Countering Tax Avoidance in Sub-Saharan Africa’s Mining Sector

IMF Blog, November 5, 2021

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Sub-Saharan African countries are estimated to possess 30 percent of global mineral reserves.
One multinational company has invested five times more in a single bauxite mine (as a percent of GDP) than the government has spent in total public investment since 2018 (Guinea example).
The mining sector contributes about 10 percent to GDP across 15 resource intensive sub-Saharan African countries.
In most of these countries, mining exports represent 50 percent of total exports on average and is the main source of foreign direct investment.
For the 15 resource-intensive economies in the region, revenue from mining accounts for just 2 percent of GDP on average.

New IMF staff research estimates governments in sub-Saharan Africa are losing between $450 and $730 million per year in corporate income tax revenues due to profit shifting by multinational companies in the mining sector.
This loss occurs amid increased fiscal pressure to raise public spending in response to the pandemic and to meet Sustainable Development Goals.
A global policy development: 136 countries, including 20 countries in sub-Saharan Africa, agreed to a minimum effective corporate tax rate of 15 percent starting in 2023.

Most countries collect mining revenues via a combination of royalties, corporate income tax, and sometimes a non-controlling ownership stake with dividends.
Out of the 15 resource-intensive economies in sub-Saharan Africa:
- Only three had lower corporate income tax rates for mining in their tax law.
- Six had higher tax rates for the sector.
- At least nine countries have reduced ad-hoc corporate income tax rates as an incentive in at least one resource contract with investors (widespread practice of negotiating down rates).
The practice of negotiating down corporate income tax rates in contracts has led to a lower effective corporate tax rate in the mining sector compared to statutory rates.

Multinational companies reduce tax liabilities in higher-tax producing countries by shifting profits to lower-tax offshore jurisdictions.
Identified channels include:
- Interest-bearing intra-group loans where interest expenses are deducted in the higher-tax country while interest income accrues in a lower-tax offshore country.
- Underpricing minerals.
- Using subcontractors to move profits offshore.

An increase in the corporate income tax rate differential between the (higher) producing country and the average (lower) offshore countries by 1 percentage point results in a decrease of reported profits in the mining sector by 3.5 percent.
Imposing interest limitation rules halved the responsiveness of profit allocation by multinational companies to international tax rate differentials in the research.

Recommended actions to reduce tax avoidance and foster revenue mobilization:
- Strengthening and simplifying transfer pricing protection.
- Limiting interest deductions.
- Improving tax treaty practices.
- Limiting tax incentives.
- Strengthening investment negotiation practices.
Country-level reforms already taken:
- Sierra Leone: new fiscal regime moving away from negotiating fiscal terms mine by mine.
- Guinea, Liberia, and Mali: strengthened transfer pricing protection.
- South Africa and Nigeria: set limits on interest deductions.
- Nine of the 15 resource intensive economies: have alternative minimum taxes to ensure at least some corporate taxes are paid each year.
- Kenya: introduced an anti-treaty shopping provision into its tax treaty policy.
The global minimum tax is expected to mitigate profit shifting and reduce pressures from tax competition.
Policy improvements require careful preparation and stronger capacity, which take time, resources, and political commitment.

Source: Countering Tax Avoidance in Sub-Saharan Africa’s Mining Sector — IMF blog, November 5, 2021