The Politics of Poverty

Ideas and analysis from Oxfam America's policy experts

DRC’s largest mine was just sold. And DRC got nothing.

Posted by
An open pit at the Tenke Fungurume mine. Freeport-McMoRan Inc. The largest copper mine in the Democratic Republic of Congo. (Photo: Johnny Hogg / Reuters)

Sales like these are much more common (and legal) than you might imagine.

Kathleen Brophy is a Research Assistant for Extractive Industries at Oxfam America.

Last week, the International Consortium of Investigative Journalists unveiled a collection of new stories in their latest Panama Papers leak, this time with a focus on Africa. The stories reveal new details about illicit financial flows and the extractive industries, showing how multi-billion dollar oil and mining deals across the continent serve to make the rich even richer while providing no benefits to some of the world’s poorest populations.

So what exactly does this mean? How is it that billions of dollars are being made off of Africa’s natural resources without benefitting African populations? For multinational oil and mineral companies the answer is simple: separate the actual from the transactional.

In early May, mining giant Freeport McMoRan finalized a deal with China Molybdenum Inc. (CMOC) to sell the company’s controlling stake in the Tenke Fungurume copper mine in Democratic Republic of Congo (DRC), the company’s largest copper mine in Africa. Freeport sold their 56 percent stake in the Congolese project for $2.65 billion.

At a glance, it would seem that everybody wins in Tenke’s recent sale. Freeport offloads the asset in an effort to reduce the company’s global $21 billion debt bill. CMOC acquires the valuable asset, adding a critical component to the company’s growing portfolio. And what about DRC? The country certainly has a lot to gain from the sale considering that Tenke is the single largest private investment in the country’s history and accounts for 3 to 4 percent of the country’s total GDP.

One might expect that the sale of such a huge asset would surely benefit the country. Since the physical assets worth billions of dollars in copper reserves sits within DRC’s borders, one would assume that the country would be involved in the deal, and gain a healthy slice of capital gains tax, for example.

But the Government of DRC knew nothing about it until after it happened – despite their 20 percent stake in the project.

When asked about the government’s position on the transaction, Minister of Mines Martin Kabwelulu questioned the opacity of the sale, adding that there must be a tax on the sale of the Congolese asset and that they will push the tax authority to claim it. But this tax may be more difficult to claim than they think.  And while billions of dollars transfer between the two companies’ bank accounts, the citizens of DRC may not see a penny from the two billion dollar sale.

This is because Freeport did not sell the Tenke Fungurume copper mine.

Freeport sold its interests in a company called TF Holdings Limited, a Bermuda holding company that indirectly owns an 80 percent interest in Tenke Fungurume Mining SA. Freeport has a 70 percent interest in TF Holdings—an effective 56 percent interest in Tenke Fungurume Mining SA. Therefore, CMOC is acquiring this indirect stake through purchase of shares in a Bermuda holding company. To be exact, a subsidiary of CMOC will acquire the stake, according to the company’s press release on the deal.

To you and I, the complexity may not make sense. The sale of a mine should seem straightforward enough. Why are there so many layers of complication? Why doesn’t the transaction reflect the basic facts of the sale?

According to the rules of the game for multinational finance, financial transactions often reflect little to nothing about the reality of the sale. In the case of Tenke, the sale of rights to extract billions of dollars of copper from beneath Congo’s soil has been made as a foreign transaction, occurring between offshore subsidiaries thousands of miles from the mine site. This sort of deal is hardly unprecedented. Multinational extractive companies operate in complex webs of hundreds, sometimes thousands of subsidiaries around the world. These subsidiaries exist to serve a number of purposes, from neutral to illicit. But this complex corporate structuring can sometimes affect tax liability, as Oxfam recently examined in a report on the use of tax havens by multinational oil companies operating in Kenya.

Whatever their purpose, subsidiaries play an important role in frequently divorcing the financial transactions of a company from their actual economic activity. Thus in the Tenke deal, the financial transaction takes place in a remote and indirect way, completely financially detached from the  mine itself and those it affects.

Such detachment prevents governments from taxing these transactions, even though they may reflect economic activity that may normally be considered taxable. So even though Freeport sold the mine to CMOC, since Freeport sold an indirect stake in the mine through the sale of shares in a Bermuda holding company, it will be much harder for the government of DRC to levy a capital gains tax on the sale.

While nothing in this case signals malicious activity or that Freeport was intentionally avoiding a capital gains tax payment to DRC, that sort of action is not unheard of. The fact that everything the companies did was likely all legal makes it even more troubling.

There are a number of international efforts seeking to curb to curb exploitation of tax loopholes and the abuse of tax havens. In the US, Oxfam advocates for the passage of the Stop Tax Haven Abuse Act which would impose strict rules for corporate financing on US-based companies in an attempt to limit the use of certain aggressive tax planning strategies. Oxfam also encourages private-sector leadership on the issue, urging multinational corporations to adopt “responsible tax behavior” as explained in a recent Oxfam discussion paper with Action Aid and Christian Aid.   Oxfam is also currently exploring ways to support civil society engagement on these issues in DRC itself.

The way that major assets change hands is an issue of critical importance, especially as multinational companies continue to react to the commodity price downturn by unloading assets. Companies like Freeport will be forced to shed assets in multi-billion dollar sales. Through a multitude of local and international efforts, Oxfam and partners work to ensure that governments receive due tax payments and no longer watch from the sidelines as companies make billions through far away deals.

Share this story:

Join the conversation

  1. p.carter@odi.org.uk'Paddy Carter

    “no longer watch from the sidelines as companies make billions through far away deals.”

    does anybody know whether in this case the seller is making billions – i.e. are there any capital gains to be taxed?

    Reply
    1. kashalahilaire@yahoo.fr'Hilaire Kashasa

      Yes capital gains can be taxed, but Congolese officials and even lawyers don’t know the way for. Technical but confidential information can be released if action is decided and sustained.

      Reply
  2. Pingback: DRC’s Largest Mine Was Just sold. And DRC Got Nothing — ICES

  3. hiyamaya@gmail.com'Maya Forstater

    This article raises an important topic for debate and understanding on responsible tax, although it just scratches the surface.

    Looking at the Bloomberg article, it looks like the deal is still going through, and so it is more accurate to say that they haven’t paid any capital gains tax *yet*. The case of Anvil Mining quoted in the article suggests that similar deals have resulted in payment.

    Beyond this specific case though, as the article notes the use of offshore holding companies is commonplace for enabling indirect asset transfers without capital gains tax. Mike Lewis wrote an interesting blog post on this ages ago http://www.mikelewisresearch.com/2014/12/where-have-all-tax-avoiders-gone.html/

    He highlights that this does not fit into the emerging view of ‘tax avoidance’ as egregious and extreme behaviour, as this is normal practice. This seems like a discussion worth having, as companies increasingly declare that they do not undertake ‘artificial’ or ‘contrived’ transactions, yet there is a lack of clarity (or a difference in opinion) about what that means.

    Simply pointing at this deal and suggesting that $2.65 bn is going untaxed, and represents additional money is overly simplistic though. As Paddy notes – it is not all a capital gain (overall it is said that there has been a $3bn investment in Tenke Fungurume).

    Most importantly, as the IMF highlights taxing capital gains represents a tax on the value of the future profits of the asset (as represented in what the buyer is willing to pay for the asset). If this gets transfered into the cost of capital for the project it means that revenues are brought forward but are not additional (more capital gains tax now, less profit tax later). How to tax natural resource rents is the question – Capital gains tax may not be the best answer.

    Reply
    1. adamsonm2@gmail.com'Adamson Mwangonde

      The fairness in such deals lays on which side you are on. On one hand we feel bad for DRC because its seemingly getting nothing, and on another hand, the financial people handling the deal will receive praise for avoiding the tax on capital gain.

      Reply
  4. Pingback: DRC’s largest mine was just sold. And DRC got nothing. | CONGOLESE ACTION YOUTH PLATFORM Blog

  5. Pingback: How a Corporate Copper Mining Giant Deceived An Entire Nation and Its Govt | Boomer Health Report

  6. Pingback: African Elements Week In Review | July 31 – August 6 2016 | African Elements: Black Studies

  7. aarnchawo@yahoo.co.uk'Aaron Madechawo

    Definition of Africa-a continent where clever people come and make money with the help of politicians and go back leaving nothing behind for the poor people who were doing the physical work for them.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *