By Joyce Mulama
NAIROBI, Mar 27 (IPS) – The African continent is rich in natural resources; but the terms under which multinational companies exploit these resources mean that governments – and Africa’s people – enjoy only a tiny fraction of the benefits.
Favourable legislation has set low royalty rates, which combines with mining contracts – often negotiated behind closed doors – that routinely grant companies further tax concessions and holidays of up to 25 years. On top of this, Africa loses vast sums each year to corruption and illegal tax evasion by multinational corporations (MNCs).
The Tax Justice Network for Africa (TJN-A), ActionAid, Southern Africa Resource Watch, Third World Network Africa and Christian Aid – all non-government organisations with an interest in an equitable world trade system that will enable development – have just published a report titled “Breaking the Curse: How Transparent Taxation and Fair Taxes can Turn Africa’s Mineral Wealth into Development.”
The document draws on evidence from seven mineral-rich countries including Ghana, Tanzania, Malawi, Zambia, South Africa, the Democratic Republic of Congo and Sierra Leone, to reveal questionable accounting practices by multinational companies that conceal the true value of their operations while a mixture of secrecy and flawed laws passed by parliaments across the continent further deprive Africa’s people of revenue.
For example, Zambia’s mining law allows the minister in charge to give mining rights to a company without consulting anyone. “Surely the minister is open to corruption because these contracts are not subject to any form of scrutiny. This paves way for non-transparent transactions,” a senior official in the country’s environment ministry told IPS on condition of anonymity.
Similarly, the report is critical of mining laws adopted under pressure from the World Bank, which pushed for low tax rates to attract foreign investment in mining. “African governments have enacted laws giving tax subsidies to the industry and mining companies have been pushing for tax breaks in secret mining contracts, amounting to an aggressive tax avoidance strategy,” says the publication.
It cites Ghana and Tanzania, where low royalty rates cost treasuries 68 and 30 million dollars respectively in 2008. For South Africa, the figure is 359 million.
Tax breaks granted in Malawi cost the treasury 16.8 million dollars; in Sierra Leone eight million. The tax exemption on a single mining contract in the DRC may have cost the treasury 360,000 dollars a year.
“The same governments continue to borrow almost to alcoholic proportions from the developed world; they borrow in order to finance education, water and sanitation. They borrow actually to provide basic services,” observed Brian Kagoro, the policy manager for ActionAid International.
This is in contrast to the situation in the 1960s and 1970s, when mostly state-owned companies reaped healthy profits from mineral exploitation. In some cases this revenue only fed massive corruption by African leaders like Mobutu Sese Seko in what is now the Democratic Republic of Congo, but in Zambia for example, it enabled strong investment in agriculture, healthcare and education.
“When you look at the potential revenue lost as a result of tax concessions, you realise that what was being borrowed could have been financed by an equitable tax structure or equitable royalty,” Kagoro added.
The establishment of mining tax regimes that so strongly favour multinational corporations dates back to the early 1990s when the World Bank asked Africa to open up its mining sector to foreign private investors. Governments facing heavy debt loads, and unable to raise capital for investment in the sector directly, were persuaded to offer favourable terms to mining corporations – frequently entering into long-term agreements that left the high profits from the 2002-2008 commodity boom in the pockets of the corporations.
Corruption by African leadership continues, of course, but the “Breaking the curse” report highlights a less-noticed aspect: sharp accounting practices by multinational companies that allow them to evade taxes by over-valuing imports and under-valuing exports as equipment and mined ore is transferred between subsidiaries of the same company in various countries, or by overstating operating costs.
To be able to tap the profits made from mining for development, the report says the continent must reform its laws to have uniform tax rates and tax holiday periods, as well as embrace legislation that ensures mining contracts are scrutinised by parliaments, to guard against corruption. But critics say the responsibility to address corruption is not only Africa’s but for the developed countries as well, where the mining companies come from and where capital flight from Africa is stored.
“An act of corruption involves two parties. The developed countries also have to play their part. We must all act together to end corruption,” said Prof. Olusanya Ajakaiye of the African Economic Research Consortium.
To address the question of illegal tax evasion by mining multinationals, the report calls for the International Accounting Standards Board to adopt a new accounting system compelling mining industries to issue clear statements about their profits and expenditure as well as taxes paid in each financial year on a country-by-country basis.
This will go a long way to address the challenge facing tax authorities in most of Africa. Jack Ranguma, a former Domestic Tax Commissioner in Kenya , points out that tax data is still collected and processed manually, meaning that catching companies concealing profits or mis-pricing transfers between their subsidiaries is almost impossible.
A massive titanium mining project in Kwale District, on the Kenyan coast, highlights many of the problems covered by this report. Titanium deposits in the area amount to 3.2 billion tonnes – 14 percent of the world’s titanium resources. The mine will be operated by Tiomin Resources, a Canadian-headquartered firm that was granted mining rights over 10 years ago, but disagreements among its shareholders are holding up the commencement of mining operations.
“The arrangement is that Tiomin is supposed to be set up as an EPZ (Export Processing Zone), which means that were it to commence operations, it would enjoy a wide range of tax incentives including tax holidays of 10 years, exemption from withholding tax among others,” Mosioma said.
Activists are calling on the Kenyan government to learn from the experience elsewhere on the continent and revise terms of the deal to the benefit of Kenya’s people when the project takes off.