Mines could be short-changing govt, Auditor General fears
Mbongeni Mguni | Monday November 22, 2021 06:00
A special audit into the Department of Mines’ efficiency in collecting revenues from the mining sector, found loopholes through which companies could be side-stepping their obligations to government.
Mineral revenues are government’s most important source of funding, accounting for one third of budget incomes, or P20.3 billion, in the current financial year. Government earns mineral revenues through royalties paid on production, dividends in instances where it has equity in the mining companies and taxes.
However, the Auditor General’s investigations found that loopholes in policy and law, as well as poor capacity at the Department of Mines meant that government could not be entirely sure it was getting its fair share of the values being generated in mining.
The report was released this week but covers the years between 2014 and 2019.
“The Department of Mines had not been sufficiently monitoring operations. “This had been attributed to non-submission of production returns, financial reports as well as lack of capacity in terms of numbers and skills, and financial resources,” the Auditor General, Pulane Letebele noted.
While this challenge was focussed on smaller mines such as quarries where activities were difficult to monitor, the Department also dropped the ball with the larger mines as it relied on a “trust” system.
“Operations of large mining companies had not been monitored for their entire period of operation,” Letebele said. “This was exacerbated by the Department trusting that these companies had mechanisms in place to provide assurance on compliance to requirements and legal statutes.”
The Department did not have a resident officer to verify that royalties paid were commensurate with the quantity and quality of minerals extracted, as situation which “created opportunities for under-statement of production and ultimately under-payment of mining revenue”.
While the Department told the Auditor General that where funds had been secured, private entities were engaged to audit large mining operations, Pulane said no evidence to that effect had been provided to substantiate the claim.
The situation is seen in numbers dug up by Letebele’s investigation. According to the Auditor General, the Department set the same baseline target for non-Debswana mineral revenues between 2016-2017 and 2018-2019, without explaining how this would be achieved. Over those three years, the target was only met once in 2017-2018.
At Debswana, no baseline targets were set, while the confidential agreement between De Beers and government could not be provided to allow Letebele to further analyse whether state coffers were receiving best value.
“The failure to avail the Debswana mining company’s terms of operation made it difficult to understand the responsibilities and obligations of the contracting parties,” Letebele said. “The Extractive Industry Transparency Initiative principles encourage countries to publicly disclose their extractive (mining) sector contracts agreements and licences. “Botswana is however not a member of the EITI.”
Mines were being allowed to defer royalties, which amounted to debts of P264 million at the time of the audit, while Letebele found that some had closed, meaning recovery of the arrears would be difficult.
“Most of the mining companies did not pay royalties as required by the Mines and Mineral Act, but instead deferred payments. “Lamentably, most of these mining companies were placed under care and maintenance or provisional liquidation and even if penalties for non-payment of royalties were imposed, they would not be recovered as most of the companies have ceased operating or would have ceased operating.”
The Auditor General’s findings come in the wake of a recent appeal victory by the Botswana Unified Revenue Service (BURS) against a diamond polishing firm it accused of paying less taxes than applicable. Documents seen by Mmegi indicate a Board of Adjudication established in terms of the Income Tax Act recently ruled against Diacore Botswana, a diamond cutting and polishing company.
Diacore Botswana recorded company losses in its tax returns between 2010 and 2014, prompting the BURS to audit its finances, which revealed that for some of the period a tax liability of P8 million was due. Diacore had avoided the liability via a method known as transfer pricing, in which the diamonds it sold to its parent company outside Botswana were priced lower than it would have priced them had they been sold to an independent, separate entity.
Typically, local cutting and polishing firms buy rough diamonds from the De Beers/Debswana pipeline, polish these locally and ship them to their international parent companies, who then do jewellery manufacturing and shop sales.
This week, the BURS declined to comment on whether the Diacore case was symptomatic of the industry as a whole. Questions on how regularly the BURS audits the diamond cutting and polishing sector, as well as on the taxman’s ability to audit transfer pricing, were equally rebuffed.
“The revenue laws constrain us from disclosing taxpayer information to third parties and therefore we cannot discuss the issues as this would be breach of taxpayer confidentiality,” acting general manager communications, Refilwe Moonwa said in a written response.
She however added: “It is important to note that the fact that BURS has won this case twice at different appeal stages signifies the level of competence in what we do with respect to auditing.”
Moonwa said the BURS continuously re-tools its skillset to be able to keep pace with the evolution of international taxation and transfer pricing, in order to deal with “such issues as and when they arise”.