‘African states have realised how powerful they are’, say IMF experts

By Estelle Maussion

Posted on Wednesday, 20 April 2022 10:44
In the Kipushi copper mine in south-eastern DRC, operated by Invanhoe Mines. © Petrus Saayman.
In the Kipushi copper mine in south-eastern DRC, operated by Invanhoe Mines. © Petrus Saayman.

Mining codes, transfer pricing, contract negotiation...Although governments are becoming more and more experienced when it comes to dealing with private operators, the IMF is calling on them to help prevent tax erosion. We speak to three experts from this institution.

In 15 resource-rich sub-Saharan African countries, the mining sector contributes 10% of gross domestic product (GDP). However, state revenues from mining only account for 2% of GDP. This “does not represent a ‘fair’ distribution of benefits.” This is not a statement from an NGO but rather the International Monetary Fund (IMF).

This is one of the findings of a study published in September 2021 and carried out by three IMF experts: Giorgia Albertin, deputy head of the Southern Africa Division of the IMF’s Africa Department and mission chief for Namibia and Eswatini, Dan Devlin, a tax policy specialist in the Public Finance Department, and Boriana Yontcheva, deputy head of the Regional Studies Division of the IMF’s Africa Department and mission chief for the Seychelles.

How adequate mining conventions – a long-standing issue – is now coming to the surface as states seek to mobilise resources to fun post-pandemic recovery.

Although progress has been made in Sierra Leone, Liberia, Mali and Guinea among others, much remains to be done to rebalance relations between private operators and governments.

Liberia, DRC, Guinea… Several countries have renegotiated mining contracts or are in the process of doing so. Are states regaining power over private actors?

Dan Devlin: I wouldn’t say that they have more power than in the past, but rather that they have become aware of this power. There are a lot of risks in mining negotiations, especially when the discussions are fast-tracked, and for a long time governments have tended to downplay them.

Boriana Yontcheva: The issue of income distribution between private actors and states, i.e. tax erosion by the former through profit shifting, is much debated and documented in developed countries, but a lot less so in Sub-Saharan Africa. However, the phenomenon also exists in this region and states may be insufficiently equipped to deal with it.

What is the extent of this phenomenon? Can we put a figure on the loss of revenue?

Giorgia Albertin: It can be seen in the discrepancy between, on the one hand, the importance of the mining industry in sub-Saharan economies, the considerable amounts of investment made, the weight of the sector in exports and, on the other hand, the limited volume of revenue collected. For example, in Guinea’s case, a multinational company has invested in a bauxite mine that is worth five times more as a percentage of GDP than the state has spent on public investment since 2018.

Two mechanisms are at work. First, to attract investors, states reduce the tax rate in the sector, thereby fuelling unhealthy regional tax competition. Secondly, private operators, the vast majority of which are multinationals, use international profit shifting to limit their tax base – and therefore their tax liability – in the places of production.

As a result, the loss of corporate taxes is estimated to be around $600m per year on average for sub-Saharan Africa. [In Guinea’s case, the latest IMF country report notes that reducing the tax exemption from five years to one year would raise the equivalent of four times the budget for agriculture.]

Yet many countries have adopted new mining codes or modernised their legislation. Are they not enforced?

Giorgia Albertin: Mining codes are often circumvented by conventions signed between states and operators. What happened in Guinea is that the country adopted a code containing the sector’s best practices. But we have entered a period of bauxite boom and many new operators have come forward. Bilateral negotiations were followed by signed contracts that grant tax exemptions, thus bypassing the mining code.

Boriana Yontcheva: The problem is now well identified and many countries have undertaken reforms. It also helps that 20 countries in the zone adopted a minimum effective tax rate of 15%, which was set up by the OECD/G20 inclusive framework and due to come into force in 2023, on companies. That being said, although progress has clearly been made, further efforts are needed because there are many channels of revenue leakage, and now that one has been tackled, the next must be addressed.

Where does one start?

Boriana Yontcheva: There are simple good practices to adopt. First of all, during negotiations, the finance minister – whose administration is in charge of revenue collection – should systematically sit next to the minister of industry and mines, who will discuss the technical and practical details.

Secondly, another strong recommendation is to stop mine-by-mine negotiations and instead set a framework for the whole industry. On this point, Sierra Leone, via its Extractive Industries Revenue Act (Eira) adopted in 2018, is an example to follow. Not only does the law establish a single tax regime that avoids special contracts, it also requires that the country transition to this system in the event that existing contracts are renegotiated. It also creates a resource rent tax whose rate is consistent with that of the corporate tax to avoid tax optimisation. And, contrary to what one might think, most private players also say that they are in favour of a single framework.

Finally, states would benefit – as Liberia has done – from negotiating a better valuation of the price of mined minerals, in line with the world market price.

On a more technical and fiscal level, what is the priority?

Boriana Yontcheva: We need to close the profit transfer channels in order to reduce the profits declared abroad as much as possible. This means, in particular, regulating transfer prices and limiting interest deductions and tax incentives. This must be a regional movement.

Dan Devlin: Zimbabwe is an interesting case in point. The country has adopted clear and firm legislation on transfer pricing and has made documentation that explains the expectations and sanctions available to operators in the event that rules are not complied with or required documents are not submitted.

These sanctions are effectively applied where appropriate. Other countries that have strengthened their transfer pricing protection include Guinea, Liberia and Mali. South Africa and Nigeria have set limits on interest deductions. And Kenya has added a provision against treaty shopping to its tax treaty policy.

Do states have the means to implement these reforms?

B. Y.: Here too, there has been an awareness of the need to strengthen tax administrations by investing in training, seeking technical support from the IMF, the OECD and the World Bank, in particular, and by using legal and consulting firms. This is a long term change but it is underway.

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