Selected Issues

Abstract

Selected Issues

Profit-Shifting in Mali: Risks and Policy Responses1

Multinational enterprises (MNEs) play a central role in Mali’s economy and finances. In 2016, gold exports (dominated by MNEs) accounted for over 80 percent of total exports. MNEs generate over 50 percent of the total turnover of corporations subject to corporate income tax, and slightly over 80 percent of taxable profits. There is indication that profit shifting by MNEs in Mali erodes its revenue base, due to the importance of low-tax jurisdictions as origin of FDI into Mali, insufficient guidance on transfer pricing and absence of effective thin capitalization rules, and the fragmentation of Mali’s tax policy framework in various legislations—which increases the risk of incoherent policy making and tax enforcement. On the positive side, Mali’s limited network of tax treaties has withholding tax rates close to domestic rates on dividends, interest, and royalties. This paper proposes a strategy with four elements to address more effectively profit shifting risks in key sectors of the Malian economy: (1) keep withholding tax rates in tax treaties (present and future) close to current domestic rates; (2) enrich the recently-enacted transfer pricing regulations with simple methodologies adapted to Mali’s economic structure, in particular to inter-company transactions in the mining and telecommunications sectors; (3) introduce effective thin capitalization rules; (4) rethink the use of tax incentives, in particular tax holidays, as a policy tool to encourage investment.

A. Introduction

1. Multination enterprises are major contributors to government revenue in Mali. In 2016, they represented more than 50 percent of the total turnover of companies subject to the corporate income tax (CIT), and more than 80 percent of the CIT (excluding small and medium-size companies).2 The five largest mining MNEs and the two sole telecommunication operators, dominate the MNE sector: each group accounts for one-third of the CIT. The importance of MNEs for Mali’s tax base continues to grow, with the stock of foreign direct investment increasing by more than 80 percent from 2011 to 2015. MNEs have also been diversifying their investments in other economic sectors, such as oil, construction, and financial services.

2. The mining sector, which is the focus of this paper, plays a key role in the economic development of Mali. Gold mining dominates the sector, with reserves estimated in 2017 at 830 tons or 16 years of output at current production levels. Mali has 0.5 percent of the World’s gold reserves (Chart 1). Mali is among the five largest gold producers in Africa, with 50.6 tons of production in 2017. The share of the mining sector in GDP declined from a high of 10 percent in 2006 to 6 percent in 2016—in part due to the decline in commodity prices. However, the contribution of gold to Mali’s external position has remained strong: gold’s share in total exports of goods has consistently exceeded 50 percent since the early 2000s, and was 62 percent and 67 percent in 2015 and 2016, respectively. The direct employment effects of large-scale mining are limited, but artisanal mining employment has increased in recent years.

3. This paper assesses the exposure of Mali to the erosion of its tax base through international profit shifting—with a focus on the mining sector—and proposes policy measures to mitigate such risks. The paper is organized as follows: section II describes the main features of Mali’s international tax rules; section III provides an assessment of the potential risks of international profit shifting to Mali’s tax revenues; and section IV assesses the key international tax issues arising from intra-group transactions in Mali.

Figure 1.
Figure 1.

Mali: World Gold Reserves

(2016)

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A003

Source: S&P Global Market Intelligence.
Figure 2.
Figure 2.

Mali: Share of the Mining Sector in Mali’s Exports, Revenue and GDP

(in 2015)

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A003

Source: EITI, 2015.

B. Mali’s International Tax System

4. There are two key elements that govern Mali’s international tax rules: (1) domestic tax policy, which generally applies to all investments, whether originating in Mali or from foreign countries, and includes the General Tax Code (Code Général des Impôts, CGI), three mining codes (1991, 1999, and 2012), the Investment Code, and Mali’s recent transfer pricing regulations; (2) bilateral tax treaties, which Mali has signed with partner countries, including other members of the West African Economic and Monetary Union (WAEMU).

Domestic Law

5. As in most other countries, the primary policy instrument of the domestic law is the CIT (Impôt sur les bénéfices industriels et commerciaux), which Mali applies on a territorial basis: profits from sources in Mali are subject to tax in Mali, while profits from sources outside of Mali are exempt. The CIT, which key features are presented in Box 1, is consistent with Sub-Saharan African (SSA) countries, both in terms of its base and rates. However, the interaction of the CIT with various other laws, such as the mining or investment codes, make the overall CIT system complex for investors and the tax administration.

6. The Mining Code (MC) and the Investment code (IC) play a key role in framing the overall tax regime for MNEs operating in Mali. While one of the key policy aims of these codes is to provide incentives for investment and employment, they create complexities and opportunities for tax avoidance strategies that shift profits outside Mali, or inside Mali from taxable to non-taxable (or lightly-taxed) companies.

7. Mining companies in Mali and their subcontractors are governed by mining codes from 1991, 1999 and 2012.3 The MC defines the main taxes, duties, levies and royalties applicable to mining companies and grants fiscal stability of up to 30 years to eligible MNEs. Some of the rules for determining such taxes are in the MC, in which case they override the general tax law in the CGI; others refer to the CGI. This overlapping of tax rules has created complexity and has inhibited the ability of the government to undertake effective CIT reforms.

8. The mining and investment codes grant exemptions from VAT and customs duties. In 2016, these exemptions amounted to 24 percent of all VAT and customs tax expenditures, and about 21 percent of total tax expenditures.4 These exemptions are similar across the three mining codes, and consist of temporary admissions and exemptions during the exploration phase and the first three years of production. They also include exemptions from import duties for petroleum products during the entire operation phase. From a tax policy perspective, customs exemptions for intermediate and capital inputs are not all problematic, since their primary purpose is to neutralize the effect of the tariff on the cost of capital. However, customs exemptions provide opportunities to artificially increase the prices of intercompany purchases, and thus reduce the CIT base.

9. The 1991 MC grants a CIT holiday of five years, which is particularly generous considering the life expectancy of mines (10 to 15 years). The 1999 and 2012 MC removed the five-year exemption, but since the 1991 code is still applicable to many projects, several MNEs have been able to continue benefiting from this exemption over recent years, including for mining extension projects.5 The CIT tax expenditure estimate attributable to the MC is surprisingly low, amounting to 1.2 percent of the CIT paid by MNEs in 2016.

10. CIT rates applied in the mining codes have declined over time. The 1991 MC implemented a CIT rate of 45 percent; the 1999 MC reduced it to 35 percent; the 2012 MC applies the CGI rate of 30 percent, but provides a reduced rate of 25 percent for the first fifteen years of a mine’s operation. The current rate is comparable to mining countries in Africa. For example, the top in South Africa is 28 percent, the Democratic Republic of Congo, Tanzania and Niger apply 30 percent.

11. In addition to the CIT and withholding taxes, Mali’s laws include specific taxes applicable to sectors which could generate above-normal profits due to country-specific attributes, such as in mining and telecommunications (Table 1). Thus, mining companies are subject to royalties of 6 percent under the 1991 and 2012 code (3 percent under the 1999 code). Telecommunication companies are subject to a turnover tax of 5 percent. These rates are generally consistent with the rates applicable in the region.6

Table 1.

Mali: Mining and Telecommunications Royalty Rates

In selected SSA Countries (%)

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Sources: Laporte De Quatrebardes and Bouterige (2016) for mining and IBFD for telecommunications.Note: Countries use various names for the telecommunications turnover taxes, but they are economically equivalent to ad-valorem (percent of turnover) royalties.

Key Features of the Malian Corporate Income Tax

The standard CIT rate is 30 percent (reduced from 35 percent in 2012).1 A minimum tax of 1 percent of turnover applies, even in cases where companies make losses (Impôt Minimum Forfaitaire). The CIT is in line with Sub-Saharan Africa (SSA) CIT rates (Figure 1), and the base generally follows international standards.2 It is noteworthy that only two SSA countries had a tax rate below 20 percent in 2015 (Mauritius and Madagascar), and that all others are close to the average of 28.8 percent. Depreciation is deductible in respect of tangible assets, at rates consistent with the economic life of the asset. Losses incurred in accordance with tax rules may be carried forward for three years.

Figure 3.
Figure 3.

CIT Rates in Sub-Saharan Africa, 2015 (%)

Citation: IMF Staff Country Reports 2018, 142; 10.5089/9781484359068.002.A003

Source: FAD Tax Policy Rates Database.

Withholding taxes apply at rates of 10 percent on distributed dividends, and 15 percent on interest and service fees paid to non-residents. This withholding system reduces the potential benefits of tax rate arbitrage required in profit shifting strategies.3 One caveat lies in the drafting of article 41 of the General Tax Code (Code Général des Impôts, CGI) which refers to interests paid rather than accrued. MNEs can use this article to deduct interest due to foreign affiliates from their CIT base without paying the interests, thus deferring payments of the withholding tax.

1/ Law 2011–078 of December 23, 2011 (budget law for 2012 fiscal year).2/ Mali is a member of the West African Economic and Monetary Union, which coordinates the setting of domestic tax policy through regional directives. Both the CIT rate and base are subject to directives. See Mansour and Rota-Graziosi (2014) for an overview of the WAEMU tax harmonization framework.3/ The arbitrage stems from deducting expenses at the standard CIT rate of 30 percent, but paying withholding at lower rates. The incentive to shift profit through deductible expenses depends primarily on this difference.

12. Mali does not currently tax indirect transfer of mining rights, or of any other title or right to assets located in Mali—i.e. transfer of shares of the legal entity owning the rights, as opposed to the direct sale of the rights. This issue has been recognized and analyzed by the Platform for Collaboration on Tax, as a potentially significant source of profit shifting, especially in sectors such as mining and telecommunications.7 It is of particular interest to Mali given the very high level of FDI into Mali transiting through tax havens (see section III). Mali could consider extending the taxation of gains on such transfers.

Transfer Pricing Regulations

13. Mali recently enacted transfer pricing regulations, clarifying the application of the arm’s length principle (ALP).8 Introduced in the 1930s in US and European laws, the ALP has been included in article 9 of the OECD and the UN model conventions. It consists in comparing the price of an intragroup transaction to the price that independent companies would have agreed under similar circumstances. Despite its common use worldwide, the ALP has been criticized for its inability to effectively tackle profit shifting and base erosion techniques. Its practical implementation has reached a level of sophistication that is hardly adapted to the capacities of developing countries.

14. Mali’s transfer pricing regulations are consistent with international standards, but do not apply to intercompany transactions within Mali. This is potentially a significant risk, due to the various preferential regimes for direct and indirect taxes, which create incentives for MNEs to manipulate their transfer prices within Mali—for example, between a profitable mine reaching the end of its life and a new mine (organized as different but related subsidiaries), or between a mine and its related sub-contractors.

15. The regulations introduce documentation requirements based on the OECD Master file/Local file approach as well as a simplified declaration. This is a positive development that will allow Mali to perform risk assessments of profit shifting more effectively, to select the types of audit that have good probability of yielding additional revenues and to perform audits more effectively. The introduction of country-by-country reporting requirements can occur at a later stage, once Mali has developed knowledge and capacity in transfer pricing.

16. The regulations should be expanded to develop rules that target the most important transactions, such as gold exports, and offer clear pricing methodologies to increase tax

17. Certainty for MNEs. The current regulations are of general application, and do not entail any simplified rules or specific safe harbors.9 Nevertheless, several characteristics of Mali’s economy and policy framework call for simplified methodologies: the capacity of the tax administration is relatively low, particularly in international tax; the number of large MNEs remain limited; and the types of economically significant intercompany transactions are also limited and fairly stable, but important in value.

18. The only existing safe harbor relates to a limitation on the interest rate charged on related companies debt, which is set at the BCEAO rate plus 2 percentage points.10 Such a limitation significantly reduces the potential for contentious issues.

Double Tax Treaties

19. Tax treaties can be useful in providing certainty for the tax treatment of investment flows between two countries, and help eliminate double taxation.11 However, unless they are structured effectively, individually and as a network, tax treaties could create opportunities for tax avoidance strategies, and significantly limit the taxing rights of the source country (in this paper, Mali). As of October 2016, Mali had a multilateral tax treaty with WAEMU partner States, and bilateral treaties with France, Algeria, Russia, Morocco, Tunisia, and Monaco. All these treaties generally follow the UN model convention.

20. Mali’s tax treaties have generally maintained the protective role of withholding taxes on payments to non-residents, with some exceptions (Table 2). The most important is the zero withholding on inter-company management and technical services—i.e. the 15 percent rate on such expenses in the CGI does not apply to payments to residents of the treaty partners. This exception could be significant from a base erosion perspective, as technical and management services payments between related companies have increased in importance over the years.

Table 2.

Mali’s Tax Treaty Withholding Rates

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Sources: Countries’ laws.

21. Mali should continue negotiating withholding tax rates in its tax treaties in line with the general rates in its CGI. Significant variations of rates across treaties and with non-treaty countries should be avoided, as they may generate treaty shopping practices—whereby a multinational would set up residency in a treaty country solely to benefit from its low withholding rates. Such practices require another layer of anti-abuse rules, which can be difficult to implement.

C. Exposure To Tax Avoidance

22. This paper analyses channels and indicators to identify the extent of Mali’s exposure to tax avoidance by MNEs. Rather than applying a quantitative approach targeting a high-level estimate of potential tax losses,12 analysis is based on the patterns of FDI and firm-level data from tax returns, which provide stronger indicators and some quantification of the extent of profit shifting. This section explores the patterns of transactions with low-tax jurisdictions, the profitability of MNEs in Mali and their thin capitalization practices. This is complemented by an analysis of the main intercompany transactions occurring in Mali (see section IV). Together, this section and the next allow for formulating options for more effective policies to protect Mali’s tax base derived from MNE’s business activities.

Exposure to Low-Tax Countries and Exports Undervaluation

23. Data from the Coordinated Direct Investment Survey (CDIS) suggest that a significant share of FDI into Mali transits through low-tax countries. Over 2011–2015, the three most important origins of FDI into Mali were the UK, Barbados, and Australia (Table 3). The United Kingdom does not report in the CDIS any outward investment in Mali; these investments may therefore be attributed to the British Overseas Territories and Crown Dependencies13 such as Jersey (e.g. Randgold Group) and the Cayman Islands (e.g. Avnel Gold Mining Group).14 At the end of 2015, over 60 percent of Mali’s inward FDI position was with the UK and Barbados (e.g. Avion Resources Mali).15

Table 3.

Mali’s FDI Inward Position in 2015

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Sources: IMF Coordinated Direct Investment Survey.

24. The increase in inward FDI has been mainly in the form of debt, indicating a significant risk to the tax base from thin capitalization.16 Over 2011–2015, about 84 percent of the increase in FDI (USD 1.38 billion) originated as debt from low-tax countries (UK dependencies and Barbados). This implies that high levels of interest deductions are taken against income generated in Mali. Such income may come from developing new mines, or expanding existing ones, and will have tax consequences for Mali over several years—hence, the importance of analyzing tax-returns data over long periods.

25. The destination of Mali’s exports may also indicate exposure to profit shifting through transfer pricing. About 75 percent of exports are destined to South Africa and Switzerland, and this ratio is relatively stable over recent years. This concentration may appear normal given the importance of gold refining in these two countries (especially Switzerland), but it raises the issue whether such exports are valued appropriately for Mali’s CIT and royalties. The issue could be complicated by the fact that non-refined gold may be harder to value using readily available price indices. Further analysis identifying the nature of gold exports, the relationship between exporters (in Mali) and importers (in the two recipient countries mentioned), and the structure of prices charged on such exports, could shed more light on base erosion through undervaluation of inter-company export prices.

Profitability of MNEs in Mali

An Example of Profit Shifting Through Excessive Interest Deductions

Thin capitalization rules cap the amount of debt for which interest is tax deductible. Interest deductibility is typically restricted if a measure of the company’s debt relative to its assets or equity exceeds a certain ratio. The exact definitions of the debt measure in the numerator of the ratio and of assets or equity in its denominator vary across countries. In recent years, the trend in OECD countries, in particular European countries, has been to replace thin capitalization rules with interest limitation rules—e.g., interest as a percent of Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA).

A hypothetical case illustrates the revenue losses due to interest deduction. In both cases shown, invested assets amount to 1,000 million euro, but in the “Related Parties” case, debt from a foreign parent company is 90 percent of assets, leading to excessive interest deductions relative to the “Arm’s Length” case, and 19.2 million euros in CIT losses.

Hypothetical Case

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26. Low profitability of MNEs in Mali is another indicator of international profit shifting. The profitability of MNEs was therefore analyzed and compared with the profitability of domestic companies to distinguish between potential situations of transfer pricing avoidance, and genuine economic factors.17

27. Affiliates of MNEs resident in Mali represent a high proportion of total CIT (81 percent), but this share is unequally spread among them. The 10 largest affiliates contribute more than 67 percent of the CIT. The median CIT-to-turnover ratio for all MNEs is 1.1 percent,18 which is just slightly above the minimum tax of 1 percent of turnover, suggesting a very low tax profitability of affiliates of MNEs resident in Mali, which could be partly the result of profit shifting.

28. The tax profitability of MNEs is on average lower than that of domestic companies, also suggesting profit shifting outside of Mali. For instance, 29.5 percent of MNEs in Mali reported negative taxable results in 2016, against 16 percent for all companies under the normal CIT regime (excluding exempt companies). In addition, 42.7 percent of MNEs paid the minimum CIT in 2016, and more than 31.4 percent over 2014–2016. Given that this period coincides with a decline in the price of gold, an analysis over a longer period is necessary.

29. Further sectoral analysis would be useful to identify more narrowly the channels and the revenue loss associated with tax avoidance. This could include benchmarks on various elements of the revenue and cost structures of companies resident in Mali. The analysis could also be extended to companies resident in other countries with economic structures similar to Mali, and operating in the same economic sectors.

Thin Capitalization

30. Mali’s exposure to thin capitalization indicate excessive leverage in the early stages of investment, and a decline thereafter due to the accumulation of earnings. About 35 percent of inward FDI by country of origin in 2015 had debt to equity ratio exceeding 500 percent (Table 4). Investments reported from the United Kingdom show a ratio of 159 percent in 2015, declining from 263 percent in 2011. FDI from Barbados indicate a similar situation, with a large debt injection into Mali in 2015.

Table 4.

Mali’s Exposure to Thin Capitalization Risk

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Source: CDIS, and IMF staff calculations.

31. About 84 percent of FDI into Mali is subject to thin capitalization risk—assuming a debt-equity ratio of 1.5 over the long run is standard practice. This seems particularly the case of mining MNEs, and is confirmed by firm-level data from tax files, which show that the ratios of financial debt to social capital (i.e. original equity contribution) of mining companies are disproportionate relative to the level of total investment. All mining MNEs have subscribed the minimum required social capital (or slightly above), financing the remaining investments by debt.19 By comparison, similar ratios in the telecommunication industry appear more reasonable. Thin capitalization practices in the mining sector were used despite the limitation in the 1991 MC, which caped the deduction of interest on intercompany debt to the amount of the social capital.

32. This pattern is an indication of excessive interest expenses accruing in the early stages of an investment, creating losses that can be carried forward against future earnings, which in turn defer payments of CIT and the 10 percent priority dividend to the Malian State.20 The large injection of debt in the early life of projects, will eventually have to be repaid out of accumulated earnings, with no tax consequences.

33. In summary, both the patterns of FDI inflows and firm-level tax data suggest that thin capitalization is undermining Mali’s tax base. More effective thin capitalization rules could combine a debt-equity ratio (instead of a minimum original equity contribution) with an interest limitation rule, to capture both the debt level and the interest rate. The latter could be extended to non-related party, including in the domestic context.

D. Strengthening Transfer Pricing Rules

34. This section proposes simplified approaches to strengthen Mali’s recently adopted transfer pricing regulations. Clear and easy-to-apply methods should enhance Mali’s protection against aggressive transfer pricing practices. The issuance of administrative guidelines, and the development of relevant capacities in the tax administration, are feasible objectives to pursue over the next few years.

35. Considering the importance of the mining and telecommunications in the Malian economy, and the limited types of relatively important transactions that may erode Mali’s tax base, this section focuses on the following areas of profit-shifting risks: undervaluation of gold exports; profit shifting within Mali, in particular due to weak ring-fencing rules in the mining sector; pricing and structuring of inter-company services and royalty fees; and, pricing of incoming international calls.

Valuation of Gold Exports

36. Mali’s authorities have good control over the quantity and quality of gold export by MNEs. Mineral content is verified through MNEs’ own controls and refining reports are made available to the Malian authorities. While this does not eliminate all risks, it limits blatant abuses. The authorities have plans to develop their own laboratory resources; while this could enhance existing controls, it should be considered from a cost-benefit perspective.

37. The authorities have less information about export prices, which MNEs may understate, thus affecting CIT and royalty revenues. This situation is made particularly more difficult in the mining sector, where the MC maintains a complex fiscal regime by splitting the royalties into two taxes: a tax based on turnover, and an ad-valorem tax based on mine gate prices.

38. A simpler valuation methodology, based on the Comparable Uncontrolled Price, should aim at consistency across the different taxes on turnover. The development of this methodology requires a comparative analysis of transactions between exports to third parties, and exports to related parties, to identify discrepancies and to determine simple rules consistent with independent market practices. Such analysis would be helpful to determine an arm’s-length allocation of revenues arising from the difference between quoted ex-mine prices and over-the-counter prices. Given the importance of economic rent in the mining sector, methods based on margins or costs should not be allowed, including for taxes on profits.

Adapting Tax Audits to the Investment Lifecycle

39. The type of tax arbitrage varies over the investment lifecycle, particularly in capital intensive sectors, such as mining. For instance, during a CIT exemption period under the MC (or the investment code for non-mining companies), MNEs may inflate the price of capital goods imported under a customs exemption regime to claim higher amortization charges after the end of the CIT exemption period. At the end of a mine’s life, MNEs have an incentive to sell capital goods at a low price to related parties to avoid realizing capital gains.

40. MNEs may extend the benefit from indirect tax exemptions beyond the exemption period. They could artificially increase their stocks of intermediate and capital goods (e.g. spare parts) before the end of the exemption period, to use them for activities taking place after the exemption period. This highlights the importance of extending tax audit to quantities (not only prices), and to the complexity of doing this when exemption regimes are provided for both inputs and profits.

41. Other abuses may arise from mining extension projects. In case of an extension of a project within the same legal entity, the immediate deduction of charges related to the extension may offset profits of existing activities, thus delaying the payment of CIT and priority dividends to the Malian State. In the case of an extension in a separate legal entity, an allocation of expenses and revenues between the related companies may be used to transfer profits to the newly established company which benefits from a CIT exemption. A similar issue arises in case of separate projects managed by two related parties.

42. Ring-fencing rules should be strengthened, to limit transfer pricing risks across separate but related entities, or across projects within the same legal entity. This means that there should be clearer limitation on consolidation of income and deductions for tax purposes across different activities, or different projects, undertaken by the same taxpayer, and transfer pricing regulations should be applied to intercompany transactions within Mali. This will also facilitate tax audits related to the use of CIT and customs exemptions. The ring-fencing rules should strike a delicate balance between reducing opportunities for base erosion, and encouraging the development of new projects and extension of existing ones.

Intercompany Services

43. The overcharging of technical and management services represents an important risk considering the industrial and technical nature of MNEs in Mali (mining, telecommunications, building, oil, and to a lesser extent financial services). One common technique used in Mali is to charge services based on a fixed percentage of the recipient’s turnover, without any guarantee that the service is effectively rendered. The main protection against this abusive practice is the domestic withholding tax of 15 percent. However, as noted earlier, Mali’s tax treaties reduce this rate to zero, and hence greatly undermine the effectiveness of such protection.

44. Mali’s transfer pricing regulations could be adapted to deal effectively with the supply of services between related companies. The primary approach should be to base such services on cost incurred for services rendered (provided they are justified from a business perspective), and not on turnover of the recipient company. For simplicity, safe-harbors can be used to determine the acceptable margin on the costs of the services provided—as suggested by the UN Practical Manual on Transfer Pricing for Developing Countries—, together with a cap on maximum deductible amounts for all management and technical services, expressed for instance as a percentage of other expenses.

Royalty Fees

45. The main economic sectors in Mali are not highly exposed to tax avoidance through royalty payments to non-resident related parties. Nevertheless, the main protection for Mali against possible abuses through this technique lies in the applicable withholding tax of 30 percent. Mali’s tax treaties generally maintain this protection, though with reduced rates. The treaties with France and Russia eliminate fully this protection—royalties paid to residents of these countries should therefore be audited carefully. In this regard, Mali could consider developing a tax audit practice defining a methodology to price inter-company royalties. Considering the absence of relevant third-party data on comparable transactions in the relevant geographic area, a royalty based on profits could be considered.

International Calls

46. The pricing of incoming international calls may be a concern from revenue perspective considering that Mali is generally a receiving country. Besides CIT, a decrease in turnover would also affect other taxes such as the turnover tax on telecommunication companies. Mali has recently enacted a regulation21 establishing a communication right to access information pertaining to international calls such as volumes and roaming agreements. The effective implementation of this regulation should be monitored and the information gathered can be used to establish clear guidelines regarding intercompany pricing. The use of comparable transactions with third parties would be particularly useful to audit transfer prices.

Developing Effective Transfer Pricing Capacity

47. Transfer pricing is a technically complex field, which draws upon tax, legal, accounting, and economics expertise, as well as its own methodologies. Although this paper does not discuss tax administration capacity issues, it is obvious from discussions with Malian tax inspectors, that Mali needs to develop its human resources in key agencies (tax and customs administrations, and the Ministry of Mines), to effectively enforce the anti-avoidance rules discussed in this paper. The development of a dedicated team, commensurate with the number of MNEs operating in Mali, would allow building a strong centralized expertise to manage the most important cases, and to support tax auditors. Key competencies to acquire are knowledge of MNEs business models and structures, transfer pricing comparability analysis, management accounting, and transfer pricing audit management.

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1

Prepared by Mehdy Ben Brahim, Mario Mansour, and Irena Jankulov Suljagic

2

Unless otherwise specified, all tax-related indicators in this paper are based on data provided by the Malian Ministry of Finance and its agencies (primarily the tax and customs administrations).

3

The Malian authorities are currently working on a revision of the mining code. Seven out of a total of ten mines currently operate under the 1991 MC, due to lengthy stability clauses, and three operate under the 1999 code.

4

The estimates used in this paper were provided by the Malian tax and customs administrations. Mali does not publish the methodology, data sources, and the benchmark tax system for its tax expenditures estimates, which makes it difficult to assess their quality.

5

Two mines in activity among the largest and most profitable have benefited in the past few years from CIT exemptions under the 1991 MC.

6

Although royalties are seen as a tax on rent, they are economically less efficient than other forms of rent taxes (See Boadway and Keen (2010).

8

Finance laws for 2016 and 2017.

9

Safe harbors are statutory provisions that relieve taxpayers from general transfer pricing regulations; their purpose is to provide certainty of tax outcomes, when taxpayers follow certain rules.

10

Under the 1991 MC, the base rate applicable to mining companies was Libor instead of the BCEAO’s rate.

11

Double tax treaties allocate the respective rights to tax between two contracting states.

13

The CDIS data allows for reporting of investment flows from the British Overseas Territories and Crown Dependencies. Mali could align its reporting to this structure to better assess FDI flows from low-tax jurisdictions.

14

Extractive Industries Transparency Initiative, Mali Report 2014, December 2016.

15

Idem.

16

See Box 2 for a description and illustration of the effect of thin capitalization on tax revenue. The “Third Parties” example is based on cases encountered in tax returns of mining MNEs resident in Mali.

17

The analysis in this section is based on firm-level data provided by the Direction Générale des Impôts for the most-recent available years (2014 to 2016).

18

This ratio can be thought of as a “tax return on turnover ratio”—i.e. how much the government shares in each Euro of sales from the mining rent.

19

Through the life of a mine, accumulated earnings are likely to increase equity and therefore reduce the debt to equity ratio to a more acceptable level.

20

The Malian State generally owns 20% of the mines, of which half are entitled to priority dividends.

21

Finance law for 2016.

Mali: Selected Issues
Author: International Monetary Fund. African Dept.