CAPE TOWN (miningweekly.com) – A World Bank report has raised concerns about tax compliance by mining companies in Africa, tax loopholes and the illicit flow of funds in a range of African countries.
The report, ‘Transfer Pricing in Africa, with a focus on Africa’, has shown that several countries on the continent have struggled to achieve a tax to gross domestic product ratio of 15%, against an average of over 33.6% for Organisation for Economic Cooperation and Development countries since 2000.
“It is critical that African jurisdictions continue to pay a fair amount of taxes on the profits generated in a country,” World Bank lead mining specialist Boubacar Bocoum told delegates at the 2017 Investing in African Mining Indaba, in Cape Town.
He said the report, compiled by an international team of mining and tax experts, would support a series of workshops with African tax officials starting early this year.
The report says multinational enterprises (MNEs) often undercharge for mineral products they export and overpay for routine corporate services and specialised goods and services, such as insurance and logistics. By doing this, they reduce the profit of the mining subsidiary and the tax collected in the host country.
“While some tax practices may be technically legal, it may be argued they are ethically questionable,” says the report.
MNEs have tended to structure their businesses by consolidating high-value functions and related intangible assets in hubs that provide goods and services to their global operations. They locate them in low-tax jurisdictions or in jurisdictions allowing the establishment of preferentially taxed special purpose entities.
The way MNEs organise their global corporate structures often leads to the eroding of the tax base of the host country as profit is shifted abroad. The functions of the mining subsidiaries are often stripped down to mostly routine activities using primarily less skilled employees and tangible assets, the report reveals.
The report says few mining companies are fully vertically integrated, while, increasingly, mining companies are entering into cross-border transactions which provide for high-value, specialised services and assets and financing.
The World Bank has called on tax authorities to question whether the profits of mining subsidiaries and of overseas related customers and service providers match the value actually added by each of them.
The report says African governments need to look at how to strengthen their capacity in the area of tax administration. They have to research the structures, value chain characteristics and processes of the mining industry in their countries.
“While most jurisdictions already have adequate legislation, the challenge now is to put in place supporting regulations, structures and adequate administrative capacity to effectively enforce it,” suggests the study.
The report says the “extreme complexity and artificiality” of some multilayered structures shows evidence that some conduit companies are effectively just “mailboxes” with no clear business purpose, adding little or no value. There are indications that they are primarily designed to cut the tax paid by multinational companies at the consolidated level.
Civil society participants attending the special session on transparency within mining, also raised deep concern, saying mining companies were not open and transparent.