Session Two: “Mining Tax Regimes in Africa and Illicit Financial Flows (IFF)”

The first presentation in this session was by Saviour Mwambwa of Tax Justice Network Africa. After an initial overview of mineral taxation in sub-Saharan Africa (SSA) the presenter proceeded to discuss some of the factors behind poor mining tax revenue mobilisation in SSA. These include: the erosion of tax base due to factors (such as lack of effective ring fencing, treatment of hedging, reference prices and control of production, export and by products); and the ineffectiveness of corporate profit based tax standard instruments in the mining sector. He also cited factors such as the lack of political will among Africa’s ruling elites and the effects of external imposition of policies.

The presenter then proceeded to discuss IFF. He explained the variety of ways in which they can occur without showing up in balance of payments or national accounts records and indicated the massive scale of the problem for Africa’s economies with figures drawn from a variety of sources. He then discussed the mechanisms, facilitators and actors in illicit financial flows. These include:

  1. Secrecy Jurisdictions (International Financial Centres, Tax Havens, Off- Shore Centres);
  2. International system of financial rules and structures that facilitate ‘Tax Planning’ and shell/phantom companies; and
  3. MNCs via transnational and intra company transactions such as transfer (mis)pricing and trade misinvoicing. Each of these issues was discussed in some detail, especially transfer pricing and mispricing.

The presentation of the problems was followed by a set of proposals on how to deal with them. Four approaches were presented and discussed:

  • Arms Length principle:  Endorsed by OECD &UN and  widely used as the basis for bilateral treaties between governments. Arm’s length principle very hard to implement, (e.g. specialised products, intangibles etc.)
  • The unitary taxation approach: taxing the various parts of an  MNC based on what it is doing in the real world vs Arm’s length principle: gives  MNCs leeway to decide for themselves where to shift their profits
  • Country-by-country reporting would require each multinational corporation to provide specific disaggregated information about the various aspects of their activities where ever they operate.
  • BEPS Project: Action Plan (response to G20 calls for reform of international Tax system). Base erosion and profit shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to make profits ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low resulting in little or no overall corporate tax being paid.

Saviour concluding by drawing attention to the fact that the discussion of Illicit financial flows has to be situated within a broader discussion about how the exploitation of mineral resources can contribute to broad based development and transformation and trying to understand how and why countries become stuck in dependence on mineral exports and external dependency.  He identified a number of factors which account for this reality. These include:

  • Driving interest of  MNCs, resource-based capital seen as opportunity for fast and large resource-based primitive accumulation by national, emerging capitalist classes
  • Privatisation of rents from resources as a key element in translating multinational accumulation into domestic, fast capitalist accumulation;
  • Only narrow articulation occurs, within the minerals-energy dynamics, (concentration on unprocessed exports and relatively small size of rents);
  • Close association between political elite and private accumulation – the role of the state is focused on facilitating private accumulation.

He drew a number of lessons for mineral rich African countries:

  • Pick the right battles, e.g. although CSR is important, it is most often not the «deal breaker» in terms of what fundamentally could ensure that a country achieves sustainable development
  • Transparency and accountability, build in all three levels of transparency initiatives in country; EITI, CBCR-PBP and Transparency Guarantee,
  • Concessionary versus contractual regulation, there is a fundamental imbalance in SSA in the choice of the most complex approach (e.g.MDA, PSA, PSC) combined with weak capacity and transparency and accountability weaknesses.

The presenter concluded by offering suggestions for action:

  • Urgent renegotiation of mining contracts when they are unfavourable.
  • Governments need to develop productive strategies that exchange mineral rights for local content conditions
  • Capacity-building in the geological survey capacity in sub-Saharan Africa needs to be developed in order to improve the bargaining power of states vis-à-vis multinationals. 
  • Review approach to state ownership share in mining firms. Ownership interest, below a certain threshold ownership interest is ineffective (especially free or carried) and overall has not worked well in SSA.