Differences in export royalty rates between neighbouring countries are often cited by officials in the region as a major driver of cross-border gold traffic. The 3% difference between the DRC and Uganda/Burundi (historically 3.5% versus 0.5%) is believed to have been one of the primary reasons for the development of the cross-border networks exiting the DRC. However, while interviews with gold dealers have yielded ample
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Tanzania Kenya
testimony as to the importance of small differences in price, the theory hasn’t yet been tested empirically.
The data set assembled here offers three natural experiments for testing the effects of royalty differentials on cross border gold flows: Tanzania, which raised its royalties from 3% to 4% in 2010; the DRC, which lowered its royalty from 3.5% to 2% in 201215; and Burundi, which raised its royalty from 0.5% to 2% in 201416. If tax rate differentials are indeed significant drivers of illicit ASM gold flows, one should expect to see changes in export volumes (positive or negative) resulting from the change in tax rates.
Tanzania
Tanzania is the best of the test cases. The royalty change came at the end of 2009. There are 7 years of data preceding the change and another four years after. The export data and tax rate are shown in Figure 7.
Figure 7: Tanzanian inferred ASM gold exports (kg) and royalty rates (%)
As shown, the data provide fairly graphic evidence of the negative effects of a royalty rate jump on ASM gold. From 2009 to 2010 exports dropped by over half, exactly coincident with the jump in royalty rates.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Tanzania Exports Royalty Rate
No other factor would seem to explain such a drop. Gold prices increased over this period, from $32/g in 2009 to $40/g in 2010. Tanzanian officials noted no diminution in the number of miners or intensity of ASM activity. The sole variable factor here appears to be the royalty hike.
The case illustrates the potential negative effects on revenue from hiking royalties (without regional coordination among neighboring countries). Had gold prices not risen so spectacularly in these years, Tanzania would have would ended up collecting less in taxes with a 4% royalty than it had with 3% as far as the ASM sector is concerned17. Averaging the four years before the rate change and the four years after, Tanzania would have collected 40% less income at 4% than it had at 3% royalty rate. Even with the near doubling of the price of gold the royalty hike turned out to be effectively revenue neutral; the increased tax rate and gold price are more than balanced by the drop in declared production18.
DRC
The DRC provides the second test case. The DRC dropped its export taxes in late 2011 from 3.5% down to 2%. The DRC took this move in order to discourage cross-border traffic to Uganda and Burundi, and encourage legal exports from the DRC itself.
Unfortunately for the purposes of this experiment, DRC exports for 2014 have not yet been obtained. There is thus only data for only two years after the change in tax rates.
These do show an increase, from some 200 kg per year before the reduction to around 300 kg (see Figure 8), an increase of some 50%, but still a marginal fraction compared to its ASM gold productive capacity of 10 tons or more. Given these volumes, a difference of only 100 kg could just as easily represent luck, weather, the quirk of a single mine owner or any one of a dozen other factors as much as it could the success of a new tax policy. It is thus impossible to draw any firm conclusions.
17 However, it did benefit in terms of its dominant industrial gold sector as shown in the TMAA reports. ASM and LSM sectors may hence require a differentiated tax approach.
18 Calculation based on SUM production per year X average price per year X royalty rate for that year; Net of 2006-2009 =
$15.03 Million; Net of 2010-2013 = $14.6 million.
Figure 8: DRC ASM gold exports (kg) and royalty rates (%)
Burundi
The third test case – Burundi – is similarly hampered by the lack of a long series of data.
Burundi raised its ASM gold royalty from 0.5% to 2% at the very end of 2013, along with a range of additional fiscal measures (e.g., registration fees for gold export comptoirs).
At the time of writing, gold export figures after the change are available only for Jan-Oct 2014. As shown below in Figure 9, the single data point after the change does indeed show a dramatic drop in exports, from 2,800 kg down to 538 kg19 . This drop could be read as the result of the royalty increase. However, the fact that Burundi experienced a drop of a similar magnitude over the two year period from 2008-2010 – when the royalty rate remained a constant 0.5% - argues for some caution. Before any firm conclusions can be reached on Burundi another year’s worth of data would be required, along with a directed inquiry into the causes of the previous export drop. For now, the results are merely suggestive. Additional impact factors for the low legal gold export levels registered for 2014 may be related to the restricted number of comptoirs that were able to obtain a gold export license under the new mining code, with the total number of comptoirs coming down from over 20 to only 3. Gold mining in the country has continued throughout this period, albeit often illegally, as miners did not register as cooperatives as required under the new mining code.
19 Pro-rated to 12 months this would still amount to only 646 kg.
122
Figure 9: Burundi gold exports (kg) and royalty rates (%)
2,855 3,229
3,905 4,313
2,423 2,170
980
310 1,052
2,147 2,823
538
0.0 0.5 1.0 1.5 2.0 2.5
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Burundi Exports Royalty Rate
5 SOLUTIONS TO GOLD SMUGGLING AND CROSS-BORDER TRANSIT
In addressing the problems on in-region cross border traffic and out- region smuggling, it’s important to keep in mind the relative scale of the two issues: out-region smuggling is an order of magnitude more important. And yet, it is the cross-border traffic that seems to have captured the attention of government officials.
In Burundi, officials complain that their gold travels east to Tanzania (or in some cases even to Rwanda). Tanzanian officials believe their gold gets smuggled into Kenya.
Ugandan officials likewise tag Kenya as the destination for their gold. Congolese officials and international observers believe Congolese gold travels pretty much throughout the region: Tanzania, Burundi, Uganda, Kenya and South Sudan at a minimum.
There is truth in these allegations, as was shown in Section 4. But as shown in Section 3, the cross-border traffic is dwarfed by the out-region smuggling. To take the example of Tanzania: cross-border traffic to Kenya, as shown in Section 4.4, likely cost Tanzania some 1,300 kg of gold in 2010, worth some $2.6 million in lost government royalties.
Out-of-region smuggling to Dubai that same year cost Tanzania nearly 14 tonnes, or nearly $22 million dollars20.
Across the region the scale of the challenges are similar. Cross-border leakage may lead to gains or losses for one or the other country of some millions of dollars. But the consistent mass smuggling of gold from the region collectively costs the governments of the region some 21 tonnes of gold per year (worth more than US$1 billion p.a.), or US$20 million at the modest royalty rate of 2%.
To some extent, the measures needed to address the one challenge should also be effective against the other. The priority, however, should clearly be given to out-region smuggling. In order to bring fully smuggled gold back into legal channels, a balance of incentives and regulation – sticks and carrots – will likely be required. The most cost-effective measures would include a harmonisation and reduction of export royalties, and enhanced scrutiny of out-going passengers at the region’s key international airports.
These options are briefly described below.
Certification and/or licensing of gold exports could also prove an effective technique, but only if destinations such as Dubai can be brought to accept the legitimacy of these documents, and demand their provision as part of their import controls. This option is also explored below (See Section 6 for more on Dubai).