This article was written by Alex Baykitch AM, Robert Edel and Edwina Kwan.
On 24 January 2018, the senate of the Democratic Republic of Congo (DRC) unanimously passed a bill which, once enacted, will increase taxes on natural resources in the DRC and revoke contract guarantees for existing mining projects across the country.
The bill is likely to have a significant impact on international investors in the mining industry who will be immediately subject to higher royalties and a tax on “super-profits”. Although the bill will not take effect until President Joseph Kabila signs it into law, this is expected to happen imminently unless miners and lobbyists are successful in convincing the President to suspend the adoption of the bill.
If the bill is enacted, international miners may be able to seek remedies by enforcing their rights under relevant international investment treaties. These treaties allow foreign investors to commence arbitration proceedings against the DRC government to pursue compensation for the diminished value of their investment where the government has breached any of the broad protections offered to foreign investors under the treaties.
Increase in mining royalties
The DRC holds more than two-thirds of the world’s cobalt, is one of Africa’s biggest copper producers and also holds significant nickel and gold deposits.
The mining bill will increase the royalties on cobalt, copper and gold, with those for cobalt rising from 2% to 10% if the DRC government categorises cobalt as a “strategic substance”. Cobalt (a common by-product of copper and nickel mining) is used in batteries for electric cars and mobile phones and the increase in demand for cobalt has seen the price double since 2017, with predictions that it will double again in the next two years.
The increased royalties will be immediately applied to all holders of mining rights which are valid on the date in which the law comes into force.
Tax on “super profits”
The mining bill also introduces a “profit-windfall tax” which will increase the tax on profits from 30% to 35%. There will also be a 50% tax on “super profits”, which is defined as income realised when commodity prices rise 25% above levels included in a project’s feasibility study.
Revocation of 10-year contract guarantees
One of the biggest impacts of the mining bill on international miners with pre existing projects in the DRC is the revocation of contract guarantees that protect licence holders from complying with changes to the DRC’s fiscal and customs regime for a period of 10 years. Under the new bill, miners in the DRC will no longer be protected under the existing mining code’s 10-year stabilisation regime and will instead be immediately subject to any increases in royalties and taxes.
Changes to mining laws - a trend across Africa
The proposed changes to mining laws in the DRC mirror a trend across resource-rich African nations looking to better benefit from increases in the prices of their natural resources. In addition to the DRC, Tanzania and South Africa have also recently amended their mining laws with similar impacts on foreign investors (as covered in KWM's article concerns for Tanzanian resources sector amid legislative reforms). The themes underpinning the changes are increased state and local ownership of mining projects, increased tax and royalties and mandating the inclusion of the local economy in the mining industry.
Options for foreign investors – investment treaty protections
If the new mining bill becomes law, foreign investors may seek to enforce their rights under specific contractual agreements with the DRC government. In addition, foreign investors can assert any rights available to them under Bilateral Investment Treaties (BITs) or Treaties with Investment Provisions (TIPs) signed between the DRC and foreign states whose companies are affected by the new law.
These investment treaties allow foreign investors to commence arbitration proceedings against the DRC government, seeking compensation where the government has breached any broad protections offered to foreign investors. These broad protections include where a foreign investment is not accorded fair and equitable treatment, is subject to arbitrary and unreasonable measures, is deemed to have been expropriated by the DRC government, or where the treatment of the investment as a result of the new law is contrary to any legitimate expectations held by the investor.
The DRC has entered into BITs with a number of countries including:
Given the substantial impact that these legislative changes will likely have on international miners, foreign investors in Africa (in particular the DRC and other African nations facing similar legislative amendments) should be considering any protections and remedies owed to them under relevant investment treaties. Any future investments should also be structured to take full advantage of the benefits and protections offered by international investment treaties.
Impact on Project Development
If these amendments come into effect, they are likely to make financing the development of new mining projects in DRC significantly more difficult. The increase in royalty rates, taxes and the removal of the stability regime in particular will be concerning for financiers.
Whilst the increases in royalties and taxes may not prevent the development of particular projects, the removal of stabilisation regimes exposes projects to unexpected tax and royalty increases in the future. Companies developing projects in DRC should give careful consideration to seeking to enter into a private Investment Agreement with the DRC that seeks to reintroduce a stabilisation regime in order to underpin the financing of the project. In order to be effective, such an agreement would need to be given the force of law. This is not uncommon in Francophone Africa and such agreements have previously played a critical role in the development of resources and other projects in the DRC and elsewhere.