Twitter Icon Envelope icon

Empowering Officials to Realize the Financial Benefits of Mining in Senegal

Posted by IGF Secretariat

Empowering Officials to Realize the Financial Benefits of Mining in Senegal

Senegal’s growing mining sector produces phosphates, gold, mineral sands, manganese, and industrial clays that accounted for 40% of the country’s export revenue, 2.2% of GDP, and 5.3% of government revenues in 2019. The country faces severe ongoing economic challenges, and responsibly growing the mining sector can provide livelihoods and alleviate poverty for many Senegalese people.

The Challenges

Like many countries, Senegal uses a mix of mineral royalties, income taxes, state ownership, and value-added taxes to generate government revenue from mining, but the financial benefits have often fallen short of the government’s expectations.

Under 1988 and 2003 mining laws, many investors operated with generous fiscal incentives that were guaranteed in contracts and persisted despite a 2016 law designed to remedy the situation and optimize revenue from mining.

The government needed to strengthen the fiscal regime governing mining, but a critical lack of capacity and resources left Senegal vulnerable to three important risks related to tax base erosion and profit shifting (BEPS) in mining.

1. Mineral Pricing for Royalty Collection

Royalty payment values depend on the market price declared for minerals produced and the volume sold (mostly exported). Senegal’s mining ministry has in the past lacked capacity to correctly price important mineral transactions and had to rely on companies’ self-assessments, which sometimes underestimated the value of mineral exports.

2. Indirect Transfers of Mining Assets

As Senegal’s extractive sector grew over the last decade, several large, offshore transactions involving mineral and petroleum assets and licences took place without any tax benefit to the country. This was often due to gaps in domestic law and tax treaties pertaining to the indirect transfer of shares between parties that own assets in Senegal. In response, the government updated its income tax law in 2019 and cancelled a tax treaty with Mauritius that served as a multinational tax avoidance vehicle. Implementing the new tax rules required capacity to identify offshore transactions, value the Senegalese mining assets subject to the transactions, and respond to complex legal challenges from corporations.

3. Transfer Pricing

Abusive transfer pricing occurs when companies shift their profits to low-tax jurisdictions by transacting goods and services between related parties at artificial prices. In 2013, Senegal began modernizing its transfer pricing legal framework to address the issue, but few tax auditors had experience with the intricacies of applying these complex rules to mining companies.

An IGF training in Senegal in January 2020

 

Our Role

Senegal approached the IGF and the African Tax Administration Forum (ATAF) in early 2020 for help addressing these persistent risks to mining revenue. Senegal promptly entered the deep-dive support program from the IGF’s BEPS in Mining Progam in partnership with the ATAF.

The support program took a whole-of-government approach and engaged with both the mining and finance ministries to build capacity with key officials to audit the mineral prices used to calculate mineral royalties; implement new tax rules governing offshore indirect transfers of mining assets, and conduct mining-specific transfer pricing audits. Working with officials in both ministries was key to helping identify and create synergies for effective and efficient administration.

The joint workshops with the tax administration have enabled us to strengthen the links between government agencies and to collaborate in audit activities.

– Lamine Diouf, Director of Control and Monitoring of Mining Operations, Ministry of Mines and Geology, Senegal

1. Mineral Pricing for Royalty Collection

The IGF and ATAF worked closely with officials in Senegal’s mining ministry who audit mineral royalties to help them identify comparable mineral prices from global service providers, analyze large quantities of data, and identify taxpayer information gaps.

We focused on key commodities in the extractives sector by organizing training on the value chain of mineral sands (zircon, ilmenite, rutile) and helped regulators develop a systematic approach to royalties for phosphate producers.

2. Indirect Transfers of Mining Assets

We reviewed Senegal’s updated 2019 tax rules for offshore indirect transfers of mining assets and supported the tax authority in ascertaining the economic value of such assets and licences for tax assessments. We also hosted a technical workshop for officials on the topic of asset valuation for tax purposes.

3. Transfer Pricing

The IGF and ATAF supported the tax authority to implement stronger transfer pricing audits in mining through a dedicated training workshop in 2021 as well as providing technical assistance in a specific transfer pricing tax audit.

Our Impact

1. Mineral Pricing for Royalty Collection

Following our engagement with royalty auditors, the regulatory body opted to subscribe to a minerals data provider, develop a sustainable model in mineral price audits, and establish a royalty price formula for manganese exports.

“With the support of the IGF, we were able to audit mining royalty declarations in more depth by establishing reference prices for the export of minerals for manganese and phosphate,” said Lamine Diouf, Director of Control and Monitoring of Mining Operations, with Senegal’s Ministry of Mines and Geology.

The mines ministry improved its royalty audits and saw an increase in mining revenue of USD 3.2 million (or 7%) from 2019 to 2020 as royalties increased on key mining products, including manganese (84%), phosphates (39%), and mineral sands (15%). These increases are partly due to the increased value of production, in addition to the use of international benchmark prices and enhanced monitoring by regulators. Results from audits in 2021 are pending.

2. Indirect Transfers of Mining Assets

Following our work to strengthen rules and increase auditing capacity, Senegal’s tax authority issued its first tax assessment for an offshore indirect transfer of mining assets in 2020, reportedly amounting to USD 208 million and now subject to an arbitration proceeding initiated by the company. This first case is a milestone for the government, as such asset transfers are becoming larger and more frequent in Senegal’s growing sector. It sets an important legal precedent to help the government consistently tax offshore indirect transfers in the extractive sector in the future.

3. Transfer Pricing

Building on our support to build auditors’ capacity on the transfer pricing analysis and audits of extractive industry taxpayers, the tax authority is preparing to issue a transfer pricing tax assessment following an audit of an extractive company.

“[We] have forged a fruitful partnership with the IGF and ATAF. The technical assistance offered through this partnership has helped to build capacity in tax policy as well as in the management and audit of the mining sector,” said a joint statement from Amadou Abdoulaye Badiane, Director of Legislation and International Cooperation, and Abdoulaye Diagne, Director of Large Enterprises, with Senegal’s tax administration at the Ministry of Finances and Budget.

“Thus, in addition to support for the ongoing improvement of the legal framework, several dozen officers have been trained or supported in the in-depth analysis of taxpayers’ BEPS practices.”

4. Inter-agency Collaboration

Additionally, by simultaneously engaging officials in the ministries of mining and finance, the IGF and ATAF encouraged inter-agency collaboration that has led to better information sharing and coordination between royalty and tax audits, and there is a process underway to formalize this relationship. “The joint workshops with the tax administration have enabled us to strengthen the links between government agencies and to collaborate in audit activities,” said Lamine Diouf, with Senegal’s mining ministry.

Read more IGF Impact Stories