system, that canâ€™t be right! With the Bill, we are trying to correct the system,â€ Ranthocha said.
Meanwhile, Mining Minister Serialong Qoo declined speaking to Newsday saying the issue was still on the table.
â€œI am not in a position to talk about that issue, if it is still being deliberated on by relevant stakeholders,â€ he said refusing to confirm or deny if indeed the LRA did not consult his ministry when the Bill was developed.
The chairperson of the Cabinet Sub-committee, who is also the Trade and Industries Minister, Dr Thabiso Molapo on his end also declined commenting, citing the matter was a Finance issue which needed to be best explained by the minister or the LRA.
â€œThe right person for you to speak with is the Minister of Finance who is the custodian of tax issues. I am just a chairperson of the sub-committee thus cannot comment on issues of finance, but if you ask me about Trade issues I would respond. The Committeeâ€™s role is to give audience those who have issues with certain ministries. We would then make those ministries know of issues and in this regard the finance minister would be contacted and be made aware, then once the committee has heard all sides would then make recommendations.
â€œI will not comment on the issue at the moment because we only have one side and still waiting for documents from all sides, only then will the committee have recommendations. At the moment I canâ€™t say much,â€ Dr Molapa said.
Thabo Sofonea Finance Minister, when asked of the possibility of the Bill being returned after being passed by the parliament, painted out that that opportunity had already been wasted.
â€œThey (LCM) failed to convince the Senators and yet they are now complaining.
â€œThe meetings being held are a waste of time. That process doesnâ€™t even make sense at all, itâ€™s very contradictory, how can cabinet ministers who are also members of parliament now be entertaining talks on a bill which they passed in parliament? It is as if they are now doubting their decision which they reached collectively.
â€œFurthermore, the stage at which the bill is at, there is no turning back! It has passed in both Houses and is awaiting the Royal ascent, thus whatever talks there are, itâ€™s pointless at this stage, I mean they were afforded audience to defend the bill from passing in the Senate, but they failed to make their case; their move to have some cabinet ministers to deliberate on an issue that has passed Parliament doesnâ€™t make sense,â€ the minister said.
He added, â€œThe law is what the country needs and according LRA, once the bill is passed, the country will be able to block that revenue leakage.â€
Why LRA pushed the 3rd VAT Amendment Bill
In terms of the statement of objectives and reasons that accompanied the VAT Bill, the proposed amendments distinguish between (a) VAT on imported services in a â€œbusiness-to-businessâ€ transaction, where the recipient of the service is a Lesotho VAT vendor, and (b) VAT on imported services in a â€œbusiness-to-consumerâ€ transaction, where the recipient is a final consumer.
LRAâ€™s Public Relations Manager Phello Mphana, explained that the mandate of the authority from its inception is to collect specified revenue according to existing legislatures Income Tax, VAT and Customs Tax.
â€œLRA assesses and acts in accordance with existing policies and laws of the country,â€ he said.
He added, â€œIn the LRA Act, we are also mandated to advice the Minister of Finance on tax policies and the proper administration of tax, thus the section of the act empowers the LRA. Our mandate is to further look at existing tax systems and if they are of the best practices, and are they achieving set goals. To look at existing gaps and the administration of the systems, especially because while there are wonderful tax systems to bring to effect, it is sometimes the how part that can prove to being a challenge.
â€œEven with the journey of the VAT Amendment Bill, it was mentioned in three previous budget speeches, however, it is only now that it is seeing the light of day. The journey started with LRA researching and collecting lessons on how best it can be implemented.â€
â€œThe 3rd VAT Amendment Bill falls directly within the section of the Act of advising the Minister on areas we see that tax policies can be reformed or changed along with the times, and we also give reason to why there is a need to change.â€
Mosuoe Mapetla, Commissioner Operation Support revealed that the LRA was not administering VAT on imported services in an adequate manner, so the Bill directly addresses that.
â€œFinance, Mining, Telecommunications and Manufacturing are sectors which the most tax erosion on imported services happen, and the LRA through this Bill is trying to provide mechanisms of collecting tax from the imported services rendered to locally registered entities,â€ he said.
He stressed that â€œUnlike imported goods which are physical, services are hard to track, but with the automated compliance and the sharing of information system being implemented in collaboration with our different stakeholders along with accounting books from the sectors mentioned, it is going to be possible to the LRA to effectively administer collecting VAT on Imported services, whether done physically or remotely. We are connected with banks.â€
â€œThe success future of tax administration and systems the world over is collaboration amongst governments, tax administrations and sectors. It is now achievable to put in place tax systems through the information sharing in collaborations,â€ Ranthocha added.
â€œWhen being specific on imported services from the mining sector, there is a process of prospecting whose needed expertise to analyse the land prospected, the service is offered in Australia, and unlike the norm where the Australia would charge VAT, we say that has to stop. The end user of that service is the prospecting mine registered in Lesotho, therefore, that company needs to pay for the services they sought externally,â€ Ranthocha explained, adding the same would apply to the Multi-Choice TV services offered to Basotho.
â€œMulti-Choice is another company that is going to have to comply with their imported services of TV offered to Basotho users, meaning when a Mosotho pays for their TV monthly subscription, there will now be a VAT charge on the end user, being a Mosotho, this will allow the LRA to collect,â€ he said.
VAT a form of an indirect tax levied on goods and services supplied in and outside Lesotho
was introduced in July 2003 replacing General Sales Tax (GST). It is applicable on all transactions where value is added for the end user, it is paid by the consumer hence it is described as a destination tax. A registered business is charged with the responsibility of collecting VAT when supplies are made to customers.