It is critical that African countries increase their domestic resource mobilization. The pressing need for economic stimulus in response to the devastating effects of the COVID-19 pandemic has compounded preexisting budgetary pressures for governments. For mineral-rich African countries, mining has great potential to generate significant tax revenues; however, the sector has often failed to deliver the expected financial benefits for a number of reasons, including aggressive tax planning, overly generous tax incentives, and weak tax administration.
With these challenges in mind, the African Tax Administration Forum (ATAF), the Intergovernmental Forum on Mining, Minerals, Metals, and Sustainable Development (IGF) and the Organization for Economic Co-operation and Development (OECD) facilitated a series of virtual seminars in 2021 for government officials across the continent. Our goal was to build government capacity to address revenue risks related to tax base erosion and profit shifting (BEPS) in the mining sector.
Participants in Their Own Words
A total of 322 government officials participated, representing mining, finance, and revenue authorities from 35 African countries—providing a unique opportunity for participants from different agencies and countries to learn from each other.
“This training is very important for government officials that are new to the mining industry but also for those with vast experience in the sector,” said participant Lameck Manda, a revenue officer from the Malawi Revenue Authority. “For those that have been in the field for a long time, the course offers an exciting platform to learn about emerging issues and debates affecting mining taxation. For upcoming officials, it provides a strong foundation of knowledge.”
Two key BEPS issues resonated with participants during the eight-module training: fiscal incentives and the taxation of offshore indirect transfers.
Fiscal Incentives in Mining
For decades, governments in Africa have sought to attract foreign investment with tax incentives and preferential rates in tax treaties. Unfortunately, these instruments have not always had the desired effects and often led to substantial revenue losses for governments. The IGF’s tax incentives database shows that the incentives most harmful to revenue collection are more widely used in Africa than anywhere else—the IGF’s tools on tax incentives support a more targeted use of incentives.
During this training, participants from Malawi shared a recent case involving one mining company where the country lost USD 15.6 million from reduced mineral royalty payments due to tax incentives and a further USD 27.5 million from tax treaty shopping over a 6-year period.
” Officials need more training like this to build capacity on mining tax issues. ” – Mariame Marry-Lorde Wendso Dabo, Internal Revenue Service, Burkina Faso
Emerging global tax reforms advancing via the OECD’s Inclusive Framework coincided with this training. Building on years of international tax cooperation on BEPS issues, most of the world’s nations have agreed to adopt a global minimum corporate tax to limit tax competition, a policy that will have major implications for tax incentives. Oliver Chasiyeni, a training manager with the Zimbabwe Revenue Authority, summarized it clearly: “Tax incentives given to foreign investors may not benefit the country as intended in light of new global developments in coming up with a global minimum tax.”
Offshore Indirect Transfers
Governments can also forego significant revenue by failing to tax gains realized from the sale or transfer of mining assets within their jurisdictions. The risk is especially high with offshore indirect transfers—when the transferor is a resident of another country for tax purposes. In some cases, investors can use tax treaty loopholes to avoid paying taxes on the gains from such transactions.
Participants from Uganda shared how the country almost lost USD 250 million in taxes due to these transfers. Others from Senegal mentioned a dispute in which a mining company is contesting the government’s USD 208 million capital gains tax assessment. The course instructors referred participants to the Platform for Collaboration on Tax’s toolkit for guidance on this issue and an upcoming practice note from the IGF and OECD.
Mariame Marry-Lorde Wendso Dabo, a participant and senior tax inspector with Burkina Faso’s Internal Revenue Service, said, “I will use what I learned to alert my colleagues about the risks emerging from international tax treaties, transfer pricing, and offshore indirect transfers. The latter has generated huge revenue losses for tax administrations in Africa. Officials need more training like this to build capacity on mining tax issues.”
The Zimbabwe Revenue Authority’s Oliver Chasiyeni echoed that sentiment: “I will suggest legislation changes in my country’s tax legislation especially on capital gains tax on offshore sales where the underlying asset is in our country.”
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