Mining & Trade News

The 
Kangankunde case:  
A missed 
opportunity for Malawis’ Rare Earths.

News that Lindian Resources, a mid-tier company mining rare earth in Malawi at Kangankunde hill, has entered into strengthening its trade, marketing and logistics in Singapore soon after first blast gives an insight into how mining companies operate having an advantage over a mineral host country to their advantage. Singapore is not a traditional, classic tax   haven like the Cayman Island, Bermuda which include secrecy, minimal taxation and lack of economic substance. It is   classified as a tax haven because of its high, competitive tax regime, zero capital gains and other incentives that ultimately lower effective corporate taxes for foreign investors although it claims that it is legally compliant, transparent in its dealings and internationally recognized. This type of open tax policy and locality makes it a gateway for mining companies wanting to expand into emerging multinationals rendering Singapore a global hub for international investment and trade.
 

Possible reasons why Lindian chose Singapore

• Singapore is a centre for international
  trade and finance.
• Favorable policies for people living and
  doing business.
• It offers several tax breaks, relatively low
  corporate tax rate and top personal tax
  bracket and there is no any levy/tax on
  capital gains. 
• Its’ territorial tax system allows certain
   foreign-sourced income to be exempted
   under specific conditions
• Qualifying companies may receive 
   partial exemptions on a certain amount 
   of  chargeable income,

Unlike traditional tax havens, Singapore requires companies to demonstrate real economic activity, such as hiring local employees and maintaining local operations, to qualify for tax incentives. This ensures that businesses are not merely briefcase companies and contributes to the country’s reputation as a legitimate financial hub. Such incentives have also attracted global multinationals who use Singapore for regional headquarters and strategic tax planning.
 

What does this mean for Malawi as a mineral host country?

Critically, Malawi will somehow be disadvantaged in the following ways:

1. Base erosion and profit shifting (BEPS).
This is a situation where a mining company exercises tax avoidance strategies to exploit gaps in tax rules to artificially shift profits to low or no-tax location. This risks transfer pricing where Lindian may undervalue its rare earth export of concentrate and sell cheaply to its own Singapore marketing hub, effectively trapping the largest profits in a low-tax jurisdiction and leaving the host country (Malawi) with minimal taxable corporate income. This may shift the profits realized from Malawi as an extraction site to Singapore. Besides, the country has probably already been deprived of its taxes, royalties and other community benefits after being allowed as a Mid-tier miner (medium scale mining). Furthermore, the host nation (Malawi) also bears all environmental and social costs.

2. Tax Incentive Asymmetry

Generally, when a country trades with a tax haven, it avoids high/standard corporate tax rates in a host country opting for these countries that offer specific incentives in form of schemes thereby reducing the tax rates on trading income. There is an inherent tax gap where a company (Lindian) will maximize its profits in Singapore.
 

3. Information and Asymmetry 
Obscurity
Singapore has physical trading with complex financial institutions and has capacity for hedging (a risk management strategy used in finance and business to offset the risk of adverse price movements in an asset) than in Malawi. In another aspect, Malawi as a host country, tax authorities lack the data or capacity to audit these complex offshore transactions and with creation of hidden margins, the true commercial profit margins remain obscured.
 

Proposed solutions for Malawi to do 
better (win-win situation)

a). Review and Reduce Tax Incentives
Host countries often lose revenues from overly generous tax holidays and accelerated depreciation. An example is the Kayelekera Uranium Mine which was mining uranium under Paladin Energy and was given a 10 year tax holiday where price downturn forced the mine to be under Care and Maintenance just after operating for 5 years. Malawi must balance these incentives with primary infrastructure investments to support domestic value addition. It is unfortunate that while the agreement showed that Lindian would be exporting rare earth oxide, the mining sector has learnt that the company is exporting monazite concentrate according to some documentation released to the public

(b). Direct State Participation
Host governments secure a direct share of revenues and mitigate tax-avoidance risks through equity stakes and direct licensing. Through MAMICO (Malawi Mining Investment Company), the government must brace itself for the upcoming   mining companies to get involved in equity sharing and  also with time, localize the mines.
 

c)Mandatory Disclosure Rules
Mining companies are obliged to submit standardized data on production, subcontracting, procurement, local content and offshore transactions in alignment with mining frameworks. Malawi must make sure that these frameworks are adhered to and embraced as mandatory.

(d). Joint Mandate Traceability, 
Monitoring and Data Exchange
Malawi must intensify inter-government collaboration) and non-state actors in monitoring, tracking and verification of mineral exports, point of sale, imports for use by the mining company. The Ministry of Mining including its’ Departments, Mining and Minerals Regulatory Authority (MMRA), Malawi Revenue Authority (MRA) while the non-state actors like MWEITI, Natural Resource Justice Network (NRJN) have to check on accountability and transparency in exercise of this collaboration.

(e). Implement the Sixth Method
 Some countries like Zambia implemented mandatory use of publicly quoted commodity market values as a benchmark like from London Metal Exchange based on shipping date/loading for related-party mineral sales to prevent deliberate underpricing. This is a transfer-pricing rule used to prevent multinational mining companies from artificially reducing taxable profits by selling minerals to offshore, related-party marketing hubs at undervalued prices where it is called the Sixth Method. Malawi must adopt the same because these mining companies avoid internal pricing formulas to run away from taxes.
 

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