Tax Avoidance in Sub-Saharan Africa’s Mining Sector
Author: Boriana Yontcheva1, Dan Devlin, Hilary Devine, Sebastian Beer2, and Irena Jankulov Suljagic
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
Publication Date:
28 Sep 2021
Language:
English
Keywords:
International Taxation, Corporate Income Taxation, Multinational Enterprises, Profit Shifting, Mining, Developing Countries, Africa, Revenue Mobilization, Tax Incentives, Tax Avoidance.
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This 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 multinational enterprises (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.

Abstract

This 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 multinational enterprises (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.

Introduction

Countries’ ability to reach the UN Sustainable Development Goals relies crucially on securing their financing. They must find ways to contribute significantly to the funding of their development objectives, and revenue mobilization is a key component of that contribution. Sub-Saharan African (SSA) countries also have clear goals to increase industrialization1 and integration into the global economy, which can create policy tensions with revenue raising objectives.

Furthermore, the impact of the global COVID-19 pandemic and policy responses to support the economy and protect the most vulnerable have also strained the budgets of SSA countries (as elsewhere). This will require fiscal repair in the coming years once the emergency has passed.

Natural resources taxation has the potential to make a substantial contribution to all these objectives. Tightening controls against international profit shifting could be a key component to mobilize domestic resources and support fiscal recovery. The IMF is actively assisting developing countries to ensure their fiscal regimes for mining – and their tax systems more generally – effectively collect taxes while fostering investment.

This paper discusses the role of the mining sector in SSA countries (Chapter 1) and focuses on the contribution to government revenue mobilization of MNEs active in the mining sector in SSA and the fiscal regime structures used (Chapter 2). Drawing on existing research on base erosion and profit shifting the paper then provides estimates of the magnitude of tax avoidance in mining in the region (Chapter 3).2 It then highlights “real world” case studies from the region to illustrate channels of tax avoidance and the challenges faced by SSA governments (Chapter 4). It finally discusses policy actions that can be—and are being—taken to combat revenue losses by countries in the region (Chapter 5).

Chapter 1 Mining and Multinationals in Sub-Saharan Africa

A Key Economic Role

The mining sector plays a key role in SSA, with 15 countries in the region defined as “resource-intensive.”1 A substantial proportion of the world’s mining production comes from Africa, including more than 30 percent of global production of chromium, cobalt, manganese, platinum, gem diamonds and tantalum (Republic of Austria 2020) (Figure 1).2 Based on 2018 data, 10 of the top-15 most mining-intensive economies in the world are in SSA (ICMM 2020).3 Thus, mining plays a major role in several SSA countries. In total, the region produced minerals with an estimated worth of about $350 billion in 2018 (Republic of Austria 2020).4 These include cobalt and tantalum in the Democratic Republic of the Congo, diamonds in Botswana, gold in Burkina Faso and Tanzania, bauxite in Guinea, copper in Zambia, uranium in Namibia, iron ore in Liberia, and platinum in South Africa.

Figure 1.
Figure 1.

Mining in Africa

Citation: Departmental Papers 2021, 022; 10.5089/9781513594361.087.A001

Sources: Production data: Republic of Austria (2020); and Mining Dependence Index, ICMM.

Furthermore, SSA countries have substantial untapped mining resources. The region is estimated to possess 30 percent of global mineral reserves (UNEP 2008). This indicates a future where mining will continue to play a key role—including as inputs in emerging technologies, for example car batteries that require cobalt (signifcant reserves in Democratic Republic of the Congo), manganese (South Africa, Gabon, Ghana), and graphite (Mozambique, Madagascar, Zimbabwe). In addition, the role of mining in SSA could grow further if rates of regional exploration increase: many stakeholders perceive the region to be relatively under-explored (Figure 2).5

Figure 2.
Figure 2.

Africa Gold Mining Exploration and Gold Price

Citation: Departmental Papers 2021, 022; 10.5089/9781513594361.087.A001

Sources: S&P Global; and IMF staff estimates.

Looking at the national accounts of African economies, the importance of mining can be seen in several ways (Figure 3). These include:

  • Over the last decade, the mining sector contributed about 10 percent to GDP on average across the 15 SSA countries considered resource-intensive.

  • In most SSA resources-intensive countries, mining exports represent 50 percent of total exports on average.

  • The mining sector is the main source of foreign direct investment (FDI) inflows in the region, representing about one-third of total inflows in 2017 (Figure 3), albeit with large variations among countries and over time as projects are developed and commence.

Figure 3.
Figure 3.

Contributions of Mining Resources to SSA Countries

(Average, 2009–19)

Citation: Departmental Papers 2021, 022; 10.5089/9781513594361.087.A001

Sources: Country authorities; FAD Resource Revenue Tax Database; FDI markets; and IMF staff estimates.

A Heavy Reliance on Multinational Enterprises

Multinational enterprises (MNEs) play a dominant role in mining in SSA countries. African governments and domestic investors often lack the capacity to exploit mineral resources. For resource-intensive countries in the region, more than 80 percent of all entities making payments to governments are foreign-owned MNEs— that is, corporate groups operating in multiple countries (Figure 4).

Figure 4.
Figure 4.

Importance of MNEs in Mining and Revenue Mobilization in SSA

Citation: Departmental Papers 2021, 022; 10.5089/9781513594361.087.A001

Sources: Extractive Industries Transparency Initiative (EITI); UNCTAD World Investment Report 2019; World Bank Development Indicators; and IMF staff estimates.Note: Data for EITI reporting countries only, for MNEs operating in mining (excludes payments made under EITI by petroleum MNEs). Payments of VAT are notably lower than other revenue categories because MNEs that export their minerals are typically entitled to VAT refunds for tax paid on their inputs.

Most big mining MNEs have a presence in Africa (Laporte and de Quatrebarbes 2015). These include Glencore Xstrata (for example, iron ore in Mauritania; zinc in Burkina Faso; copper and cobalt in Democratic Republic of the Congo; nickel in Tanzania; copper, cobalt, and zinc in Zambia; zinc in Namibia; chromium in South Africa), Rio Tinto (aluminum in Cameroon and Ghana, bauxite in Guinea, ilmenite in Mozambique, copper and ilmen-ite in South Africa), Anglo American (diamonds in Botswana, Namibia, and South Africa; platinum and palladium in Zimbabwe; iron ore and manganese in South Africa), Barrick (copper in Zambia and, following the 2019 Rand-gold merger, gold in Mali), Newmont (gold in Ghana), AngloGold Ashanti (gold in Ghana, Guinea, Mali, Namibia, Democratic Republic of the Congo, and South Africa), and Kinross (gold in Ghana and Mauritania).

MNEs mobilize substantial capital resources and bring specialized capability to resource extraction. MNEs are typically better-suited to undertaking these investments than governments and their expertise can help ensure SSA mines operate efficiently and maximize the gains from mineral deposits. MNEs involved in mining may also be service-based businesses not directly engaged in mineral exploitation (for example, they may provide rock sampling/ drilling services).

Chapter 2 Mining Fiscal Regimes and Tax Revenue Performance—Adequate Fiscal Gains?

Fiscal Regime Settings for Mining Investors

Mining investors operate under “tax-royalty” fiscal regimes across the region. Most countries in Africa operate a mining fiscal regime based on a combination of royalties, corporate income tax, and, for many, on the state taking a non-controlling ownership stake in projects, receiving dividends from corporate profits. Alternative minimum taxes (AMTs) are used frequently to buttress the company tax when tax payments would otherwise fall below some minimum level. Taxes targeted at economic rents are used much less frequently (see Annex 1 for summary of fiscal regimes).

Almost all resource-intensive countries in SSA use contracts to define the fiscal terms applying to particular projects. These contracts override domestic revenue legislation, incorporating tailored fiscal terms for projects based on upfront negotiations. The included fiscal terms often deviate from the generally-applicable fiscal regime and also include clauses to fx (“stabilize”) those terms over time.

Revenue Patterns

Payments data reported under the Extractive Industries Transparency Initiative (EITI) show mining companies making a wide range of payments. For the nine resource-intensive economies participating in EITI, payments comprise those directly related to mineral production (for example, royalties, state participation dividends) and payments made under generally applicable revenue laws (for example, CIT, trade taxes). For EITI countries1:

  • Royalties contribute over 25 percent of total payments in all countries except Liberia and Mali (around 15 percent).

  • Corporate taxes represent over 15 percent of total payments. The only exceptions were Liberia and Sierra Leone which were both below 5 percent (although data for both are affected by the Ebola pandemic that began in 2014).2

  • Taxes on mining company goods and trade (excises, customs duties, and export taxes) are contributing materially to total payments. In Burkina Faso, Guinea, Mali, and Zambia, these represent over 15 percent of total payments. In Ghana, Niger, Liberia, Sierra Leone, and Tanzania, however, these payments were less than 15 percent.

  • The source of remaining payments varies. Ghana for example received around 38 percent of payments from state participation dividends while, in contrast, Sierra Leone received around 18 percent of payments from license fees (see Annex 2 for charts).

For the 15 resource-intensive economies of the region, revenue from mining accounts for 2 percent of GDP, on average. Most remain in the range of 1–3 percent of GDP, on average, with Botswana a notable outlier, consistently recording higher mining revenues than other African economies at over 12 percent (Figure 5, panel 1). This revenue performance is reinforced by 50–50 joint venture arrangements with De Beers3 for both diamond mining and trading. Botswana also negotiated a 15 percent stake in De Beers itself (Korinek 2013). These arrangements generate dividend revenue and may also help stife international profit shifting within the joint-venture companies by exerting managerial influence. Beyond Botswana, only Guinea and Zambia have mining revenues that contribute over 15 percent of total revenues—for the remaining ten economies, the contribution is much lower (nine economies are under 10 percent of total revenue; Figure 5, panel 2).

Figure 5.
Figure 5.

Mining Revenue in Sub-Saharan Africa

Citation: Departmental Papers 2021, 022; 10.5089/9781513594361.087.A001

Source: IMF.

There are concerns that this level of revenue does not represent a “fair” sharing of the benefits of mining for the region. General concerns about international profit shifting by MNEs are at the forefront of the international tax debate (IMF 2021) and with MNEs dominating African mining, these concerns have mixed with regional concerns about the sharing of resource wealth. African Union leaders, for example, have noted a paradox that the region’s “vast mineral wealth exist[s] side by side with pervasive poverty” (African Union 2009).4 A related concern is that changes in the value of mineral production are not reflected in mining revenues—particularly during periods of strong prices—which is seen as an indicator MNEs are enjoying economic rents and fiscal settings are unbalanced. Mansour (2014), for example, observed that tax revenue from natural resources in SSA5 increased by about 1.4 times between 1985 and 2010 while world mineral prices increased by a factor 2.3 on average; and de Quatrebarbes and Laporte (2015) estimated that the value of regional mineral production increased by 4.6 times during 2000–10, while government revenues from nonrenewable resources only increased by a factor of 1.2.

Numerous factors affect the potential to raise revenues in mining and contribute to fostering development in SSA. These are examined to place concerns around international profit shifting by mining MNEs into their wider context and examine what might be driving any disconnect between the extent of economic rents and revenue performance.

Fiscal Regime Structure

The structure of mining fiscal regimes in SSA directly affects the pattern and magnitude of revenue from mining. As noted, the region has tended to adopt a fiscal regime model with a prominent revenue role for mineral royalties, company taxes, and state participation.

Fiscal instruments vary in their potential to raise revenue, responsiveness to changes in production values, and ability to capture economic rents (as well as their impact on investment decisions). Corporate income tax (CIT) and resource rent taxes, for example, are designed to capture more of the “upside” from mining relative to royalties, which aim for greater stability in revenue over time—even in times of lower mineral prices (IMF 2014).6 Even for CIT, there can be lags between commodity price increases and when governments might receive increased tax payments, depending on the financial position of companies and whether the investor can use prior-year losses to offset current profits. The primacy of royalties in the region and lesser role for cash flow taxes on economic rents places some limits on how responsive the total fiscal regime can be to changes in prices and production. Fiscal instruments also have unique vulnerabilities to different types of avoidance and profit shifting, which can affect performance, potentially reducing revenue from profit-based instruments such as CIT and state participation dividends (examined in Chapter 4).

Corporate Taxation and the Pressures of Tax Competition

Competition for inbound investment can manifest via tax incentives, particularly CIT rate reductions and/or provision of tax holidays. Efforts to boost economic development have seen policymakers encourage investment via reduced tax rates on many sectors, and this includes mining. This tax competition can be incorporated into tax legislation, investment promotion laws, mining codes, and/or as provisions in individual investor agreements.

The instruments used to engage in such tax competition vary across countries, but often arrive at the same result—lower CIT rates and/or periods of zero tax (Table 1). Examining the 15 resource-intensive economies, in 2020:

  • Only three countries had lower CIT rates for mining, compared to other sectors, in their legislation, six had higher rates, and the remaining six applied the same rate across industry sectors.

  • Three countries have investment promotion and/or special economic zone provisions that include CIT rate incentives for mining explicitly, and an additional four countries have investment promotion laws that switch off alternative minimum taxes.7

  • At least nine countries have reduced CIT tax rate as tax incentive in at least one resource contract with investors. Five countries do not publish their resource contracts.

Table 1.

Corporate Taxes and Incentives

article image
Sources: IBFD; Intergovernmental Forum on Mining, Metals and Sustainable Development mining incentives database; Natural Resource Governance Institute; resourcecontracts.org; and IMF.

Unclear if mining is included/excluded from possible SEZ status.

CIT rate used in at least one current resource contract.

Gold CIT rate varies according to formula (but cannot go below 28 percent).

Note: While many countries maintain statutory corporate tax rates for mining that are in line with, or higher than, other sectors of the economy (green shading), they can be reduced through incentive policies (red shading). The actual rates applying to many investors can also be negotiated away in investment contracts. All data as at 2020, but resource contracts reflect latest year available (in operation 2020 but signed in a prior year). s/tax = additional tax above CIT.

Ad hoc and reduced taxation in mining contracts continue to act as a major impediment to revenue mobilization. These negotiated fiscal terms are direct financial transfers to investors, but usually not instrumental in whether investments occur (PCT 2015). The use of investment-based incentives and resource contracts also suggest a degree of policy incoherence within governments, as investment promotion comes at the expense of revenue mobilization (especially notable in those countries where tax legislation provides for higher tax rates on mining than other sectors).8 When combined with other common features of CIT systems for mining (for example, accelerated depreciation), implicit CIT rates appear to be notably below statutory CIT rates (Figure 6).

Figure 6.
Figure 6.

Statutory CIT Rates on Mining and Implicit Tax Rates (EITI Countries)

Citation: Departmental Papers 2021, 022; 10.5089/9781513594361.087.A001

Sources: Extractive Industries Transparency Initiative (EITI); IMF Fiscal Affairs Tax Rate Database; and IMF staff estimates.Note: The statutory CIT and the effective CIT series are not directly comparable, due to methodological differences in calculation. Effective CIT rates have been averaged over the three latest years available. Some statutory CIT rates differ to Figure 5 (Figure 5 uses latest year available, Figure 6 rates match effective tax ra data). Countries chosen on basis of data—some countries not available due to data limitations.

Creating tax-preferred sectors or entities in the economy also facilitates purely domestic tax planning. This domestic tax avoidance focuses on shifting profits from taxable entities to tax-preferred entities, which can be done by both MNEs and domestic firms (examined further in Chapter 4).

Chapter 3 Macro Evidence of MNE Tax Avoidance in SSA

International profit shifting involves MNE actions to take advantage of tax differentials between countries. At its simplest, this means MNEs seek to allocate corporate tax deductions to countries with higher tax rates, with the corresponding income allocated to lower-tax countries.1 For example, an interest-bearing loan could be arranged between different entities within an MNE group, with interest expenses claimed as deductions in the higher-tax country, and the interest income allocated to the lower-tax counterpart.

At the macro level, these tax-planning strategies have placed the international corporate tax system under unprecedented stress (IMF 2019). A recent study on the empirical profit shifting literature concluded that a 1 percentage point larger tax rate differential (between different entities in an MNE) reduces reported pre-tax profits in the higher-taxed affiliate by 1.5 percent (Beer, De Mooij, and Liu 2019).2

There is evidence that developing countries are severely affected by profit shifting, more so than advanced economies. While uncertainty remains on the magnitude of profit shifting by MNEs and associated revenue losses, developing countries are frequently considered the “prime losers” from global profit shifting.3 One study estimated the revenue loss at 1 percent of GDP for OECD economies and 1.3 percent of GDP for developing countries globally (Crivelli, De Mooij, and Keen 2016).

MNEs involved in natural resource extraction may be more likely to relocate profits than MNEs in other sectors. MNEs in resource extraction tend to operate across a wider scope of industry sectors than other MNEs, making them more complex, and they typically contain dedicated entities within the group with a higher ratio of intangible assets (for example, mining rights) to total assets (Beer and Loeprick 2015).4 Both of these indicators tend to be associated with an increased sensitivity of reported profits to international tax rate differentials (Beer and Loeprick 2018).

Quantifying the Impact of Profit Shifting in SSA—New Evidence

Sectoral analysis on the magnitude of profit shifting, such as for mining, is relatively limited but new evidence is emerging. The lack of analysis of mining profit shifting is in part explained by significant data gaps that remain in the region,5 but efforts to increase transparency around extractive industry investment and revenue reporting are enabling new data sets to emerge. For example, EU- and Canada-based MNEs are now required to disclose payments to governments on a country-by-country (CBC) basis,6 building upon transparency initiatives such as EITI. Combining payments data, EITI reports, an internal IMF resource revenue data set,7 and financial information from more than 600 MNE groups (with subsidiaries in more than 160 countries) has enabled new analysis of firm-level profit shifting in the extractive industries, taking into account differences between mining and petroleum MNEs (Beer and Devlin 2021).

This new research points to MNE profit shifting in mining as a material threat to revenue mobilization in SSA. A key measure to gauge the extent of profit shifting by MNEs is the sensitivity of their reported profits to international tax rate differentials. The sensitivity of taxable profits captures how the location of reported profits within an MNE changes in response to changed profit shifting incentives; the latter is measured as the difference between the host country tax rate and the average CIT rate affiliates in the same MNE group face. The regression results indicate that an increase in the CIT rate of a host country by 1 percentage point decreases the tax base (reported profits) in the mining sector in that country by about 3.5 percent—over double the elasticity reported when MNEs from all sectors are included. This research also provided some evidence that MNEs in mining may be more sensitive to international tax rate differentials than petroleum MNEs.8

These results are robust to different model specifications. These specifications control for factors that may explain differences in reported earnings (for example, the magnitude of real production factors employed across firms, and income per capita). While the measured sensitivity to tax differentials is larger than previous estimates for the economy as a whole, it is consistent with earlier findings on heightened risks in the hydrocarbon extraction and variation at the industry level.9 Moreover, both datasets used for analyzing tax avoidance—CBC reports and revenue information at the country level— arrive at similar conclusions.

Building on this research, African countries are estimated to be losing about $450–730 million in CIT revenue a year on average from mining MNE tax avoidance. This baseline estimate suggests a loss of about $600 million per year, based on the observed tax rate differentials between African countries and offshore affiliates in the same MNE group. There are two primary sources of uncertainty around this estimate: the semi elasticity itself and the true tax rate differential for each MNE. Using confidence intervals for the elasticity and the tax rate differential, the upper bound would imply a maximum loss of $1.5 billion on average per year (see Annex 3 for explanation). The analysis also indicates that rules to restrict profit shifting can materially reduce the extent of profit shifting (discussed in Chapter 5).

Chapter 4 Country-Level Experiences: Investment Patterns, Base Erosion, and Profit Shifting

This chapter examines the “lived experience” of profit shifting in mining in SSA countries. It highlights the patterns of investment, channels of profit shifting, and tax policy choices that are hindering resource revenue and which can amplify revenue leakages. It is based on case studies from the region drawn from IMF technical assistance reports, public information, and interviews with authorities.1

Prevalence of Inbound Investment Via “Hubs” and Tax Treaty Shopping

Inbound Investment into Mining in SSA Countries

Consistent with the evidence on MNE responses to tax rate differentials, inbound investors are often channeling mining investments into the region via third countries. These intermediary jurisdictions—broadly referred to as “investment hubs” in this paper—have high levels of FDI relative to their economy.2

These intermediary countries often impose light taxation on entities in the hub country that are used as a conduit to investment elsewhere. This light taxation is typically achieved through some combination of operating a territorial tax system (ofshore profits not taxed), having low profit taxes, applying no taxes on the transfer of business interests or capital gains, and/or having extensive tax treaty networks with low withholding taxes.3 Conduit countries typically have most (if not all) of these elements, in addition to other factors such as a stable legal regime. Light conduit taxation incentivizes financial investments to pass through these countries with little contribution to the local economy (de Mooij and others 2020). According to one estimate, countries with a tax treaty with an investment hub risk losing three times more in company tax associated with CIT tax avoidance than those that do not (Beer and Loeprick 2018).4

Nearly 45 percent of FDI flows into SSA mining come via investment hubs (African Business Review 2017). In some countries, the investment-hub share of FDI exceeds 50 percent (for example, Liberia and South Africa; Figure 7). Tirteen of the 15 resource-intensive economies see investment hubs feature in their top-5 sources of inward investment, while the remaining two economies feature established territorial jurisdictions (for example, Barbados, Cayman Islands, and the Isle of Man). These hubs are also used for other business functions such as procurement and marketing/sales of mine production.

Figure 7.
Figure 7.

Top 5 Sources of FDI Inflows to Extractive SSA Countries

Citation: Departmental Papers 2021, 022; 10.5089/9781513594361.087.A001

Source: IMF Coordinated Direct Investment Survey.

Mauritius has emerged over recent decades as a significant regional investment hub for inbound investment into SSA. Mauritius has an FDI to GDP ratio of about 2,000 percent, and it is a top-5 inbound investment source for seven of the 15 resource-intensive economies of the region. This status is enhanced by the country’s low taxes on conduit investment entities.5

Tax Treaty Shopping

Withholding taxes—particularly in developing countries—act as a “backstop” for company (and personal) income taxes, helping to ensure company income is taxed as funds flow offshore. For offshore investors with little connection to the local economy, withholding taxes can replace tax fling obligations, simplifying tax administration. Ta x rates are set in local legislation but can be modified, typically reduced, in bilateral tax treaties and investor agreements.

Tax treaty withholding tax rates are under pressure in the region (Table 2). Once withholding tax rates are reduced in one treaty, this creates pressures in subsequent negotiations for other countries to be afforded the same treatment, and for MNEs to use that revised treaty to divert profits to a location where they will not be taxed. This is especially the case with conduit countries that have chosen low or zero withholding tax as their policy, but less so in “residence countries.”

Table 2.

Withholding Taxes in SSA—Reductions Relative to Domestic Law

article image
Source: IMF based on IBFD.Note: This table shows the lowest withholding tax rate afforded by each country in the region to at least one of its treaty partners. Dividend rates are for direct investments with >10% ownership. Orange-shaded rates indicate a reduced tax rate relative to that country’s legislated withholding tax rate, while red-shaded rates indicate the country has afforded a zero-tax rate to a treaty partner. White-shaded rates indicate treaty rates are equal to the legislated rate.

Where investments in the region are routed via low-tax conduit countries, withholding tax reductions with those countries brings profit shifting risks. Unless local company tax base protection measures are in place, withholding tax reductions remove a “last line of defense” in taxing income and profits before they are repatriated. The more withholding tax reductions are afforded to conduit countries, the stronger the incentive for MNEs to route investments in this way (often referred to as “treaty shopping”).

Material gaps remain between inbound sources of investment and tax treaties coverage, however (Table 3). On average, the 15 resource-intensive economies only have treaties with two of their top-5 inbound investment sources, which at first glance might suggest that withholding tax reductions might be less of a risk for the region. But local policy actions are weakening the potential for withholding taxes to combat the outflow of untaxed income—for example, Botswana, Central African Republic, Democratic Republic of the Congo, and Zambia have all unilaterally reduced dividend withholding taxes to zero in domestic law for mining companies, and Guinea has overridden domestic withholding taxes in resource contracts with investors.

Table 3.

Foreign Direct Investment Sources and Tax Treaty Coverage

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Source: IBFD tax treaty database; and IMF, Coordinated Direct Investment Survey (2019 or latest available).Note: Dividend withholding tax rates are for direct investors with >25% ownership of local entity. Democratic Republic of the Congo—domestic rate for mining is zero, otherwise 20%; Ghana—dividends from free zone companies exempt (otherwise 8%); South Africa—Netherlands MFN rate from Sweden treaty; Zambia—dividends paid by a mining company are exempt from tax (otherwise 20%); Zimbabwe—dividends to approved investors are exempt. For the 15 resource-intensive economies of the region, investment hubs are a notable source of inbound investment (blue-shaded countries). Mauritius plays a prominent role, as a top-5 source of investment for seven economies. Among non-hub investment sources, the United Kingdom has the greatest prominence (8 economies), followed by Canada (7), France (6), and South Africa (5). Notable gaps remain between investment sources and tax treaty coverage, however, with SSA economies having treaties only with two of their top-5 investment sources on average.

Only two resource-rich countries in SSA—South Africa and Burkina Faso— have taken steps to limit treaty shopping, using tools developed under the OECD/G20 project against Base Erosion and Profit Shifting (BEPS) (OECD 2020a). Both countries have signed up to a multilateral convention implementing the tax treaty elements of the BEPS package (often referred to as the “multilateral instrument” or “MLI”).6 One benefit of the MLI is the inclusion of a strengthened “limitation of benefits” article in tax treaties that is intended to confne treaty benefits (for example, reduced tax rates) to bona fde investors from those countries—albeit this only applies for treaties the signatories identify as being covered. As part of the MLI process, South Africa will have upgraded protections in its treaties with key sources of investment including Cyprus, Mauritius, Singapore, Switzerland, and United Arab Emirates.7

Intra-Company Transactions (Abusive Transfer Pricing)

Much of the following discussion relates to transactions and practices between members of the same global corporate group (referred to as “related parties” or “afliates”). The terms and conditions used in these transactions to exchange value are usually referred to as “transfer prices.” Introduced almost a century ago, transfer pricing analysis involves comparing the conditions of an intragroup transaction to the price that independent companies would have agreed under similar circumstances (at “arm’s length”).

Related party transactions are observed across most business functions, including financial flows within the MNE. These transactions include the sale of mine production to marketing hubs; the provision of services from one arm of the group to another; and fees associated with procurement for the mine both during the development phase (for example, capital equipment) and the operating phase (for example, fuel or chemicals).

These transactions can bring efficiencies for the group by centralizing functions, but they also provide profit shifting opportunities if the mining entity effectively “over-pays” for the goods or services provided. Intermediaries can ensure that the MNE coordinates sales from its mines (for example, stopping different mines in the group from accidentally bargaining against one another), as well as arranging contracts and managing payments. But these transactions can also be used to shift profits abroad, by underpricing the mine production through discounting (creating an arbitrage opportunity in which their affiliate then on-sells the shipment at higher prices), and/ or by paying marketing and other fees above the true cost of providing those services.

African tax administrators report that issues relating to transfer pricing represent one of the highest risks to the tax base of African countries (ATAF 2020). Transfer pricing approaches can be difficult to apply and can quickly swamp the capacity of tax authorities to assess the related transactions. The difficulty is establishing whether the payments made are commensurate with the goods or services provided and the terms under which arm’s length parties would have transacted. This requires economic analysis, commercial experience, and data.

Judgments as to whether related party transactions are in line with arm’s length outcomes must often be made on the basis of incomplete information. The specialized nature of many of the inputs needed for mining makes finding “comparables” a difficult task (PCT 2018a). Moreover, the finan-cial databases and pricing publications used for this analysis have relatively limited coverage of the region. This exposes tax auditors to the prospect of having their decisions overturned on appeal and can create a disincentive for auditors to take on more complex cases.8 It also potentially exposes investors to auditors seeking inducements, given their discretion over the decision. In addition, many tax authorities in the region simply do not have access to the data and/or the personnel required to undertake this analysis without a high opportunity cost to other tax compliance tasks.9

A: Related Party Loans

Financial transactions within MNEs (a subset of transfer pricing) are a major channel for profit shifting. Simple contractual arrangements can be established whereby, for example, one subsidiary of the MNE located in a low-tax jurisdiction lends to another in a producing country. The larger the loans and the higher the interest rate used, the higher the income tax deductions in the producing country and the more profit moved offshore (Table 4).

Table 4.

Profit Shifting Via Interest Deductions

This example illustrates how interest deductions can be used to avoid tax. In both scenarios shown, EUR1 billion is invested. In the “High‑Debt Scenario” case, loans from the parent company abroad make up 90 percent of assets, leading to larger interest deductions relative to the “Low‑Debt Scenario” case and 19.2 million euros in CIT losses per year.

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Source: IMF Country Report No. 18/142.

IMF capacity building in Africa has consistently identified exposure to excessive interest deductions as a key risk. In addition, interviews with tax authorities have confirmed that this is a concern across the region, with many identifying related party loans as a significant profit shifting vulnerability (Figure 8). This is despite more and more countries implementing some form of interest limitation rules (of the 15 resource-intensive economies, only Central African Republic, Democratic Republic of the Congo, Liberia, and Mali had no limitation rules by mid-2020).10

Figure 8.
Figure 8.

Examples of Profit Shifting Via Loans in SSA

Citation: Departmental Papers 2021, 022; 10.5089/9781513594361.087.A001

Source: IMF.Note: The Group Treasury is the MNE’s arm that borrows from international financial markets. LIBOR = Overnight London Interbank Offered Rate.

In Figure 8, panel 1, a relatively simple case from the region illustrates the basic approach to profit shifting via the use of loans. In one country, the authorities identified loans being made from a related party in a low-tax jurisdiction to a local mining company. In Sierra Leone, one company used an interest rate well above its cost of borrowing from financial markets, adding a rate premium of 16 percent to the Overnight London Interbank Ofered Rate. The cost of these loans means the local mining company is not expected to pay11 income tax on its mining operations for years to come—at the time there were no limitations on this transaction.

In Figure 8, panel 2, another example from the region serves to illustrate how narrowly targeted rules that limit interest deductions can lead to MNE adaptation with the same result. Authorities in Mali had imposed a limitation on the interest rate that could be used to calculate allowable interest deductions—effectively closing of the arrangement outlined in panel 1. However, with no associated limitations on the size of the intra-group loans, the MNE restructured its financing to reduce the interest rate, but increase the quantity borrowed, maintaining the amount of tax deduction.

Loans can be used in other ways to avoid taxation and those tax benefits drive whole investment strategies. In mine acquisitions, for example, “leveraged buyouts” involve investors borrowing as much as possible to finance the purchase of a mine, using the assets of the mine as collateral. Once the funds are borrowed offshore and the mine entity is purchased, the now-related entities agree that the mining entity will borrow from the offshore entity, generating deductions to the mining entity (OECD 2018). Moreover, loans can be used to facilitate purely domestic tax planning (discussed under tax incentives).

Non-controlling state equity stakes are vulnerable to profit shifting via debt. With many countries electing to take non-controlling stakes in resource projects, MNEs have an incentive to lend to local subsidiaries to absorb local profits before they can be paid as dividends. This practice can also lower dividend withholding tax revenue. Smaller (passive) equity stakes are more vulnerable, since they confer no input into management or finan-cial decision making. The use of debt is, in part, a practical response to a government-imposed constraint: additional capital must not dilute the agreed equity stake of the government, so it is provided as loans. But it can also be used to stream profits to preferred shareholders.12 As an example of this vulnerability, in Ghana one MNE parent advanced all funds for the development of a project to the local subsidiary as interest-bearing debt. It further decided no dividends would be paid from the subsidiary until all debt had been repaid. This eliminated dividend revenue and dividend withholding tax. Even with interest limitation rules that denied some interest deductions for CIT, the company was still better of characterizing cashfows as interest than dividends.

Cash flow taxes targeting economic rents, however, often exclude deductions related to interest, making them less vulnerable. In contrast to corporate taxes, cash flow taxes often allow the immediate expensing of capital spending in the year they occur, rather than affording depreciation allowances. By doing so, this removes the justifcation for deductions for interest expenses (Baunsgaard and Devlin 2021). This all but closes of a significant profit shifting channel.

B: Under-Pricing Minerals and the Remuneration of Marketing Hubs

A lack of open market transactions for many mineral products means that such sales can be manipulated to shift profits offshore. This lack of market transparency can be due to several factors, including a concentration of producers (for example, lithium production) and vertical integration of MNEs whereby mine production is sold as an input to another part of the company group.13 Zambia’s Mopani copper mine is a well-publicized example of mineral underpricing between related parties, with the company being ordered to pay an additional $13 million in tax in 2020.14

Profit shifting can occur via several techniques. These include under-quoted prices, mis-specified reference prices, excessive penalty adjustments for the grade of the shipment, commissions and handling fees, or not declaring income from by-product minerals (PCT 2018b). In Liberia, for example, a mining MNE sold all production via a related party in a low tax country. In its sales contract, the company made quality adjustments (as is standard practice) but then also applied additional discounts on the price for marketing and other costs that were not explained or justified (Figure 9). These adjustments and fees reduced the value of shipments by more than 10 percent, transferring about $500 million in profits offshore over several years.

Figure 9.
Figure 9.

Profit Shifting Using Mineral Prices

Citation: Departmental Papers 2021, 022; 10.5089/9781513594361.087.A001

Source: IMF.

Over-payment for services to offshore afliates is a common issue. Many countries in SSA note that their mining exports are sold first to affiliates in low-tax countries, who then on-sell to final customers outside the group. Many companies are using substantial service, marketing, or management fees to ofshore affiliates as a simple profit-shifting mechanism. In another recent example, South Africa’s revenue authorities recovered about $185 million in tax to settle the over-remuneration of an offshore iron ore marketing hub in Luxembourg.15

This is also an area of revenue risk for royalties and cash flow taxes, but some royalties are less exposed. Fiscal instruments that base their calculations on the value of mineral product sales (primarily mineral royalties, CIT, and resource rent taxes) all face mispricing risks. Often mineral royalties are calculated on a “gross” basis excluding costs such as sales fees which reduces vulnerabilities, and for some minerals (for example, precious metals) they are calculated with reference to the value of the contained mineral rather than on the value of the product that is sold.16 This approach simplifes the royalty calculation considerably and removes avenues for mispricing, but it is not applicable to all minerals (for example, royalties for low-grade bauxite might use the value of the ore rather than refned aluminum prices).

C: Use of Subcontractors to Move Profits Outside the Mining Fiscal Regime

MNEs may also structure domestic mining operations into two or more entities to move profits beyond the mining fiscal regime. While most countries clearly impose taxes and royalties on the holder of the right to extract resources, there can be some uncertainty about other entities that undertake core functions involved in mining. For example, a company may create a second related company in the producing country (the subcontractor) that is contracted to undertake all mining on behalf of the local mining license holder, paying a service fee for the mining done on its behalf. This may allow the MNE to move profits outside of the mining fiscal regime and into general company tax law. The pressures for these arrangements are stronger where the corporate tax rate faced by the holder of the mineral license is higher than the generally-applied company tax rate, as the tax rate differential creates an incentive to book profits outside the project’s “ring fence.”17

Offshore Indirect Transfers of Interests in Mining Companies

For mining companies, capital gains from projects can be substantial. These gains (that is, income from the change in asset values) can occur when initial discoveries are made by exploration firms, or later in a mine’s life if the project exceeds initial expectations (for example, if costs are lower, or ore grades are better than expected). New information can cause the value of a mining lease (or operational mine) to quickly change—for example, when Global Atomic Corporation announced a discovery of uranium oxides in Niger, its share price jumped by 43 percent (Table 5).

Table 5.

Mineral Discoveries and Share Price Changes

article image
Source: IMF based on S&P Global data.Note: The focus is on transfers of direct investments, rather than portfolio share sales.

The frequency of capital transactions varies across minerals. As one snapshot of the general trend, according to S&P Global, of the 33 transactions done in the first quarter of 2018 valued above $5 million, 17 targeted gold, 8 copper, with the remainder in diamonds and cobalt (2 each) and silver, palladium, nickel, and zinc (1 each).18

Both commercial and tax motives drive ownership changes. For example, exploration-focused companies are usually unable to borrow because they generate little-or-no income—their remuneration comes when they discover minerals that can be commercially mined and sell the rights to that resource (OECD 2018). In addition, operational mines can change hands as investor priorities change. But irrespective of the motivation, capital gains can represent substantial income to investors. Transactions may be for spe-cific mine assets or indirectly, involving the sale of shares of a company that operates a mine.

Most resource-intensive SSA countries tax capital gains, but offshore transactions can be harder to tax. While there is a tax policy debate on whether these gains should be taxed, 13 of the 15 resource-intensive economies in SSA have made the decision to tax them—only Namibia and Zambia do not tax these gains in some way. But as noted earlier, many investment hubs exempt these gains from taxation, providing a strong incentive for transactions to be structured in these locations. Engineering an offshore transfer can also defeat producing-country withholding taxes, both on dividends (if profits are retained and accumulated rather than distributed), and on interest (if interest is capitalized in the producing country and repaid when the entity is sold). This creates serious challenges for producing countries:

  • Identifying transactions: Offshore transactions can be difficult for producing countries to detect and investors may not report them to authorities in a timely way. They may also be undertaken through complex legal structures across multiple countries. Moreover, countries that do not tax these gains may also be less interested in monitoring them, removing a potential information-gathering avenue for producing countries.19

  • Asserting a legal right to tax them: Where offshore transactions are legally constructed to occur in other jurisdictions (and as noted, effected through complex ownership chains), this can raise disputes as to whether a source country has the authority to tax those gains (a “taxing right”) under domestic law, reinforced in tax treaties. This can also create complexity in domestic tax legislation.

Tax Incentives and Stabilization of Fiscal Terms

As noted in Chapter 2, tax incentives to promote investment are common. Incentives can also be included in investment negotiations, and, in some countries, companies have been afforded substantial tax cuts. Project-by-project negotiation of fiscal terms is particularly high risk for revenue loss, particularly where governments are drawn into expedited negotiations that can be leveraged to press for concessions, often locked in by stabilization clauses.

In Guinea-Bissau for example, an investor proposed a tax/royalty reduction that would cost about $400 million in revenue over the mine’s life. The investor proposed an investment contract with zero CIT for an initial period of production, half-rate CIT thereafter; no limitations on interest; no VAT or customs duties; no dividend or interest withholding taxes; no capital gains tax; a reduced royalty rate; CIT accelerated depreciation; and stabilized fiscal terms (unless tax changes were advantageous).20

Despite their prevalence, tax incentives are not usually the decisive factor in whether an investment proceeds. Where countries afford entities tax holidays or other investment-based incentives, they increase the risk that all companies—whether they be multinational or domestic—will seek arrangements that make best use of those incentives, which may or may not stimulate the economic activity desired.21 Where companies in one part of the economy for example are tax-free, this increases incentives to shift domestic profits into those entities and away from sectors that are taxed. These incentives also increase competitive tax pressures in the region.

In Mozambique (Figure 10, panel 1), one MNE was able to adopt simple internal company transactions to shift profits from its mining business (which paid tax) to another entity in the same country that was tax-exempt, operating in an export processing zone (EPZ). Using a loan arrangement, the two companies were able to generate tax deductions for the mining company and interest income for the zero-taxed EPZ entity. The tax cost of the arrangement was estimated at EUR 20 million per year.

Figure 10.
Figure 10.

Unintended Effects of Tax Incentives: SSA Examples

Citation: Departmental Papers 2021, 022; 10.5089/9781513594361.087.A001

Source: IMF.

Tax incentives afforded as special economic zones (SEZs) are also being used in unintended ways. Many practitioners (including the Platform for Collaboration on Tax) continue to caution that incentives risk revenue losses far more than what was anticipated, tipping a mining project’s relative costs and benefits toward a net loss. In Guinea for example, legal design flaws meant CIT holidays were afforded to mining investments but not tied to a particular project or project license. This meant companies could restructure their affairs as the holiday was set to expire, transferring the mining license to another local entity with the same owners, restarting the tax holiday for another 5 years. In effect, projects could be shielded from CIT indefnitely (Figure 10, panel 2).

Tax stabilization clauses amplify potential revenue risks and complicate tax reform. These agreements reduce the range of possible tax outcomes the investor might face over the life of the project, acting as an incentive in themselves—particularly when investors are able to enjoy favorable tax changes whilst being shielded from potential tax increases. Moreover, they can make it exceptionally difficult for countries to legislate base protection measures and lengthen the transition to a new fiscal regime—in Sierra Leone, for example, authorities may need to wait another 10–15 years until existing investors are subject to the recently enacted fiscal regime for mining.22

Chapter 5 Combating International Profit Shifting

Corporate income taxation has clear profit-shifting vulnerabilities and these appear elevated in mining relative to many other sectors. The vulnerabilities, highlighted through international tax reform processes such as the G20/ OECD Base Erosion and Profit Shifting (BEPS) process, are also borne out by the IMF’s experiences in supporting tax policy and administrative reforms in African countries through technical assistance.

These vulnerabilities, which affect all resource-producing countries, are exacerbated where there are capacity gaps. A lack of local capacity in tax administration and across government (including in policy formulation and inter-agency coordination) mean corporate taxes are underperforming in most African countries (Annex 5). International research and practical country experience both indicate transfer pricing (including via loans) as a clear area of vulnerability.

These channels of profit shifting reflect a combination of drivers—including tax policy choices. The relative performance of CIT (and the overall fs-cal regime) is partly the outcome of policy choices on incentives and lack of profit-shifting defenses. Many countries are setting corporate tax rates in the mining sector below generally applicable rates, usually to encourage investment in mining, and there is a general absence of resource rent taxes that could help improve the return to governments, particularly in times of strong commodity prices.1 Some countries are also favoring fiscal regime instruments that can be more susceptible to profit shifting (for example, state participation).

Once the health and economic dangers from the COVID-19 pandemic have eased, many countries will need to begin the process of fiscal repair. Te commodity impacts of COVID-19 have not been uniform across the region (gold prices, for example, have strengthened), but stronger protections against revenue losses in the taxation of natural resources could play a material role in fiscal repair.

Wider international corporate tax reform to address problems with the current system has potential implications for how producing countries tax their natural resources. In particular, reform to introduce a global minimum effective corporate tax (referred to as “Pillar 2” of the Inclusive Framework process) could provide producing countries a new mechanism to ensure some corporate tax is paid by mining MNEs.2 This approach could also lessen pressures for corporate tax competition and tax holidays to induce investment: producing countries that choose not to impose corporate taxes on mining MNEs could run the risk that the new global minimum tax affords countries where the MNE parent entity resides the right to tax corporate profits that have been, in essence, under-taxed. These potential advantages may be counterbalanced to some extent however by other possible impacts: the tax advantage to investors of existing tax incentives may be diminished (which may then cause a rush to stabilize fiscal terms), and there is also a material danger that tax competition simply moves from corporate taxes to other fiscal instruments, or to providing direct subsidies. Much depends on the final design of these rules.

Key Policy Steps to Address Current Vulnerabilities

New research into profit shifting (Beer and Devlin 2021; Chapter 3) presented robust evidence on the efcacy of interest limitation rules in preventing profit shifting. Countries that have implemented rules combating excessive interest deductions were shown to reduce the sensitivity of MNE profits to tax rate differentials by half (Beer and Devlin 2021). This indicates that interest limitation rules for mining MNEs should be an immediate policy priority for countries in SSA—especially those economies currently without such protections.

It also suggested that the effective application of transfer pricing rules is essential to limit transfer mispricing. While there is also some evidence, albeit weaker, from this research that the introduction of transfer pricing rules might limit profit shifting, the key factor is implementation. Thus, for those countries that intend to apply the arm’s length standard, this requires political will, as well as real investments in staff training, data gathering, and information exchange.3 Strong tax department capacity is essential. Alternatively, simplifed approaches may be preferable (discussed in PCT 2018, Baunsgaard and Devlin 2021).

There are several further priority measures SSA economies should implement to ensure the mining sector further contributes to revenue mobilization efforts. While these actions are not exhaustive, they represent a set of initial steps that would yield tangible results, taking into account the specificities of each country These measures span most of the issues identified in Chapter 4, and further detail is in Annex 6.

Investment Policy and Incentives

  • Tax Incentives: Tighten the use of fiscal incentives, including a “standstill” on new tax rate incentives (including zero rates), preferably in cooperation with neighboring countries; review existing provisions; and confine any new tax incentives to the most efficient options, such as accelerated depreciation (if offered at all). Also ensure any proposed incentives receive appropriate scrutiny of their revenue cost.

  • Investment Negotiations: Limit the scope of stabilization provisions for investors (if used) to key terms (for example, corporate tax rate), ensure tax officials participate, and if local capacity is low, bolster the negotiating team with external expertise.4 Remove authority of investment promotion authorities to negotiate agreements without senior Ministerial consideration of fiscal impact and risks.

Tax Base Protections

  • Locking in core taxing rights: the effective taxation of minerals starts with legislation that affirms the right of the producing (source) country to tax mining activity. This includes a strong definition of a “permanent establishment” that includes not only the fixed physical presence of the mine but also captures services provided in connection with the mine,5 and a clear policy intention to tax gains on the sale of mines whether they occur domestically or offshore.

  • Transfer Pricing: Establish legislation and protections against abusive transfer pricing, including placing the onus on taxpayers to substantiate the appropriateness of intra-group transactions. Adopt pricing guidelines for all mineral sales made to related parties and impose yearly limits on tax deductions for marketing and logistics.6

Treaty Policy

  • Double Tax Treaties: Limit treaty shopping by inbound investors by adopting treaty shopping protections either bilaterally or via the MLI, and maintain withholding taxes on royalties, interest, and management/service fees.7 In addition, expand treaty definition of “immovable property” in accordance with the PCT Toolkit.

Additional Actions

In addition, for those countries imposing capital gains tax on indirect transfers of interests in mines, this taxation could be strengthened. As outlined in the PCT Toolkit, authorities can act by:

  • Updating tax treaties to ensure capital gains taxation can be imposed on the offshore transfer of “immovable” assets. Both the UN and the OECD model treaties have text that clarifies this right to tax the offshore capital gain in the source county.8 This treaty protection must also be supported by domestic legislation which defines immovable assets so as to include their indirect transfer.9

  • Adopting either of the two “model” approaches outlined in the Toolkit to tax these offshore transfers. This could be by treating an offshore indirect transfer as if it was a transfer of the underlying asset (“model 1”),10 or by treating the gains from the offshore sale as domestically sourced income, with tax imposed on the actual seller abroad (“model 2”).11

Greater use of cash flow taxes targeting economic rents would help countries to improve their fiscal regimes and participate in commodity price upswings. For example, a simplifed cash flow tax on a mining project that excludes interest deductions could be implemented, tailored to local capacity (Baunsgaard and Devlin 2021). These taxes can increase budget revenue volatility since they are more responsive to commodity prices. However, they can make the overall fiscal regime more attractive to investors, particularly when combined with a reduced role for more distortionary fiscal regime elements such as royalties.

Implementing the Changes

One of the most challenging aspects of tax policy—particularly in mining industries where investors have made up-front investments—is the transition to new tax rules. Investors can become fearful and seek special treatment or stabilized fiscal terms if they are made worse of by tax changes. Tax policy changes should not, however, be delayed, particularly where they are targeted at clear base erosion strategies. Investor concerns can be addressed by either allowing taxpayers to continue to operate under existing arrangements and “opt in” to new rules when they wish to, or by providing a transition period that affords investors time to restructure their affairs (for example, rewrite loan agreements) before the new rules apply. For especially relevant fiscal terms in mining contracts, authorities should consider the option of renegotiation.

Linking tax policy changes to international developments and similar policy changes elsewhere can help promote reform. Multilateral policy developments, either in the African region or at the global level, can provide political assistance to local tax changes. Governments may be more able to implement unpopular tax policies if they can show that neighboring countries and competitors for inbound investment are also acting.

Recent Reforms and Progress in SSA

Many countries have taken steps to address vulnerabilities, often with the support of IMF technical assistance and other external cooperation partners. These actions demonstrate progress is possible and that countries in the region can leverage regional experiences. The IMF continues to support these efforts, along with other international cooperation partners (Annex 5).

  • In Sierra Leone, authorities implemented a new fiscal regime, the

Extractive Industries Revenue Act (EIRA), that moved the country away from negotiating fiscal terms mine by mine. This places clear limits on investors attempting to take advantage of information asymmetries and seek special deals, with the additional discipline that investors seeking to renegotiate existing contracts are transitioned to the EIRA’s fiscal terms. The EIRA also introduces a resource rent tax (RRT), whose tax rate is calculated with reference to the general CIT rate—in that way, CIT cuts do not become windfall gains to the investor, as the RRT rate adjusts automatically. This reform was implemented in 2018 by a newly elected government early in its first term.

  • In Liberia, authorities strengthened transfer pricing rules and related documentation requirements. These documentation provisions place a stronger emphasis on MNEs identifying related party transactions and explaining how those transactions are comparable with what arm’s length parties would have done. This helps the authorities assess MNE risks and ensures companies understand how they must be able to explain their transactions. The authorities promoted this reform as providing greater clarity and certainty to business taxpayers.

  • In Guinea, the authorities recently strengthened the legal framework to address risks of transfer pricing in the mining sector. Key international taxation provisions were introduced in the legal framework in 2019, including provisions to support the arm’s length principle, with the support of IMF technical assistance. This reform aimed at mobilizing additional tax revenues in the mining sector to create fiscal space for priority spending under the three-year IMF-supported Extended Credit Facility.

  • In South Africa, the authorities implemented a limitation on interest deductions using a maximum allowable interest rate calculation. These limits set a clear expectation on investors as to how much debt is permissible in local entities, reducing the need for transfer pricing analysis. In addition, those provisions also adjust automatically to changes in interest rates, meaning authorities do not need to revisit their design frequently. South Africa implemented these reforms around the time the G20 and OECD launched their BEPS Actions, taking domestic action that coincided with international momentum to strengthen interest limitation rules.12

  • In Kenya, the authorities introduced a limitation of benefits article into their tax treaty policy. This approach strengthens its domestic legislation which also provides for limitations in access to treaty benefits. In addition, Burkina Faso, Cameroon, Côte d’Ivoire, Gabon, Mauritius, Nigeria, Senegal, and South Africa have all signed the MLI to limit treaty benefits, which should strengthen protections against treaty shopping. These reforms were also the result of multilateral tax reform under the BEPS process.

  • In Nigeria, the authorities implemented a limitation on interest deductions in the 2020 Finance Act. This limitation is calculated in line with the “BEPS Action 4” approach as a percentage of earnings before interest, tax, depreciation, and amortization. This new limitation was included to assist Nigeria to meet budget financing targets (EY Nigeria 2019).

  • In Mali, authorities enacted transfer pricing regulations in 2016–17, clarifying the application of the arm’s length principle. In addition, the regulations introduce documentation requirements based on the OECD Master file/Local file approach as well as a simplified declaration. This positive development allowed Mali to perform better risk assessments of profit shifting, to select the types of audit that have good probability of yielding additional revenues and to perform audits more effectively. However, more remains to be done as Mali’s transfer pricing regulations—while consistent with international standards—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 subcontractors.

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.

Cover Departmental Papers
Tax Avoidance in Sub-Saharan Africa’s Mining Sector
Author: Ms. Giorgia Albertin, Boriana Yontcheva, Dan Devlin, Hilary Devine, Mr. Marc Gerard, Sebastian Beer, Irena Jankulov Suljagic, and Mr. Vimal V Thakoor
Volume/Issue:
Volume 2021: Issue 022
Publisher:
International Monetary Fund
ISBN:
9781513594361
ISSN:
2616-5341
Pages:
73
DOI:
https://doi.org/10.5089/9781513597041.087

Mining in Africa

Africa Gold Mining Exploration and Gold Price

Contributions of Mining Resources to SSA Countries

(Average, 2009–19)

Importance of MNEs in Mining and Revenue Mobilization in SSA

Mining Revenue in Sub-Saharan Africa

Statutory CIT Rates on Mining and Implicit Tax Rates (EITI Countries)

Top 5 Sources of FDI Inflows to Extractive SSA Countries

Examples of Profit Shifting Via Loans in SSA

Profit Shifting Using Mineral Prices

Unintended Effects of Tax Incentives: SSA Examples