A look at amendments to the Guinean mining code introduced in 2013.
On April 8, 2013 the Republic of Guinea's acting parliament, the Conseil National de Transition (CNT), adopted Law L/2013/053/CNT (the 2013 Bill), containing amendments to the Mining Code of the Republic of Guinea (the 2011 Mining Code). The 2013 Bill was promulgated shortly after on April 17, 2013. The 2011 Mining Code was intended to replace the previous Guinean mining code of 1995 but was met with widespread criticism, resulting in the authorities almost immediately ‘suspending’ the application of its tax and customs rules and in effect not enforcing the remaining provisions. This move became the source of legal uncertainty for Guinea’s mining industry. The 2013 Bill is the result of work carried out to address some of the concerns expressed by mining companies; several of the proposed amendments do provide a level of relief in respect to certain provisions of the 2011 Mining Code. However, new restrictive rules are also introduced and many of the industry concerns remain unaddressed.
For the purposes of this briefing, ‘Mining Code’ means the 2011 Mining Code as amended by the 2013 Bill.
In response to concerns expressed by the industry on the restrictive size of Guinea’s exploration land package, the 2013 Bill provides for an increase in the maximum area of exploration licences, namely from 350 km² to 500 km² in respect of bauxite and iron ore, and from 50 km² to 100 km² in respect of other substances, including gold. However, the maximum number of exploration licences that any one person can hold for any one substance remains limited to three for bauxite and iron ore and to five for other substances.
The 2013 Bill has maintained the ‘non transferable’ character of exploration licences, but has opened the door to the use of technical partnerships in order to secure funds necessary for the financing of exploration activities. However, technical partnerships remain subject to the approval of the Minister of Mines and cannot constitute a direct or indirect assignment of the relevant exploration licence.
Under the 2013 Bill, the level of investments required for a project to qualify as a mining concession has been maintained at US$1 billion in respect of bauxite, iron ore and radioactive substances, but has been reduced to US$500 million for projects covering other substances. This distinction better reflects the economic reality in terms of the size of investments required for non bauxite and iron ore projects. It will thus allow a larger number of projects to qualify for the mining concession regime, thus benefiting from longer term and renewal periods.
The 2013 Bill has amended some of the obligations pertaining to commencement of development and exploitation works under an exploitation licence or mining concession and has increased the corresponding penalties.
Penalties that apply to failure to commence development work after one year from the award of the title have been increased from US$250,000 per month for the first three months to US$2,000,000 per month during the same period for mining concessions, and from GNF5,000,000 (approximately US$710) to GNF10,000,000 (approximately US$1,420) for semi-industrial exploitation permits. The corresponding penalty has however been maintained at US$100,000 per month for the first three months in respect of industrial exploitation licenses. Similarly, the 2013 Bill has maintained the concept of a 10 per cent monthly increase of penalty amounts from the fourth month and until the twelfth month of delay.
In addressing the timeframe within which operators are required to reach the exploitation phase, the 2013 Bill has introduced a distinction between (a) exploitation activities which aim at the extraction and exportation of raw minerals and (b) exploitation activities which aim at the transformation of raw minerals in Guinea. For the former, the period to reach exploitation cannot exceed four years for holders of industrial exploitation licences and five years for holders of mining concessions. For the latter, the maximum period is set at five years for holders of industrial exploitation licences and six years for mining concessions holders.
Whereas the 2011 mining code provided that failure to reach the exploitation phase within the prescribed period incurred monthly payment of a fixed fine, penalties for failure are now calculated on the basis of the difference between the expenditures actually incurred and the agreed minimum expenditure for a one-year period. These penalties will not apply where the difference is less than 10 per cent, or if an adjusted work programme has been approved by the Minister of Mines (following approval from the National Commission of Mines).
Finally, the 2013 Bill has increased the level of minimum expenditures from 8 per cent to between 10 per cent and 15 per cent of the total amount of investment for preparatory, development and construction works.
The 2013 Bill has expanded the scope of article 88 of the 2011 Mining Code, so that withdrawal cases apply not only to mining titles but also to authorisations (covering rights pertaining to prospecting, artisanal mining and quarry projects). In addition, to take into account changes made to article 91 of the 2011 Mining Code (please see ‘Registration fees and capital gain’ below), the 2013 Bill has introduced new circumstances which may lead to the withdrawal of a mining title or an authorisation, namely the failure to withhold and remit the capital gains tax due in case of assignment of shares in a Guinean title holder or of assignment of a participation entailing an indirect change of control.
Finally, pursuant to amendments introduced by the 2013 Bill, failure to spend at least 25 per cent of the agreed minimum expenditure over two years may lead to title withdrawal; this provision is more onerous for investors than the 2011 Mining Code which provided for a 20 per cent threshold.
Although article 90 of the 2011 Mining Code, which deals with the transfer of mining titles and shares in title holders, has come under widespread criticism from the industry, it has remained entirely unaffected by the 2013 Bill. Despite the lack of clarity caused by the use of the terms ‘approval’ and ‘validation’, the requirement for a ministerial ‘validation’ of a direct or indirect, partial or aggregate acquisition of 5 per cent in the capital of a title holder has been maintained. Similarly, any contract by which rights arising under a title are entrusted, assigned or transferred partially or totally, or any option which is granted with respect to any of the foregoing, remains subject to the consent of the Minister of Mines.
Whereas article 90 has remained unchanged, the 2013 Bill has entirely overhauled article 91 of the 2011 Mining Code. This has been divided into four different provisions (articles 91-I, 91-II, 91-III and 91-IV) detailing the various fees and taxes payable upon the transfer of mining titles as well as shares of companies holding such titles. In summary, the new provisions have removed the reference to the much contested concept of ‘conditions of approval under article 90 being negotiated with shareholders’. In exchange, the rate of the applicable capital gains tax has been changed from the fixed rate of 10 per cent to the standard rate, which is also currently at 10 per cent but subject to change. In addition, a series of detailed rules have been introduced, providing for the following:
- the application of the capital gains tax on (a) the transfer of a mining title, (b) the transfer of shares in an entity holding the mining title and (c) the acquisition of a participation leading to an indirect change of control in the entity holding the mining title, bearing in mind that when such indirect change of control results from a series of transfers of shares which have occurred over a period of 12 months, then all such transfers are subject to taxation. It is also noteworthy that the concept of ‘indirect change of control’ is given a rather wide scope; the mere fact that an individual or legal entity has become able to exercise influence effectively by taking part in decisions relating to the management and financial policy of the company may be considered an indirect change of control in that company
- capital gains tax is calculated by the difference between the sales price and the net book value of the transferred mining title or shares, except when the assets of the entity whose shares are transferred are located in several jurisdictions, in which case the capital gain is only calculated on the value of the assets belonging to the Guinean subsidiary
- the Tax Administration may question the price of the transfer of an exploitation licence or a mining concession in the case of price concealment or if the price is below the arm’s length price
- the entity holding the mining title is liable to withhold at source the amount of capital gains taxes that may be due on the sale of its own shares or the shares of its parent company
- the failure to withhold and remit capital gains tax being sanctioned by the withdrawal of the relevant mining title.
Overall, despite a few welcome clarifications, the changes proposed to article 91 of the 2011 Mining Code have made the rules both more restrictive and more onerous for mining companies. It is also noteworthy that neither article 90 – which has remained unchanged – nor article 91, make any exceptions for the transfer of mining titles or shares in the title holder to an affiliate or in the context of a corporate re-organisation. These two provisions are likely to cause challenges to the smooth running of good faith transactions, whether internal or not, typically required to secure the much needed funds and/or technical capacity to develop the high potential assets found in Guinea’s sub-soil.
The 2013 Bill has introduced some alleviation to the wide scope applied by the 2011 Mining Code on joint and several liability imposed on title holders with respect to their subcontractors and lessees (amodiataire). Under the newly amended provision, title holders are jointly and severally liable with their sub-contractors and lessees in respect of activities that are the object of the subcontract or lease agreement (amodiation). Joint and several liability also applies to customs obligations, but not to domestic taxation (please see ‘Direct sub-contractors’ below).
The 2013 Bill has maintained the quota system created by the 2011 Mining Code, which requires that a mining company recruit a certain percentage of Guinean depending on the type of position and the stage of the project. However, it has introduced minor changes, including the following:
- mining companies are no longer required to give priority to residents of local communities for positions not requiring qualification, although the management may reserve certain positions for them
- while the 2013 Bill maintains the obligation to appoint a Guinean deputy general manager, it is now required to be satisfied as at the ‘date of first commercial production’, rather than the ‘launch of the exploitation company’, which was a rather vague concept. Similarly, a Guinean general manager is now required to be appointed within five years of the date of first commercial production
- the 2013 Bill has also clarified that the Guinean general manager as well as deputy general manager are to be hired by the mining company in compliance with its own procedures
- the three year restriction on the term of employment for expatriate personnel has been removed. Instead, the 2013 Bill provides that their term of employment must correspond to the initial term provided by the Law on the entry and residence of foreigners and the Labour Code; and such term is only renewable once.
The 2013 Bill has also alleviated the rules pertaining to the transfer, to the State, of the ownership of infrastructure built and financed by a mining title holder. The 2011 Mining Code required such transfer of ownership to occur after the amortisation of the relevant infrastructure and within a maximum of 20 years. The 2013 Bill now provides that the transfer of ownership will take place ‘after the time necessary for a fair return on investment’ to which a grace period of five years is added. The 2013 Bill has also addressed some of the concerns expressed by investors, by allowing mining companies to maintain a priority right on the use of the infrastructure, even after its transfer to the State. Despite this modification, the concept of ‘a time necessary for a fair return on investment’ remains unclear and may lead to adverse interpretation if not adequately clarified through the Mining Regulations.
The 2013 Bill has introduced some clarification in respect of the exercise of the state marketing right created under the 2011 Mining Code. It has removed the distinction between the percentage of production over which the marketing right could be exercised during the investment depreciation phase and the subsequent phase. It can now only cover a percentage of the production corresponding to the state’s participation in the capital of the company. The new law also clarifies that in addition to being set annually for the production of the following year, the state may exercise its marketing right at the time the title holder enters into long term sale contracts. Of course, the state’s right must be exercised at conditions at least equivalent to those offered by other buyers, and the 2013 Bill has also added that such exercise may not affect the provisions of sales agreements already in force. Finally, the 2013 Bill provides that the other shareholders of the mining company benefit from a pre-emption right on the minerals sold by the state to third parties.
In addition to the above, the 2013 Bill has introduced a State pre-emption right – which did not exist under the 2011 Code. This is to apply when transactions are concluded off-market or between affiliated companies. Indeed, the State may exercise a right of pre-emption over a maximum of 50 per cent of the company’s raw or transformed production if it considers, based on reliable and concrete data, that production has been sold below arms length’s prices for more than three consecutive months. In that case, the State may purchase such production at a price equal to 105 per cent of the current FOB price.
To complete the State’s pre-emption right, the 2013 Bill has also introduced a requirement for title holders to obtain approval from the Ministers of Mines and Finances on the prices established in any agreement setting long term prices (such as offtake agreements). The authorities have a one month period to react, failing which they are deemed to have approved the proposed prices. Once such approval is obtained (or deemed obtained), the State becomes precluded from exercising its pre-emption right during the term of the relevant agreement.
Finally, the 2013 Bill has also introduced provisions entitling the state to readjust the taxable income of a title holder who has agreed to a trade price lower than the market price, without prejudice to tax and criminal sanctions under the General Tax Code.
The 2013 Bill has introduced a number of clarifications to the state’s right to a 15 per cent free carry participation in the capital of mining companies which are likely to be welcomed by the investor community. The requirement to grant the 15 per cent free carry interest only applies to titles issued as of the entry into force of the Code (although it is not clear whether this applies to the promulgation date of the 2011 Mining Code or to the 2013 Bill). More particularly, this requirement does not apply to the holders of mining conventions which were signed and ratified prior to the adoption of the 2011 Mining Code. The 2013 Bill has also clarified that the State may not assign, pledge or mortgage its free carried participation.
Unfortunately, the amendments introduced to the state’s option to acquire an additional cash participation (allowing its equity stake in mining companies to reach a maximum level of 35 per cent) fail to address the concerns expressed by the industry. For example, the 2013 Bill specifies that this option ‘may be spread out in the time but can only be exercised once’. This may mean that the State’s option will be open for a period of time but cannot be exercised partially and in several instances. The 2013 Bill also clarifies that only the title holder can request a reduction of the State’s right to acquire such cash participation in exchange for an increase ‘for an equivalent amount’ in the extraction or production taxes and that such ‘equivalent amount increase’ must be determined by an independent expert. However, those concepts remain rather unclear and the framework within which the title holder’s option can be exercised or in which the expert’s determination is to be carried out is yet to be clarified.
The 2013 Bill has also given mandatory provisions to the shareholders’ agreement to define, among others, consultation rights granted to the state.
Finally, the 2013 Bill has failed to address the industry claim for a right of pre-emption for the benefit of other shareholders in case of a sale, by the state, of its cash participation.
As expected, the tax and customs provisions of the 2011 Mining Code have been entirely overhauled. Some of the main changes include the following:
- The mining taxes previously set out under article 161 of the 2011 Mining Code have been replaced by (i) a tax on extraction which applies to mineral substances other than precious metals (the Extraction Tax) – set at 3 per cent for iron ore, 0.075 per cent for bauxite, 3 per cent for base metals, at rates varying between 3.5 per cent and 5 per cent for diamonds and at rates varying between 1.5 per cent and 5 per cent for other precious stones and other gemstones; and (ii) a tax on the production of precious metals (the Production Tax) – set at 5 per cent for silver, gold, platinoïds, palladium and rhodium.
- The extraction of the precious metals, rather than their sale, give rise to production tax, with the tax being due on the date the ingots are weighed at the Central Bank of Guinea.
- Both extraction tax and production tax remain deductible in the calculation of taxable profits.
- Any delay of more than 30 days in the payment of either the extraction tax or the production tax is subject to sanctions extending, in case of prolonged and repeated delays, to the withdrawal of the mining title as well as the closure of the facilities.
- New export taxes have been introduced and apply to the export of mineral substances – other than precious substances (the Mineral Substance Export Tax), which are exported as raw minerals without having been processed in Guinea beforehand, with the tax rate ranging from 0.075 per cent for bauxite to 2 per cent for iron ore, base metals, and radioactive substances, other than concentrated uranium for which the rate is set at 3 per cent.
- In addition, the export tax on the industrial or semi-industrial production of diamonds previously covered by article 164 of the 2011 Mining Code has been replaced by a tax on the export of raw precious stones and other gemstones (the Precious Stone Export Tax). Tax rates are set at 3 per cent for diamonds, 1.5 per cent for precious stones other than diamonds and other gems and 5 per cent for any stone having a unit value equal or greater than US$500,000. The rate of the Precious Stone Export Tax is reduced if the precious stones or gemstones are exported after having been cut in Guinea.
- The Mineral Substance Export Tax and the Precious Stone Export Tax are due at the time of export of the mineral or stone, with the exporter being the main payer and any customs applicant acting under a representation mandate being jointly and severally liable for payment.
- The export tax on the artisanal production of gold and diamonds has been extended to cover all precious stones and other gemstones. The rates have been set at 1 per cent for gold, 3 per cent for diamonds, 1.5 per cent for precious stones (other than diamonds) as well as other gemstones and 5 per cent for any stones or gems having a unit value of more than US$500,000.
- New provisions dealing with the mining list and its content, notably in respect of each activity phase have been introduced and amendments have been proposed to the various categories of goods that can be included on a mining list.
- The withholding tax on non-wage income is now set at the standard rate rather than the fixed rate of 10 per cent and it remains non-deductible for the calculation of the tax on profits.
- The 2013 Bill has also amended the tax and customs regime for the exploration phase, construction phase and the exploitation phase. Some of the main changes include: a reduction of the corporate tax from the standard rate (currently at 35 per cent) to 30 per cent; the reduction from 6 per cent to 5 per cent of the rate of customs duties payable, during the exploitation phase, with respect to goods appearing on the first and third categories of mining lists, provided these goods are intended for on-site processing of mined substances into finished or semi-finished products; and the reduction from 8 per cent to 6.5 per cent of the rate of customs duties applicable, during the exploitation phase, with respect to goods appearing on the first and second categories of the mining list, provided they aim at the extraction and processing of raw mineral substances.
The 2013 Bill introduces new provisions specifically dealing with direct subcontractors, which include entities directly providing goods and services to mining title holders in relation to activities covering exploration, construction of mining facilities or extraction. In respect of the import of their goods, direct subcontractors benefit from the tax and customs regime applicable to mining title holders during each of the exploration, construction and exploitation phases, provided they have established a mining list in accordance with the provisions of the law. However, subcontractors of direct subcontractors are explicitly excluded from this benefit.
The 2013 Bill also specifies that exploitation title holders are jointly and severally liable with direct subcontractors for the payment of all duties and taxes, and related penalties due by such subcontractors. This liability may however be intended to be limited to import taxes due by sub-contractors, as article 94 provides that the title holders’ joint liability with their sub-contractors applies to ‘customs obligations’ but does not extend to domestic taxation (please see ‘Joint and several liability’ above).
The 2013 Bill has introduced a ‘ring fencing’ regime whereby title holders may not accumulate at a given moment, and for the same title, the advantages of tax benefits granted to different activity phases. According to article 181-IV, a legal entity holding several mining titles is required to obtain a separate tax identification number and maintain separate accounting for activities related to each mining title as well as for activities not specifically covered by the mining title. Consequently no set off or deductions can be made among expenses incurred and taxes, duties and similar charges due in relation to activities carried out by the same entity, but relating to different mining titles. No exception is provided for mining titles covering contiguous areas which typically can be explored together. The same would apply to ancillary activities that do not specifically relate to a mining title.
The 2013 Bill has introduced a number of significant amendments to the tax stabilisation regime. On the positive side, the distinction between the length of stabilisation available to exploitation title holders as opposed to concession holders has been removed, and a fixed maximum stability period of 15 years is granted to title holders which have executed a mining convention. In addition, the requirement to pay for an annual stabilisation premium has been deleted.
However, the 2013 Bill has also introduced new limitations to the scope of the stabilisation, in some instances to such extent as to deprive the regime of most of its benefits. For example, while article 182 still provides that during the stabilisation period, no new tax or charge of any kind may be imposed on the relevant title holders, it also specifies the following new rules:
- other than for the Extraction Tax, Production Tax, Mineral Substance Export Tax and Precious Stone Export Taxes, the stabilisation only covers the ‘rates’ and does not extend to the base of the taxes, duties and charges
- the stabilisation is stated to be limited – in an exhaustive manner – to the following:
- the rates for (a) the tax on industrial and commercial profits and the corporate tax; (b) the contribution to the local development; and (c) the unique entrance duty (droit d’entrée unique)
- the rate and base of the Extraction Tax, Production Tax, Mineral Substance Export Tax and Precious Stone Export Taxes
- are expressly excluded from stabilisation: fixed duties, annual royalties and surface fees, as well as excise duties and environmental taxes.
The penal provisions existing under the 2011 Mining Code have remained substantially unchanged, but the amounts of the fines have, in certain instances, been substantially increased - up to five times their initial amounts. Such increased penalties notably apply to delays in beginning development works (please see ‘Penalties for delays in beginning development and exploitation works’ above), the mining of diamond or gems without proper title or authorisation, the failure to declare to or inform the Minister of Mines or the National Direction of Mines as required, any violation of closed, forbidden, protected or security zones as well as breaches of provisions relating to radioactive substances, hazards and dangers, hygiene and safety at work.
Investors are likely to welcome the changes introduced by the 2013 Bill with regard to transitory rules. First, guarantees of mining titles existing before the adoption of the 2011 Mining Code have been extended and cover, in addition to ownership, the validity of the relevant title. Also, the 2013 Bill provides for a different set of rules in respect of the application of the new legislation to the holders of mining conventions signed and ratified before the adoption of the 2011 Mining Code. More specifically, convention holders are required to negotiate with the State and sign an addendum providing for the following amendments to their mining convention:
- amendments providing for full and immediate compliance with and immediate application of the provisions of the Mining Code concerning transparency, the fight against corruption, the transfer of interest in a mining title and capital gains tax, protection of the environment, relations with local communities, health, hygiene and security at work
- amendments providing for full but progressive – over a period not exceeding eight years – compliance with the provisions of the Mining Code concerning training, employment, and preference to Guinean companies
- in regard to all other provisions of the Mining Code, including tax and customs regimes, State participation in the capital of mining companies, State transport and marketing rights, obligations to comply with the insurance code and exchange control rules, the amendments to be contained in the addendum may be freely negotiated between the State and the relevant title holder.
Any amendments agreed between the parties become effective on the date of ratification of the addendum by Parliament, such ratification to be preceded by the approval of the Council of Ministers, the signature of the Minister of Mines, and a legal opinion of the Supreme Court. These amendments will apply to subsequent mining activities, while prior activities continue to be governed by the provisions of the existing mining convention.
Should the parties fail to reach an agreement on the content of the addendum within 24 months of the 2013 Bill’s publication, the parties must meet to agree on an addendum which is adapted to the economic terms of the project or mining exploitation. It is however unclear which regime will apply if, after such meetings, the parties still fail to reach an agreement.
Although the above changes to the mining legislation may have stemmed from the Guinean legislator’s intention to provide a stable environment as well as incentives for new investments - indeed, several of the proposed changes have the effect of improving the legal framework for the mining sector - the 2013 Bill hasn't addressed a number of the industry’s concerns, and has failed to bring more clarity and certainty and to correct inconsistencies and errors which can still be found in the legislation.
The Guinean legal framework still remains to be completed, as neither the Mining Regulations nor the various application texts to which the Mining Code regularly refers have been made public. A full view on the legal framework will only be possible when this documentation can be reviewed. The authorities will nevertheless look to implement and enforce the Mining Code. As such, mining companies must invest in understanding the new provisions and how they will impact their business.