Tax Avoidance in Sub-Saharan Africa’s Mining Sector
This paper was prepared by an interdepartmental team led by Giorgia Albertin, Boriana Yontcheva (both AFR), and Dan Devlin (FAD), comprising Hilary Devine, Marc Gerard, Irena Jankulov Suljagic, Vimal Thakoor (AFR), and Sebastian Beer (FAD)
Title: Tax avoidance in Sub-Saharan Africa’s mining sector / This paper was prepared by an interdepartmental team led by Giorgia Albertin, Boriana Yontcheva (both AFR), and Dan Devlin (FAD), comprising Hilary Devine, Marc Gerard, Irena Jankulov Suljagic, Vimal Takoor (AFR), and Sebastian Beer (FAD).
Other titles: International Monetary Fund. African Department (Series). | International Monetary Fund. Fiscal Affairs Department (Series).
Description: Washington, DC : International Monetary Fund, 2021. | Departmental paper. | Includes bibliographical references.
Identifiers: ISBN 9781513594361 (paper)
Subjects: LCSH: Tax planning—Africa, Sub-Sarahan. | Tax evasion—Africa, Sub-Saharan. | Mineral industries—Taxation—Africa, Sub-Saharan. | International business enterprises—Taxation—Africa, Sub-Saharan.
Classification: LCC K4464.A357 A43 2021
This joint African-Fiscal Affairs Departmental Paper presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Annex 4. The Role of Local Capacity in Tax Policy and Revenue Mobilization
Annex 5. Statutory Company Tax Rates for Gold Producers Compared to General Rate
Annex 6. Action Items to Combat Profit Shifting
Annex 7. IMF Support for Resource-Rich Economies in Sub-Saharan Africa
Figure 1. Mining in Africa
Figure 2. Africa Gold Mining Exploration and Gold Price
Figure 3. Contributions of Mining Resources to SSA Countries (Average, 2009–19)
Figure 4. Importance of MNEs in Mining and Revenue Mobilization in SSA
Figure 5. Mining Revenue in Sub-Saharan Africa
Figure 6. Statutory CIT Rates on Mining and Implicit Tax Rates (EITI Countries)
Figure 7. Top-5 Sources of FDI Inflows to SSA Countries, 2016
Figure 8. Examples of Profit Shifting Via Loans in SSA
Figure 9. Profit Shifting Using Mineral Prices
Figure 10. Unintended Effects of Tax Incentives: SSA Examples
Table 1. Corporate Taxes and Incentives
Table 2. Withholding Taxes in SSA—Reductions Relative to Domestic Law
Table 3. Foreign Direct Investment Sources and Tax Treaty Coverage
Table 4. Profit Shifting Via Interest Deductions
Table 5. Mineral Discoveries and Share Price Changes
This paper was prepared by an interdepartmental team led by Giorgia Albertin, Boriana Yontcheva (both AFR), and Dan Devlin (FAD), comprising Hilary Devine, Marc Gerard, Irena Jankulov Suljagic, Vimal Takoor (all AFR), and Sebastian Beer (FAD), under the general guidance of Annalisa Fedelino (AFR), and Victoria Perry, and Ruud de Mooij (FAD). Administrative assistance has been provided by Jacques Treilly and Charlotte Vazquez.
The staff team benefited from comments and advice from colleagues at the IMF, in particular Thomas Baunsgaard, Pierre Kerjean, Sebastian Leduc, and Patrick Petit (all FAD), and Brendan Crowley (LEG).
Higher public spending to meet the development objectives of sub-Saharan Africa (SSA) requires boosting revenue mobilization. Financing needs – already substantial before the COVID 19 pandemic – have increased further as SSA countries rightly responded to mitigate the pandemic’s socio-economic impact. As part of revenue mobilization efforts, natural resource taxation has the potential to make a substantial contribution in the region, supporting countries in reaching their development goals.
The mining sector plays an important role in many SSA countries, but its overall contribution to revenue mobilization could be enhanced. Fifteen SSA economies are considered “resource-intensive” (excluding oil), with mining making a significant contribution to countries’ national output, exports, and foreign direct investment (FDI) inflows. These countries have chosen fiscal regimes for mining that place royalties and corporate taxation at their center, but overall revenue from mining in most resource intensive economies in SSA remains relatively limited.
Multinational enterprises (MNEs) play a dominant role in SSA countries’ industrial mining sector. MNEs mobilize substantial capital resources and specialized capacity in efficient resource extraction across most SSA resource-intensive countries. However, revenue from these MNEs has been reduced by two forces. First, countries try to attract inbound investment by lowering tax burdens, which has stoked unhealthy regional tax competition. Second, international profit shifting by these MNEs has reduced the tax base in producing countries. For instance, nearly half of FDI inflows into SSA mining come via third country investment “hubs” (that is, countries with very high FDI to GDP ratios) which, when combined with light taxation of these conduit investment entities, are conducive to profit shifting.
This departmental paper aims to contribute to the international policy debate around profit shifting, tax avoidance and SSA’s revenue mobilization efforts in three ways. First, it examines the importance of mining, the role of MNEs, and mining revenue outcomes in SSA. Second, it assesses the magnitude of profit shifting in mining drawing on new macro level research, supplemented by case studies to illustrate the lived experience of tax avoidance in SSA mining. Third, the paper identifies tax policy reforms that could boost revenue mobilization in SSA.
New research into the extent of profit shifting in SSA mining indicates African countries are losing between $470 million and $730 million per year in corporate income tax on average from MNE tax avoidance. The baseline estimate—which also includes SSA economies with mining but not defined as resource intensive—suggests a revenue loss of about $600 million, based on tax rate differentials between African countries and offshore affiliates in the same MNE group. These effects are larger than what has been found for other sectors. The analysis also finds that rules to restrict profit shifting (for example, through limitations on interest deductions against corporate income taxes) can significantly reduce the extent of profit shifting.
Targeted policy actions could critically help resource-intensive countries in reducing tax avoidance in mining and foster revenue mobilization. A concerted effort to close of current profit shifting channels could pay dividends. Recommended actions include strengthening and simplifying transfer pricing protections, limiting interest deductions; improving tax treaty practices, limiting tax incentives, and strengthening investment negotiation practices. In addition, for those countries imposing capital gains tax on indirect transfers occurring offshore, recent work by partners in the Platform for Collaboration on Tax has highlighted where protections could be strengthened. Linking tax policy changes to similar policy actions elsewhere can help promote change, strengthening the benefits of the region acting together. Countries will also need to engage closely with international efforts to reform corporate income taxation, which can have implications for how mining MNE profits are taxed.
Many SSA countries have already taken steps to address vulnerabilities to profit-shifting in the mining sector. As examples, Sierra Leone’s new fiscal regime moved the country away from negotiating fiscal terms mine by mine; Guinea, Liberia, and Mali have strengthened transfer pricing protections, South Africa and Nigeria have set limits on interest deductions; nine of the 15 resource intensive economies have alternative minimum taxes that can ensure some corporate taxes are paid each year, and Kenya introduced a limitation of benefits article into its tax treaty policy.
These actions hold the promise of stronger revenue mobilization from mining in SSA. There is no single cause of disappointing mining revenue performance, and likewise no silver bullet in raising more revenue quickly. Improving tax policy and tackling tax avoidance require careful preparation and stronger capacity, which take time, resources, and political commitment.