African Reserves

Fight against tax evasion in the mining sector of sub-Saharan Africa – Analysis – Eurasia Review


Sub-Saharan Africa is estimated to have 30 percent of the world’s mineral reserves, representing a major opportunity for the region. Despite the high level of private investment in this critical sector, new analysis reveals that many multinational companies are avoiding paying their taxes.

To get an idea of ​​the scale of investments that companies are making in the region’s mining sector, consider the case of Guinea. A multinational company has invested five times more in a single bauxite mine (as a percentage of GDP) than the government has spent in total public investment since 2018.

New IMF staff study shows governments in sub-Saharan Africa – now under tremendous pressure to increase public spending in response to the pandemic – are losing between $ 450 million and $ 730 million a year in income tax revenues. companies due to profit shifting by multinational companies in the mining sector. Targeted policy actions to reduce tax evasion could help governments recover some of this much-needed tax revenue to help recovery and meet the Sustainable Development Goals.

Our analysis comes as part of a global effort to tackle tax competition and profit shifting by multinational companies, which has put unprecedented pressure on the international corporate tax system. To address this, 136 countries, including 20 countries in sub-Saharan Africa, agreed last month to a minimum effective corporate tax rate of 15% starting in 2023.

The importance of mining to the economies of the region is clear. The mining sector contributes around 10% of GDP in 15 resource-intensive countries in sub-Saharan Africa. In most of these countries, mining exports represent on average 50 percent of total exports and constitute the main source of foreign direct investment.

However, for the region’s 15 resource-intensive economies, mining revenues average only 2% of GDP. Some fear that this level of income does not represent “equitable” sharing of benefits.

Our research found that income is reduced in two ways. First, countries are trying to attract inward investment by lowering taxes, which has fueled unhealthy regional tax competition. Second, the international transfer of profits by multinational companies has reduced the tax base in producing countries.

An efficient tax system

Most African countries receive income from the mining industry through a combination of royalties, corporate taxes and sometimes non-state equity participation in projects where they receive funding. dividends from corporate profits.

The structure of mining tax regimes in the region directly affects the structure and magnitude of mining revenues. In addition, governments have reduced corporate tax rates in many sectors, including mining, against a backdrop of competition to attract investment and efforts to spur economic development.

Our research highlights that of the 15 resource-intensive economies in sub-Saharan Africa, only three had lower mining corporate tax rates in their tax laws, and six had higher tax rates for the sector. However, the practice of negotiating downward corporate tax rates in contracts with individual mining projects is widespread. At least nine countries have cut tax rates on special purpose companies as an incentive in at least one resource contract with investors. This has led to an effective corporate tax rate in the mining sector lower than the statutory rates.

Play the shell game

Our research also shows that international profit shifting has a dramatic effect on the revenue collected. Multinational companies are using their global reach to reduce tax obligations in high tax jurisdictions by shifting their profits to lower tax countries. One example is the use of an interest-bearing loan arranged between different entities within a multinational enterprise. Interest expense is claimed as a deduction in the higher tax country (Africa) while interest income is allocated to a lower tax country offshore. Other examples include the undervaluation of minerals or the use of contractors to shift profits overseas.

Our analysis of payments data, reports from the Extractive Industries Transparency Initiative, an internal IMF resource income dataset, and financial information from more than 600 multinational companies reveals that an increase in The corporate tax rate differential between the producing country (highest) and the average (lower) offshore countries by 1 percentage point results in a decrease in reported profits in the mining sector by 3.5 percent.

Based on this research, it is estimated that African countries lose on average between $ 450 million and $ 730 million in corporate tax revenue per year due to tax evasion by multinational mining companies.

Stop the flow

Targeted policy actions can help countries reduce tax evasion in the mining sector and promote revenue mobilization. A concerted effort to shut down current profit-shifting channels could pay off. Recommended actions include strengthening and simplifying transfer pricing protection, limiting interest deductions, improving tax treaty practices, limiting tax incentives, and strengthening investment trading practices. In our research, impose rules limiting interest halved the responsiveness of profit distribution by multinational companies in response to international tax rate differentials.

Some countries are already making progress in tackling profit shifting in the mining sector. Sierra Leone’s new tax regime has moved the country away from negotiating tax terms mine by mine; Guinea, Liberia and Mali have strengthened their transfer pricing protection; South Africa and Nigeria have set limits on interest deductions; nine of the 15 resource-intensive economies have alternative minimum taxes that can ensure that at least part of corporate tax is paid each year, and Kenya has introduced an anti-shopping provision in its convention policy fiscal.

These actions promise greater mobilization of mining revenues in sub-Saharan Africa. And the global minimum tax will likely ease profit shifting and reduce competitive tax pressures. Improving tax policy and tackling tax evasion require careful preparation and enhanced capacity, which takes time, resources and political commitment, but recent international tax developments show that change is possible.

* About the authors:

  • Giorgia Albertin is Deputy Division Chief of the Southern Africa II Division of the IMF’s Africa Department and Chief of Mission for Namibia and Eswatini. She has extensive experience working in emerging markets and low income and fragile economies.
  • Dan Devlin is part of the IMF’s Fiscal Affairs Department, specializing in fiscal policy with a keen interest in extractive industries. At the Fund, her work includes advice on tax policy for developing countries and tax modeling of resource projects.
  • Boriana Yontcheva is Deputy Division Chief of the Regional Studies Division of the IMF’s Africa Department and Chief of Mission for Seychelles. Previously, she was head of mission for Mali.

Source: This article was published by IMF Blog


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