GOLD RUSH: How the proprietors of Galane Gold mine grabbed gold and...

GOLD RUSH: How the proprietors of Galane Gold mine grabbed gold and cash

On Monday this week, Botswana Stock Exchange (BSE) boss terminated Galane Gold Limited on the domestic bourse, for ‘deliberately’ contravening the listings requirements. It emerges that its conduct circumventing BSE’s statutory requirements was only the tip of the iceberg for a company that has been digging out tonnes of gold in Botswana, shipping it abroad, making millions of dollars, then exhausting the millions through transfer pricing to a tax haven. To top it off, the company has not paid a single thebe to the taxman, Staff Writers, KEABETSWE NEWEL and KITSO DICKSON investigate.

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At the domestic bourse, Thapelo Tsheole, the Chief Executive Officer (CEO) of the Stock Exchange could not take it anymore having engaged the Canadian gold mining outfit, in a quest to get it to comply with statutory requirements. It did not, and Tsheole was fed up. A few weeks ago, the head of BSE was compelled to suspend the company, hoping that a light punishment would get the company to ‘wake up and smell the coffee’, but no. The miner sidestepped section 17.11 of the listing requirements, which accords the BSE powers to remove securities of culprits from the list unless fees and charges, due and unpaid are paid within one month after written notice of non-payment has been given.
This Monday, the BSE released an official statement, announcing that the committee took a decision to terminate the listing of Galane Gold Limited due to its continued contravention of the listings requirements.

Tsheole would not reveal the specific details of Galane Gold’s failure to abide by the listings requirements. Independent investigations by The Business Weekly & Review however reveal that Galane Gold, a company headed by CEO Nick Broodie, deliberately chose not to honour BSE requirements, while at the same time remaining fully compliant with the Canadian bourse, Toronto Stock Exchange (TSX), despite generating most of its revenue in Botswana.

It emerges that Galane Gold, whose holding company is in a tax-friendly Mauritius, owes the BSE in excess of P200 000 in listings fees. The company’s CEO has contemptuously continued to pay the Canadian exchange, where the company has its primary listing, after the BSE asked for its dues. When this publication approached Brodie, to explain why the company has failed to comply, he indicated that the lack of compliance was a deliberate move, so as to get the BSE to delist them, which in his view, was a cheaper and more effective way of delisting from the BSE, since they preferred Canada.

“On the listing, ultimately our main listing is on the Toronto Stock Exchange and we were advised by them that we were not allowed to have a secondary listing on the BSE. We tried to delist from the BSE but due to the complexities involved it proved almost impossible and this was the only avenue available to us to meet the requirements of our main listing,” Brodie said in an emailed response.

Brodie would not explain why his company initially decided to take up a secondary listing on the BSE, knowing that TSX does not allow them a secondary listing. The truth is compliance with dual listing can be costly, brokers say. But the BSE has been very open to dual listed companies with primary listing established externally, allowing them to focus on primary listing but without impiging on requirements back home. Most mining companies in the BSE are primarily listed outside. But compliance on those stock exchanges has never influenced compliance on the BSE as Galane CEO suggests, analysts argue. Where a company’s primary listing is on another exchange, the Committee will normally accepts the listings requirements of that exchange but reserves the right to request such company to comply with such aspects of the BSE listings requirements as it may, in its sole discretion, determine, according to requirements.

To delist, a listed company may, at any time, make written application to the Committee for a deletion of its securities from the list stating from which time and date it wishes the deletion to be effective and the reasons for the request. Then the Committee may grant the request for termination if it deems this to be desirable; provided the Committee deems such securities to be eligible for continued inclusion, such securities shall only be removed from the list where the listed company’s shareholders in general meeting have approved such removal. While Brodie suggests they tried several times to delist, on record the BSE says they were never made aware.

The listing of share on the primary did not result in any changes to the rights and entitlements of holders of the Company’s common shares, irrespective of whether they purchased their shares through the TSXV or the BSE. The TSXV does not ordinarily comment on specific issuers and it is uncommon for it to order a company to delist from its secondary, let alone a stock exchange with several other companies that are listed on an international exchanges. While Brodie suggests that the company made several failed attempt to delist from the stock exchange, this publication learns that at no point did Galane engage the stock exchange to delist. The BSE, in fact notes the comments with surprise.

Sources suggest that the local listing was a ploy to raise cash in Botswana and further acquire mining licenses and then dump the BSE. The company’s disregard for BSE regulatory controls extends to its general operations, where it has been mining gold in Botswana since 2005, but has for most of the years not been paying tax, if not all of them.

A look at the company’s financials suggests that Galane Gold may be channelling most of its money to Mauritius, a tax haven, through transfer pricing. The company’s available financials date from December 2012, after the company listed on the BSE. According to financials available on the BSE, it emerges that its mining revenue, which would be money derived from the sale of gold, averaged US20 million (Just over P200 million). Interestingly, almost all of the revenue was being exhausted on expenses which were not being explained in detail.

With losses being declared annually, the company did not pay tax to Botswana Unified Revenue Service (BURS) for years, yet it has found a reason to keep digging for gold and selling it abroad, despite their operation being unprofitable. Government of Botswana, at one point found itself having to compromise and defer royalties’ payable on the sale of gold, under specified terms.

As at 2016, royalties due up to June 2016 had been deferred to July 2017. Repayment of royalties due as at June 2016 were to commence in July 2017 with over 12 months Interest, to be charged from July 1, 2017 at Bank of Botswana commercial bank prime lending rate plus 5. The deferred amount was unsecured. Yet the company has financially commissioned its Galaxy Project in South Africa, with funds from Mupane Mine in Botswana. It turns out that the project exhausted Mupane to the extent that the company saw it “fit to delay the commissioning (of Mupane) until the Company has sufficient funds available.”

The Business Weekly & Review sat down with a reputable chartered accountant to analyse the Galane Gold financials. What first came to light was the fact that Galane Gold Ltd, formerly Carlaw Capital III Corp, operates through its wholly-owned subsidiary, Galane Gold Mines Ltd, which was incorporated under the Business Corporations Act (Ontario) on November 15, 2010 and whose principal business activities are the exploration for, development of, and operation of gold mining properties.

The Company’s registered and head office is located at Suite 1800, 181 Bay St., Toronto, Ontario, Canada. Effective August 30, 2011, the Company, through its wholly-owned subsidiary, Mupane Gold Mines Limited, a Mauritius company, acquired all of the issued and outstanding shares of an Australian company, Gallery Gold Pty Ltd. from IAMGOLD Corporation. Mauritius is classified as a tax-haven, which are infamous for protecting and hiding profits of corporations and people who prefer to be tax efficient. Mupane Gold Mines Limited operates Mupane Gold Mine in Botswana.

Galane has been preparing to make other investments, acquiring Vantage Goldfield Limited, a gold mining company with operations in the Mpumalanga Province of South Africa. By situating Mupane Gold Mines Limited at Mauritius, the chartered accountant believes that it was a strategic way to ensure that the money made from Mupane Gold Mine in Botswana is tax free.

“For multinational mining companies, it’s all about location. To avoid paying taxes, companies may choose where to open their offices and subsidiaries and consequently choose where it allocates its profits and expenses. This is all done in the spirit of tax avoidance and maximising returns remitted to the parent company or head office,” said the accountant. With the Mupane Gold Mine headquartered in Mauritius, the accountant, who requested anonymity for fear of victimisation said that the mine could easily channel all its cash to Mauritius, through questionable channels like transfer pricing, which would see it transacting with the Mauritius based parent company, strategically to move cash there.

Transfer pricing involves setting prices, terms and conditions on transactions with related parties on cross border transactions in a manner aimed at maximising profits in the country determined by the multinational company, to derive the greatest tax benefit. It appears that apart from transfer pricing, Galane Gold may also have been using ‘Management fees’ as a way to avoid paying taxes and transfer millions of Pula to Mauritius, “The logic here is to charge a higher fee which will be then be expensed in the high tax rate country and be taxed as income in a low tax rate country” indicated the CA.

Since Galane Gold listed on the BSE, it has been making an average of over P200 million revenue annually, but all of it was exhausted in operational expenses and management fees. All these unexplained costs, which our source accountant says eventually reach Mauritius, untaxed. For the nine months ending 30 September 2014, Galane Gold made US$34.6 million (Over P350 million) in mining revenue, or specifically the sale of gold mined in Botswana, US$28.8 million (around P300 million) was exhausted as mining expenses, which are not broken down specifically to establish the exact cost on a specific activity.

In addition, Galane Gold spent another US$1 713 601 (Around P20 million) on what it called corporate, general and administration costs, which the accountant says ends up in the Mauritian entity, which would have to bill the local mine for management fees. During the same period, over P6 million (US$617 761), was set aside as ‘other’ costs without any explanation whatsoever.

Since its listings on the BSE, Galane, has consistently exhausted its revenue on corporate expenses. On the other hand, while reporting losses, it has not had to pay tax to BURS, despite mining gold in Botswana that has generated hundreds of millions in revenue. According to the accountant, some losses are creatively made so as to strategically declare an overall loss and avoid paying tax.

The Canadian listed entity that currently owns and runs Mupane Gold mining made a total loss of US$6.6million compared to a loss of US$8.5million in the previous year as per the 2016 Financials. Corporate expenses are billed at just over US$1million (over P10 million) and professional fees at over US$700 000 (Around P20 million). According to the accountant, the challenge here is that such expenses are not easily disclosed as to what constitute corporate expenses and professional expenses, which gives the company a leeway to inflate prices and even transfer money abroad in disguise, thus avoiding tax, and robbing local shareholders of dividends.

Further, the accountant indicated that additional methods of tax avoidance would entail the company arranging for Mupane Gold in Botswana to be given loans by its parent company abroad, which would in return charge the Botswana company high interest, which be charged and paid at revenue level. This would allow most of the money to be shipped out as interest expenses on loans. Another classical way to avoid tax would be the use of loans not repayable with equity. Parent companies will model the financing of its subsidiary through the use of long term loans instead of equity. The reason here is that interest is a tax deductible expense hence will not be taxed. By charging higher interest rates, companies are still able to minimise their taxable income. The interest paid by the subsidiary is allowable under Income Tax Act as a business expense.

Galane Gold’s financing structure shows that its interest bearing loans stands at US$15million (over P162 million) compared to its equity of US$16 million (Around P173 million). This, according to the chartered accountant gives a high debt ratio of over 96 percent (Debt ratios of over 50 percent usually shows intentional debt financing) and financing costs of over US$652 000 (Over P7 million). Brokie, Galane Gold’s CEO refused to respond to The Business Weekly & Review inquiries, which sought clarification on the company expenses, and why the company continues to mine gold in Botswana for so many years despite making losses. Brodie requested that The Business Weekly & Review visit him at the mine plant in Northern Botswana to talk about the issue.

Capital flight, according to the source (as well as various World Bank Reports) is facilitated by Botswana’s shallow legislations, which has left several loopholes for blue-chip corporates to easily exploit Botswana. The lack of clear legislation on illicit transfers creates grey areas in in the law: management fees are not charged in accordance with the arm’s length principle and auditors are left with a daunting task of verifying if indeed such services charged by head office were actually being rendered.
In the absence of clear legislation multinationals will continue to use complicated hedging structures in such a way that losses are reported in a country determined by the multinational. This matter is made worse by the fact that Botswana tax losses are classified as an operating expense and can be carried forward indefinitely. Galane Gold Limited has had losses amounting to US$52million in 2016.

A tax expert at Aupracon Tax Advisory Firm, Jonathan Hore says that transfer pricing is a common practice among some blue chip corporates who exploit the accounting loopholes to funnel money out of jurisdictions for both legal and illegal purposes. According to Hore, Botswana Unified Revenue Service (BURS) ought to be concerned with this developing trend and should question the blue chip corporates on how they have arrived at the exorbitant figures they site as ‘management services, shares services and group recharges, consultancy fees, IT costs, training costs’.
Hore points out that while this practice is alive, it does not mean that every cost classified under these above mention expenses are illegitimate, since only some may have been inflated in order to justify the transfer of money out of the jurisdiction.

However he said authorities, including BURS have been lacking legislative instruments that could be used to address the loopholes. Fortunately, he indicated, the taxman is working on introducing a specific legislation on transfer pricing which is expected to be effected anytime from now. Hore said BURS could be losing hundreds of millions as tax revenue because of transfer pricing.

WHAT CAN BE DONE
Zambia losses US$3 billion (P33 billion) in taxes through the use of various tax evasion mechanisms. At least Zambia has found it fit to track this losses and keep statistics so as to inform their way forward. Even though there are no statistics in Botswana to show approximately how much is being lost in tax evasion the guess is that it is in the region of billions.
Experts argue that the following can be done:
• The establishment of a specialised mining tax unit as a starting point.
• Legislation must be clear and must require documentation to prove that all intercompany transactions have been done under the arm’s length principle. This will ensure that multinationals prove that the costs or interest they have charged are in line with competitive business rates.
• There must be restriction on the amount of interest that can be charged or deducted in arriving at a chargeable income. This will ensure multinational do not charge high interest on loans granted to subsidiaries. For example interest on debt in excess of debt/equity ratio of 3:1 disallowed in the tax computation.