Quick review of 2018 first semester…

The first of August is a public holiday in the DRC. On that day, we honor our parents, both alive and dead… But today is also a special day as one of DRC main opponents is coming back home after spending 10 years in Scheveningen prison, just six months before the elections due on December the 23^rd.  It promises many interesting months to come…

However, let’s try not to digress into the political space although we have demonstrated at several occasion its impact on the local economy…

When we look at the principal economic indicators, they have all improved since the beginning of the year! The inflation stands at 12% as of July the 27^th after closing the year 2017 at almost 60%! As a result, the Central Bank has decreased its prime rate to 14% from 20% maintaining a positive real interest rate for the first time in many months.

At the end of June, the public finances have registered a small surplus of $ 2,2 million compared to a deficit of $ 23 million for the same period in 2017 according to the Central Bank data.

The Congolese Franc remained relatively stable and the foreign exchanges increased by approximately 40% since January to reach $ 1,2 billion. This is still low by international standards but still an improvement. The country has benefited from an increase in production of its major commodities as well as the increase of their prices, notably cobalt that climbed up to $ 98 000 a ton in April before going down to $ 69 750 this week due to oversupply according to Reuters 

The GDP growth is expected at 4,2% for 2018 compared to 3,7% the previous year. This is an improvement, but it is still too small when compared to the population growth.

The biggest event of the semester is without any doubt the adoption of the new Mining Code. Some important changes were made in the new Code and they include increased royalties from 2 to 3% for copper and cobalt and up to 10% for any commodity designated “strategic substances”. It is a safe bet to say that both cobalt and coltan could qualify as “strategic substances”.  Additionally, a new 50% windfall tax or tax on super profits has been introduced. Super profits are defined as income realized when commodity prices rise 25% above levels in the project’s bankable feasibility study. The state’s free share in mining also increases, from 5 to 10%...

Obviously, major mining companies were not happy about those changes but according to expert, this Mining Code, despite the increase in royalties, remains one of the most competitive in the world.

Personally, I argue that any initiative that will improve public finances without discouraging investments should be encouraged.

Let’s just hope that those additional revenues will be spent wisely…

You can find the new Mining Code here (in French)

The Mining Companies and the VAT reimbursement issue- Interview with Yves Ilunga, CFO, Director of companies.

Today I have had the opportunity to have a discussion with Yves Ilunga around the issue mining companies are facing regarding the VAT reimbursement.

Yves Ilunga has been acting as CFO for different mining companies in several countries in Africa including the DRC.

Hervé OTSCHUDI: Mr Ilunga, we all red Bloomberg article last September saying that Congo Miners Claim $1.2 Billion of Unpaid Tax Reimbursements. What is the

current situation? Better or worse?

Yves ILUNGA: I haven't had a look at the latest figures, however, I do suspect that if Government does not exempt mining companies from paying input VAT on imports or does not allow them to compensate their VAT Credit against payable taxes such as payroll taxes, and income tax, then the situation can only get worst. Based on the information received from various key players within the industry, I suspect that the issue is still being addressed on an ad-hoc basis ("A la tete du Client", as we say in French).

Hervé OTSCHUDI:  What prevents the government from reimbursing the VAT?

Yves ILUNGA: In my humble opinion, I do not believe that Government had fully assessed the implications of implementing VAT in 2011. 97 to 98% of our exports are comprised of mining products. We also have a significant portion of our small industrial base that produces zero "VATed" products such as cement and basic food stuffs.

Considering the importance of both these segments in our economy, and the requirement to essentially "reimburse" Input VAT incurred by companies operating in these sectors of the economy, stricter treasury rules had to be implemented in the management of Input VAT received from these entities.

What I practically mean in accounting terms is that VAT received from these industries should have been accounted for as payable and not as income by Government.

When you have an industry that is VAT exempted either because its main source of revenue is derived from exports, which are zero rated, or because its main source of revenue is generated from zero-rated products, you should essentially assume that all VAT received through expenditures incurred by these companies will be reimbursable at some stage in the future.

Hervé OTSCHUDI:  Is the VAT system, as it is applied, adequate for the DRC economy?

Yves ILUNGA: I don't believe that we should be solely speaking about the structure of our economy. Many countries around the World have a positive balance of payment (I.e. exports are higher than imports) and similar VAT Rules to the DRC, where exports are exempted from output VAT. However, what these countries are doing right is that they carefully manage income from VAT payments, in order to ensure that they have sufficient funds available for reimbursement.

It also needs to be noted here that late reimbursement of VAT by Government in certain jurisdictions will result in interests’ payment by Government. That's not the case in the DRC! VAT is not only reimbursed (when this actually happens) without interests, but is reimbursed in Congolese Francs. Implying that businesses have lost out on financial income that could have been generated with these funds, and have been subject to forex loses resulting from the weakening of the Congolese Francs.

Hervé OTSCHUDI: I can only imagine the size of those foreign exchange loses based on CDF depreciation observed the last two years. The worst part is that the VAT reimbursement is still pending while the local currency is yet to be stabilized.

What could be the alternative for the government?

Yves ILUNGA: I'm a firm believer that the DRC did not have the maturity required to implement VAT... and the results are showing! I am of the opinion that we should have retained the "ICA" (Impot sur le Chiffre d'Affaires) system.

The "ICA" was a special sales tax payable by the Client, and was not reimbursable.  It allowed government to better plan for fiscal income and did not come with all the headache related to managing VAT.

However, considering that we have already implemented VAT, I am of the opinion that we need to cure the cancer first, and then improve our overall health. What I mean is that we need to ensure that Government meets its commitments and reimburses the VAT currently due. As mentioned above, this could be in the form of tax credits on future tax payments or by simply suspending the payment of VAT on imports by mining companies and other affected industries. I insist that the suspension of VAT must be on imports only, as suspending VAT on local purchases will only transfer the problem to subcontractors and other local entities providing goods and services to exempted industries, like mining.

I understand that this might have negative implications on government revenues in the future, however, "The Law is The Law" and no one should be above it, including government.

As funds are being returned to their rightful owners, government should then implement a VAT treasury management plan that will ensure that reimbursements take place at the right time and that funds received form the payment of VAT are not recorded or used as Income.

Hervé OTSCHUDI: What is the direct impact for mining companies?

Yves ILUNGA: The Impact on mining companies has been potential loss of financial revenues, forex losses, and more importantly the inability to meet working capital requirements, necessary for conducting business. I would also like to highlight that for those companies with excess cash, it implies a reduction of potential dividends that could have been paid to shareholders, and in the case of mining companies that would include Government.

Hervé OTSCHUDI: Mr. Ilunga, thank you very much for your time…