It’s all smoke and mirrors!
The title of the recent IMF paper on the issue gets straight to the point: “Tax Avoidance in Sub-Saharan Africa’s Mining Sector”.
Among the elements uncovered is the fact that, indeed, the sector avoids paying taxes in Africa in various ways.
“Tax evasion” is of course not the same as “tax evasion”: the first involves using legal loopholes to reduce tax or royalty payments, while the second usually involves fraud. or outright corruption. The line between the two, it must be said, can sometimes be blurred.
“It is estimated that African countries lose on average between 450 and 730 million US dollars in income tax revenues per year due to tax evasion by multinational mining companies. This benchmark estimate suggests a loss of around $ 600 million per year, based on the tax rate differentials observed between African countries and offshore subsidiaries of the same multinational group, ”the IMF said.
This amount would be important for African governments and corporate boards. And it is the IMF – one of the guardians of global capitalism – that points out this problem, not a left-wing NGO (although it must be said that a number of center-left NGOs have done a good job on this subject, such as the Tax Justice Network and Global Financial Integrity).
Profit shifting and tax evasion come in many forms. A business, through its global network, can lend money to each other, with interest charges deducted in a high tax jurisdiction, while interest income is channeled to a low tax jurisdiction.
Such flaws give rise to creative accounting.
“In Sierra Leone, a company used an interest rate well above its cost of borrowing in the financial markets, adding a 16% rate premium to the interbank offered overnight rate in London. The cost of these loans means that the local mining company is not expected to pay income tax on its mining operations in the years to come, ”the IMF document said.
Or take this example from Ghana.
“… In Ghana, a parent company of a multinational advanced all the funds for the development of a project to the local subsidiary as interest-bearing debt. It further decided that no dividend would be paid by the subsidiary until all debts had been repaid. This eliminated dividend income and withholding tax on dividends. Even with interest limitation rules that denied certain interest deductions… the company was still better off qualifying cash flow as interest than dividend.
Undervaluation is another tactic.
“A lack of free market transactions for many mineral products means that these sales can be manipulated to shift profits overseas. This lack of market transparency may be due to several factors, including a concentration of producers (e.g. lithium production) and the vertical integration of multinationals whereby mining production is sold as an input to another part of the group. ‘companies. Zambia’s Mopani copper mine is a high-profile example of mineral undervaluation between related parties, with the company ordered to pay an additional $ 13 million in taxes in 2020, ”the IMF document noted.
The IMF’s recommendations to thwart tax evasion include strengthening and simplifying transfer pricing protections, limiting interest deductions, and improving the fine print in tax treaties. Some might add to this list the elimination of tax havens. The Pandora Papers have certainly highlighted their role.
The IMF document comes against the backdrop of a commodities boom triggered by the recovery of the global economy and crippling shortages: evidenced by the scorching price of coal right now as China scrambles to replenish depleted stocks . Does this mean Africa is losing even more money to mining tax evasion now?
It’s hard to say. For example, in South Africa, the commodities cycle has meant that large mining companies paid significantly more to the Treasury in 2020 than last year, giving a much needed boost to fragile public finances. This doesn’t mean that some companies haven’t practiced tax evasion, but on the face of it, the South African Revenue Service has been a big winner.
The corporate mining world has also embraced ESG – environmental, social, and governance issues – with convert enthusiasm in recent years. This IMF document is one of many reminders that this conversion must not be accepted at face value through blind faith. There is no doubt that the ESG momentum has produced a lot of good, including a safer mining industry that reduces its carbon footprint, among others. But that doesn’t mean the smoke and the mirrors are gone. – Maverick company