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

_IMF Blog, November 5, 2021_

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**Canonical URL:** [Countering Tax Avoidance in Sub-Saharan Africa’s Mining Sector](https://www.imf.org/en/blogs/articles/2021/11/05/blog-countering-tax-avoidance-sub-saharan-africa-mining-sector)

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## Bibliographic details
- Authors: Giorgia Albertin, Dan Devlin, Boriana Yontcheva
- Published: November 5, 2021

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### Scale and context
- 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.

### Estimated revenue losses from profit shifting
- 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.

### Fiscal regime structure and negotiated practices
- 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.

### Mechanisms of profit shifting identified
- 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.

### Empirical findings on responsiveness to tax differentials
- 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.

### Targeted policy actions and examples of reforms
- 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*

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## References

- [New IMF staff research](https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2021/09/27/Tax-Avoidance-in-Sub-Saharan-Africas-Mining-Sector-464850)

_Source: https://www.imf.org/en/blogs/articles/2021/11/05/blog-countering-tax-avoidance-sub-saharan-africa-mining-sector_