New Toolkit Aims to Curb Transfer Mispricing in African Mining

Cross-posted from ATAF blog.

38 African tax authorities have, this week, converged in Abuja for the International Conference on Tax in Africa, convened by the African Tax Administration Forum (ATAF). The group is discussing ways to boost tax revenues, in particular, how to improve collection of corporate income tax.

His Excellency Professor Yemi Osinbanjo, Vice President of Nigeria said in his keynote address, “the use of aggressive and suspicious tax planning and transfer mispricing by multinationals to minimize their tax payments” is a major constraint to domestic revenue mobilisation in African countries.

Increased multinational investment in Africa over the past decades has boosted the risk of transfer mispricing, which occurs when two related parties distort the price of a good or service to reduce their taxable income. 

As a result, the regulatory environment in Africa around the phenomenon is quickly evolving.

Between 1995 and 2014, the number of African countries with transfer pricing rules has grown by 600 percent, according to Ernst & Young. They are developing standalone transfer pricing regulations; building specific expertise; setting up specialized transfer pricing units; and working together to share best practices through ATAF.

However, evidence shows that few African tax authorities have the sector-specific expertise to detect and mitigate transfer mispricing in the mining sector. Many tax authorities don’t have close knowledge of the mining sector, which hinders their ability to distinguish between abusive versus standard industry practice. Risk assessment is critical for developing country tax authorities given the limited resources they have to audit taxpayers.

To combat this problem, ATAF, and Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ), have today, at the International Conference on Tax in Africa, released the Toolkit for Transfer Pricing Risk Assessment for the African Mining Industry. The toolkit is the first of its kind addressing mining. It aims to assist African tax authorities to determine whether particular high-risk related party transactions should be selected for transfer pricing audit. The toolkit is complementary to and supplements the ATAF Transfer Pricing Risk Assessment Tool, which applies to all sectors.

The toolkit is practical. Tax authorities can immediately integrate it into existing transfer pricing compliance processes. It can be used in any country context and adapted for legal differences. Authorities can identify and assess transfer pricing risks in the mining sector, select the most high-risk cases for audit, and protect the mining tax base against profit shifting.

The toolkit addresses for instance the use of offshore marketing hubs: cases where a mine sells its product to a related company that then on-sells to a final customer. The risk is that the marketing hub pays an artificially low price to the mine, reducing profits in the host country, and sells the product onto a third party at market rate, allowing profits to accumulate with the hub, often in a low-tax jurisdiction. These transactions can represent big losses for resource-rich countries. BHP Billiton is currently in a dispute with the Australian Tax Office (ATO) over a USD 755 million tax bill relating to its use of a marketing hub based in Singapore to sell commodities to Asia.

How would a tax authority use the toolkit? Let’s assume the authority is planning a general audit of a large mining company. It is deciding whether the issue of a related party loan should be included in the audit. The tax authority uses the toolkit as a basis for reviewing the terms and conditions of the loan. It spots that the loan lacks a fixed repayment period, as well as financial and non-financial conditions. According to the toolkit, the absence of a clear obligation to repay may indicate that the loan is not arm’s length. Consequently, the authority decides that there is a sufficiently high risk of transfer mispricing to warrant an audit.

In addition to the toolkit, which can be downloaded here, tax authorities can receive training on how to use it. The Intergovernmental Forum on Mining (IGF) is the official training partner for the toolkit. Interested parties should contact me at or GIZ’s Anna Kravtsenko at

Alexandra Readhead is the author of the toolkit.

Inflated Expectations about Mineral Export Misinvoicing are Having Real Consequences in Tanzania

Cross-posted from the Center for Global Development. Co-authored with Maya Forstater.

At the Buzwagi and Bulyanhulu gold mines in Tanzania, and at the Port of Dar Es Salaam, around a thousand containers of copper-gold concentrate (a processed product between rock and refined metal) are stockpiling. They belong to Acacia Mining PLC, who operate the two mines, and are not moving because of a ban on concentrate exports that has been in place since the beginning of March.

In May, President Magufuli appointed two special committees to investigate the contents of 277 of the containers stuck at the port. The first committee reported that the concentrate contained around twice as much copper and silver, and eight times as much gold than was declared by the company (the main value of the concentrate comes from gold). They also detected a range of rare earths. According to their calculations, each container contains 28 kg of gold and is worth $1.36 million while information published by Acacia suggests that each container contains 3.3 kg of gold, 2.8 tonnes of copper, and 2.6 kg of silver and is each worth around $0.15 million. If the committees’ findings are accurate, the extent of the undervaluation would be enormous, amounting to almost $4 billion annually (one tenth of Tanzania’s GDP). The second committee scaled these figures up to cover 61,320 containers exported between 1998 and 2017, suggesting the true value of concentrate exports was $83 billion and that the government had lost $31 billion of revenue trade due to misinvoicing and transfer price manipulation. Acacia maintain that they have always declared all materials produced and paid all royalties and taxes that are due. 

Credit: Maya Forstater (co-author), based on data from Mruma Committee Report and Acacia/SGS information

President Magufuli responded to the committees’ reports:

We should summon them and demand that they pay us back our money. If they accept that they stole from us and seek forgiveness in front of God and the angels and all Tanzanians and enter into negotiations, we are ready to do business.

The business in question is the demand that Acacia build a local smelting facility (the government’s stated aim for the ban on concentrate exports). In 2011, The Tanzania Minerals Audit Agency examined the viability of a smelter and concluded that it would not be profitable given the volumes and quality of concentrate involved. If the concentrate produced by the mines turned out to contain eight times more gold than previously thought, these calculations might look different.

However, the committee’s belief that they have uncovered a case of massive misinvoicing (i.e., misrepresentation of the value or quantity of exports) does not seem plausible for five reasons:

1.    The findings suggest a massive scale of hidden metals production.

The committee’s reports say that the 277 containers (which represent around one month’s production) contain around 7.8 tons of gold. This is roughly equivalent to the total amount of gold Acacia reports that these two mines produce in a year. Acacia note that the committee’s findings on the amount of Iridium in the concentrate (16.9 tonnes annually), would be nearly three times global consumption of the metal. The findings for Ytterbium (9.8 tonnes annually), would be on par with largest producer in the world.

2.    These findings are geologically implausible.

Acacia notes that the results imply that they produce (from Acacia’s three mines in Tanzania) more than AngloGold Ashanti produce from 19 mines, Goldcorp from 11 mines, and Kinross from 9 mines, and that this is implausible given the size of the mines. They also argue that economic Iridium concentrations are only found as by-products in certain types of mines, not in gold deposits of the type found at Bulyanhulu and Buzwagi, and similarly, that significant levels of rare earth elements such as Ytterbium are not found in this kind of deposit.

3.    The committee’s analyses suggest an extraordinary conspiracy has undermined Tanzania’s efforts at monitoring minerals exports, as well as international financial regulations.

The Tanzania Mineral Audit Agency (TMAA) undertakes careful work to monitor minerals exports. Normally four samples are taken from every shipping container—one for Acacia (which is verified by SGS), one for the TMAA, one for the smelting company, and an umpire sample in case of disputes. Furthermore, Acacia is a FTSE250 company; it must comply with international regulatory agencies in the UK, Canada, and the United States, which require the company’s financial statements and figures to be audited in accordance with international standards. For Acacia to under-report its gold production and revenues would mean defrauding shareholders through an enormous global conspiracy.

4.    The committee’s approach to pricing the concentrate does not reflect how the metals industry works.

The committees calculated a value for every element including trace elements such as tantalum, beryllium, and ytterbium, and bulk ones such as sulphur. However, smelters do not pay out for every element in the material, but only the ones they contract for, since the rest end up in the waste pile or eventually as “anode slime” by-products at the end of the copper refining process. Acacia say they are only paid for copper, silver, and gold (and MRI Group which buys the concentrate from them confirm this).

5.    There is no sign of an additional $4 billion a year of unexplained sales in Acacia’s accounts.

Acacia’s shareholders, who have some skin-in-the-game to know what is going on, are not reacting like they have just found out that the company’s management have been defrauding them, nor that the company owns assets which are worth several times more than they thought.

While the committees’ findings are hard to believe, this doesn’t necessarily mean government isn’t justified in its concern that Acacia has not been paying enough tax. Between 2010 and 2015, Acacia paid $444 million in dividends to shareholders, despite not yet paying any income tax in Tanzania. OpenOil explains that generous fiscal terms are the primary cause, specifically, an additional capital allowance meant Acacia could deduct 100 percent of its $4 billion investment, plus a 15 percent margin, before paying any income tax.

$252 million was a “special” dividend following an initial public offering (IPO)—in other words, these funds went from new shareholders to Barrick Gold, not from the Tanzanian subsidiaries to all shareholders. However, the question of how profits to pay the rest of the dividend were available in London has never fully been answered. One possibility is that Acacia is engaging in “base erosion and profit shifting” via its Group Finance Company in Barbados. Acacia may be raising equity, and, through the Group Finance Company, providing it as intercompany loans to its Tanzanian subsidiaries. Because interest payment on the debt can be deducted from taxable income, the more debt the mines have the less taxable income they generate. Plus, interest payments are a way of shifting profits earned in Tanzania, to the Group Finance Company in Barbados. This practice of “earnings stripping,” could explain how Acacia financed the dividends. But, without access to disaggregated data for finance charges, it is not possible to know whether this theory is correct.

In Tanzania, there is significant risk attached to challenging the committees’ findings. The Minister of Mines and the chief of the TMAA were both fired following the first committee’s report, and a weekly magazine was ordered to shut down for two years after publishing an article questioning the role of previous presidents in negotiating the original mining agreements. The “Publish What You Pay” coalition of NGOs working on extractive industry transparency report has issued a general statement, but has not offered any analysis, while the Tanzania Extractive Industry Transparency Initiative has made no public statement.

It is not clear that compelling Acacia to build a smelter would be a win for Tanzania. Thomas Scurfield at NRGI warns that it would distract government attention and power supplies from other areas of the economy and might result in lower government revenues, not higher, if the marginal increase in export value it generates is offset by higher costs. Without balanced coverage of the issues related to revenues, and the economic prospects for smelting, Tanzania may end up worse off. To date, media coverage of the situation has been unbalanced, and potentially misleading.

Securing mining revenues is a major challenge for Tanzania, as with other resource-rich developing countries. Often governments know something is wrong, but lack the information, resources, and expertise to pinpoint the precise cause. However, it is vital that public debate is informed and critical, and that simplistic narratives portraying multinational mining companies as undertaking massive ‘illicit financial flows’ through widespread mispricing of ores and metals are not accepted without evidence. Governments should also avoid this trap at risk of raising public expectations of mining revenues to unsustainable levels.

Acacia and the government are now sitting down to talks with the hope of reaching a “win-win” solution. Finding a way to unwind inflated expectations, build trust and effective, realistic public scrutiny will be critical to finding a solution which is not just win-win for the president and Acacia but also for the people of Tanzania.

Is Indonesia’s move to “gross-split” the future of oil and gas production sharing arrangements?

Over the last decade, the Government of Indonesia has become increasingly concerned that petroleum companies operating the country’s oil and gas fields have been inflating costs through overspending. In 2016, a report by the Supreme Audit Agency (BPK), revealed that several petroleum companies (“contractors”) had inflated the reimbursement of their operating claims by US$300 million.

Production sharing contracts (PSCs) are common in the petroleum sector. Roughly two-thirds of petroleum producing countries have this as the core component of their fiscal regime. Under a PSC, the contractor is entitled to take a share of total production to cover its exploration and development costs (“cost oil”), and what’s left is then split between the contractor and the government (“profit oil”) according to some formula set out in the PSC. This mechanism for apportioning production is called “cost recovery.” While countries may vary the ratio of cost oil to profit oil, cost recovery has, until now, been the defining feature of the PSC.

In January this year, the Government of Indonesia abandoned the cost recovery approach. In its place the Government will apply a “gross-split” method, apportioning production solely based on a percentage, leaving all capital and operating costs to be borne by the contractor. This specific policy is virtually unknown in the world of upstream oil and gas contracts (Peru used it briefly in the 1970s). However, it is not too different from a royalty/ tax regime, whereby the contractor pays a combination of (1) a royalty based on the volume, or value of oil extracted, (2) income tax, and (3) a resource rent tax to capture a larger share of profits of the most profitable projects. Under gross-split, the contractor is effectively ‘paying’ a royalty by handing over a share of production to government before recovering its costs. This is attractive because government can collect revenue as soon as production commences. However, there is still a risk that contractors will inflate cost claims applied to income tax computations.

The Government of Indonesia argues that under cost recovery, contractors are incentivised to inflate costs to increase their share of production, the result being that Government’s share is reduced. By moving to a gross-split, contractors are forced to shoulder the costs themselves, which Government expects will encourage them to operate more efficiently, and protect the State budget. Under cost recovery, all expenses had to be pre-approved by the oil and gas regulator, SKK Migas, which led to significant delays for contractors. By giving contractors more freedom with respect to procurement and technology, the Government hopes to create a more attractive environment for investment.

Indonesia’s move away from cost recovery has been a long time coming. It is an issue that has become increasingly politicized, with the public regarding it as unfair that contractors’ costs reduce the Government’s share of production by hundreds of billions of dollars every year. It’s not hard to see why, when in 2016, the cost of cost recovery reached $13.9 billion, which was more than the sector raised in non-tax revenues. There are also administrative challenges involved in applying cost recovery. According to the Deputy Energy Minister, Arcandra Tahar “the problem with cost recovery is, there have been endless debates between SKK Migas and contractors as to how much exactly the production costs should be. It’s not easy to calculate technology costs, especially in cases where only one company has a particular technology.” SKK Migas has 750 staff; roughly 80% are involved in administering cost recovery.

Gross-split will increase the Government’s take from the sector, and ease administration. However, it may also deter investment, and prevent Government from capturing the upside if oil prices end up rising. Under the proposed gross-split of 57:43 (in favour of Government), contractors’ Internal Rate of Return (IRR) will be reduced by approximately 6% on average across all exploration prospects (i.e. onshore and offshore). The big test will be the bid round currently underway. WoodMackenzie, and company executives, are doubtful there will be much interest under the gross-split model. If they are right, Government may be forced to recalibrate the split to something that more closely resembles contractors current IRR. Given the political significance of the issue, we’re unlikely to see Government do a U-turn on gross-split.

Indonesia is not the only petroleum producing country to struggle with cost recovery risks. Tanzania’s former upstream regulator, the Tanzania Petroleum Development Corporation (TPDC), has expressed concern about companies inflating drilling rig rental fees. According to them, Tanzania’s status as a frontier basin makes it easy for companies to record the maximum rental price, and the TPDC lacks the appropriate benchmarks to challenge these cost claims. The challenge of auditing cost claims does not disappear with the gross-split model, but at least it is contained to calculating income tax, rather than being allowed to erode government’s share of production as well.

There is merit to supporting resource-rich countries to strengthen cost recovery audits. But with finite audit resources, and limited benchmarks to evaluate cost claims, Indonesia’s response to move away from cost recovery as a basis for production sharing may prove a more pragmatic approach. Petroleum producing countries will be watching closely over the next few months to see if Indonesia can get the balance right between maximising economic benefit from oil and gas, whilst continuing to encourage investment. If the Indonesians can achieve this, gross-split may well be the future of production sharing in oil and gas.

Securing Mining Revenues: Good Practice from Zambia, Tanzania, and South Africa

Co-authored by Thomas Lassourd. Cross-posted from NRGI

In Sierra Leone, the tax authority’s total budget allocation for 2015-16 was USD 13 million, about 0.5 percent of Australia’s. It has six staff responsible for auditing extractive industry taxpayers in a country where, pre-Ebola pandemic, roughly 20 percent of gross domestic product was a result of mining. None of the staff are transfer pricing specialists, and Sierra Leone’s tax court was only set up in 2015.

“We do not have capacity to get involved with legal issues,” the deputy minister of mines said. “Companies have the best lawyers; as a ministry we don’t have the best lawyers.”

Faced with such limitations, what lessons can Sierra Leone learn from countries like South Africa, Zambia, and Tanzania, which are finding context-relevant and innovative ways to limit the ability of foreign multinationals to avoid paying taxes?

NRGI’s regional report on preventing tax base erosion showed that many mineral-rich countries in Africa face similar challenges in applying “global standards” led by the Organisation for Economic Co-operation and Development to stop multinationals from using cross-border transactions to avoid tax. In particular, tax authorities struggle to apply the arm’s length principle, which compares the price of a transaction between related parties with the price of similar transactions carried out between independent parties. This is because accessing appropriate comparable data is so challenging.

NRGI is publishing case studies on South AfricaTanzania and Zambia that describe alternative legal and institutional mechanisms that these countries have put in place to control the price of mineral exports, operational and capital expenditures, and the cost of debt.

South Africa is one of the first countries in the world to introduce a law to limit the deduction of interest payments to foreign-related parties. Deductions that exceed 40 percent of turnover are disallowed. This hard cut-off means the South African Revenue Service can protect the tax base without getting into the nitty-gritty of pricing loans. (As this recent Chevron case in Australia shows, pricing loans is extremely difficult.) Action 4 of the OECD Base Erosion and Profit Shifting (BEPS) project has adopted a similar approach, while recommending a higher cap between 10 percent and 30 percent of turnover.

In Zambia, taxes from the mining sector have disappointed the public, particularly as copper prices hit historic highs. Civil society organizations believed that mining companies were selling their copper to foreign related parties under market rate to pay less tax in Zambia and accumulate profits offshore. In response, Zambia adopted an additional transfer pricing method that requires mining taxpayers to use publicly quoted benchmark prices—for example, from the London Metals Exchange—to calculate all mineral sales to related buyers. The rule makes it harder for companies to distort their mineral sale price to avoid tax.

“It removes a free kick for companies,” says one Zambian tax official.

The government of Tanzania has recognized that tax officials alone cannot detect and mitigate tax avoidance by mining multinationals. They need support from mining industry experts. The Tanzania Mineral Audit Agency (TMAA), set up in 2009, is responsible for monitoring the quality and quantity of mineral exports and the financial performance of mining companies. TMAA’s efforts have helped the tax authority collect USD 64.8 million in additional corporate tax, accounting for roughly 7 percent of mining tax receipts between 2009 and 2015 and twice the TMAA’s budget over that period.

South Africa, Zambia, and Tanzania have decided that they do not have the resources to audit all of the transfer pricing practices of multinational companies. They have therefore tried to avoid getting into unwinnable battles by introducing clear, objectively verifiable and easy to administer tax rules, as well as strong government institutions to oversee the mining sector. Other mineral-rich countries should take note.

Reputable Mining Investors Wanted in Sierra Leone: How to Improve Due Diligence in Mining License Management

 Gravel waste from the mine towers over Koidu in eastern Sierra Leone. Photo: Cooper Inveen / GroundTruth

Gravel waste from the mine towers over Koidu in eastern Sierra Leone. Photo: Cooper Inveen / GroundTruth

On the first anniversary of the Panama Papers, the National Minerals Agency (NMA) of Sierra Leone wants to know who it is doing business with. The NMA is the government agency responsible for issuing mining licenses. Beny Steinmetz of Simandou fame, is one such mining investor who has prompted the NMA to strengthen integrity due diligence. The Panama Papers implicated Steinmetz in a complex chain of ownership of Koidu Holdings, Sierra Leone’s largest diamond mine. By checking the reputation and track record of applicants, the NMA hopes to weed out shady investors, and instead attract reputable companies to transform Sierra Leone’s mineral wealth. This ambition is echoed by the EITI’s call for disclosure of the ultimate owners of extractive companies, as well as the launch of a global beneficial ownership register by OpenOwnership.

But, is it realistic to expect a resource constrained country such as Sierra Leone to be able to reliably test the ‘integrity’ of mining investors?

The short answer is yes. From October 2016 to March 2017, I was contracted by OpenOil to work the NMA to strengthen integrity due diligence in mining license management. The project was funded by the Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH. We found that prioritisation of resources, smart use of commercial products, and the ability to judge risk, enable the NMA to build a reasonably comprehensive picture of the integrity (or not) of potential investors. The expectation should not be that the NMA will always uncover the ultimate owner, or chase down the last dollar. The goal is to make informed decisions about who gets access to Sierra Leone’s natural resources.

Here are four lessons we learned that may be useful to other countries:


1. Prioritise mining license holders for ongoing integrity checks.

Developing country governments may not have enough staff to run integrity checks on all mining license holders. The NMA has four compliance staff to oversee 175 industrial mining licenses, and 2,078 trading licenses. Thankfully, not all license holders pose the same level of risk to the sector, or the wider economy. With the NMA, we developed a way of ‘triaging’ high-risk license holders for regular integrity checks. Regular checks are important because the business profile of a license holder may change over time (e.g. sale of asset).

Here’s what we did:

  1. First, we identified a set of risk indicators to measure all license holders against, based on data the NMA already collects via its Mining Cadastre System (e.g. contribution to total non-tax mining revenue);
  2. We gave each indicator a weight based on level of risk, and reliability. For example, variation in sale price has been given less weight than presence in a low-tax jurisdiction. This is because there may be numerous legitimate reasons why a company’s sale price would be lower than the market price (e.g. differences in quality), making this indicator less highly correlated to risk;
  3. Finally, we proposed an algorithm and scoring system for each indicator. The NMA is currently embedding these rules into its data analytics system. The result will be an automated list of 10-12 ‘watch list’ companies that require ongoing monitoring by NMA compliance staff.

Our aim was to establish an automated system that can generate a reasonable assessment of whether an existing mining license holder should be subject to ongoing integrity checks. Where the results appear incorrect, NMA staff can add or subtract ‘watch list’ companies.

Integrity Due Diligence Risk Matrix

2.   Commercial databases must be evaluated based on their specific application to the mining industry in the source country.

There may be limits to what open source data can deduce about an investor (e.g. where an investor is wholly owned by a company in a financial secrecy jurisdiction). The response to this challenge is usually that countries should invest in a commercial database from Reuters, or Bureau Van Djik. Yet, for many developing countries, including Sierra Leone, the cost of a database (anywhere from £5000 to £25,000 per year) is hard to justify. To decide whether to invest in a subscription, government agencies should test the specific application of the database, to the mining industry in their country. In doing so, they should consider the following issues:

  • The volume of mining companies that need monitoring. It may be that government would use only a fraction of the information on the database, despite paying for the whole resource;
  • How much information the database contains on privately held companies, that is not publicly available from the local registry. The main reason to subscribe to a database is to aid due diligence of privately held companies. Yet, if the database is so scant that government would need to purchase extra data elsewhere (e.g. from a consultancy), it may not be a good investment;
  • The extent to which the database uses public information to identify Politically Exposed Persons. It may be that this information comes from media and news websites, company websites, and sanctions lists, all of which are publicly available;
  • If the mining regulatory agency can establish the corporate ownership structure of mining investors i.e. identify all legal entities, directors, officers, shareholders etc. Some databases rely on users first knowing who the legal entities, and individuals involved are, to be able to search them. Developing countries should avoid databases that need a high level of prior knowledge of corporate structures.

A commercial database might be feasible if the EITI Secretariat and donor partners were to buy a collective subscription to license out to EITI implementing countries. This would be more cost effective, as well as help countries to implement the EITI standard on beneficial ownership.


3.   Countries with a small number of mining investors may find purchasing one-off due diligence reports more cost effective than subscribing to a database.

If a government agency finds closed data necessary to conduct due diligence, a more cost effective and targeted solution is to buy one-off due diligence reports for specific mining license applicants. However, there are costs involved with this approach, therefore it should only be done for high-risk privately held companies (e.g. investors linked to State Owned Enterprises), once the compliance team has exhausted all possible means of researching the company. An advantage to this approach is that it ‘kills two birds with one stone’ by getting a report, as well as translation of local registry documents and media.

Depending on the level of reporting, standard reports range between £100-£800. Very sophisticated reports can go up to $30,000. The cost comes down to how much source commentary, or ‘on-the-ground’ investigation is involved. In most cases, a standard due diligence report (company registration, adverse media results, sanctions and enforcements, basic information on directors and shareholders) should be enough for integrity checks, unless there are very serious concerns, or challenges to accessing company records.

For a country like Sierra Leone, where there is a handful of significant mining operations, buying one-off reports is undoubtedly more cost effective than subscribing to a database. This may not be the case for other countries with a more developed mining industry. However, even these countries may find it strategic to purchase one-off reports given databases can be variable on privately held companies.


4.   Countries seeking disclosure of ultimate owners require a legal framework for beneficial ownership. In the meantime, governments can use other data to inform integrity due diligence.

Whilst the NMA has ambitions to know who the ultimate owners of companies are, as it stands, the law only requires disclosure of shareholders who own 5% or more of the issued share capital. There is a legal review currently taking place, which will likely result in comprehensive beneficial ownership legislation. However, integrity due diligence does not have to wait until legal reform takes place. A lot can be deduced from information already collected by government agencies. For example, the NMA can already detect some PEPs issues based on the shareholder and related party data it collects from license applicants. Bearing in mind their current legal framework, government agencies should update existing disclosure requirements to maximise the due diligence relevant information they are already entitled to.

* * *

Effective due diligence of investors is critical to countering corruption, tax abuse, and criminal activity in the mining sector. Due diligence solutions should be simple and cost effective, considering the resources and capabilities of the government agency responsible for administering them. The mark of success is not a government agency knowing every legal and natural person involved in an investment. But, whether that agency can put forward an informed and reasoned view of the level of risk associated with an investor, such that a decision to grant a license (or not) can be made, and areas of concern flagged for ongoing monitoring. 

Alexandra Readhead was the OpenOil Team Leader for the NMA due diligence project. 


Treasuries in Africa Mining Hubs Under Pressure

Note: this blog originally appeared as an op-ed in This is Africa on 6 July 2016

When the African Union’s members meet in Kigali, Rwanda, from 10 to 18 July, the dire state of their public finances will likely be a key topic.

The bust in mineral and oil prices has left many resource producers with budget shortfalls. The cuts in public spending that are likely to ensue threaten social spending and development plans. With USD 35bn worth of Eurobond debt maturing between 2021 and 2025, African mineral producers have only a few years to right the ship.

Data visualization by Giorgia Ceccinato for NRGI

As finance ministers weigh options to balance their budgets, they will want to ensure that taxpayers pay their due. But this is easier said than done. Tax administration in many countries is weak, and tax policies suboptimal.

This leaves governments vulnerable to maneuvering by multinational companies – in the mining sector in particular – whose complex corporate structures allow them to make the most of the many loopholes and peculiarities of the global tax system.

Mining structures

Subsidiaries of global mining companies in Africa mostly trade with companies with which they are affiliated. They sell mineral production to marketing centers, finance the development of a mine’s infrastructure, buy machinery or pay for legal and accounting services.

If miners did this business with unaffiliated companies, they would negotiate deals for goods and services at market prices. But because most of these transactions are between affiliated companies, deals take place at “transfer prices” set by tax accountants, legal experts and management controllers at the global level to maximize a multinational company’s profits.

This can run counter to the host country’s interests when the transacting affiliates undervalue sales or overvalue purchases to reduce the declared profits – and subsequent tax bill – of the local subsidiary.

As international attention has turned to the problem of tax base erosion, the OECD and the United Nations have developed rules and international agreements to prevent transfer mispricing. But how are these rules implemented in mineral-producing African countries?

To answer this question, we studied how Ghana, Guinea, Sierra Leone, Tanzania and Zambia have approached the problem. They face some major challenges.

First, when legislators draft international rules into national laws, they sometimes do not provide detailed specifications. This leads to uneven application and conflicts with taxpayers.

In Zambia, one mining company has exploited the lack of specification on the valuation of copper and cobalt exports sold to related parties to reduce its tax payments by as much as USD 74m.

Second, finance ministries and mining sector regulators often fail to coordinate. Different teams within these institutions and even within the tax administration would do well to share information and coordinate audits. This would help to build a comprehensive picture of transfer mispricing risks created by the mining industry.

In addition, there are capacity gaps that governments need to close. Even where resources are scarce, the case for investing in tax and transfer pricing experts who can capture tens of millions in fleeing tax revenue is undeniable.

Since its establishment in 2012, the international tax unit in Tanzania has generated approximately USD 110m in tax adjustments, with a budget of merely USD 130,000.

Another challenge is insufficient access to taxpayers information, originating both from taxpayers themselves and from authorities in foreign jurisdictions. Mineral rich developing countries face the additional challenge of assessing the quality and quantity of mineral exports.

Guinea and Sierra Leone, for instance, do not control the grade and humidity of the bauxite and iron ores shipped by mining companies to smelters in Europe, Russia, North America and China. This makes estimating value, and therefore taxes owed, difficult.

Amid these challenges, there are some promising developments.

In recent years, many civil society activists and engaged members of parliament have identified tax gaps as a major issue and lobbied for stronger rules. Such external oversight can help reinforce the political will to address transfer mispricing and reduce the influence of miners on governments.

International initiatives like the OECD’s work on base erosion and profit shifting are integrating developing country concerns with a landmark meeting seeking inputs from developing countries into international tax rules in Kyoto in late June.

Regional organizations such as the African Tax Administrations Forum provide both technical assistance to member countries and a platform to develop regional tools and approaches.

Some of these approaches are unorthodox, such as the move toward simplified tax rules that rely on publicly quoted mineral prices or set maximum deductibility ratios for a range of mining companies’ typical expenses.

However, creative solutions should be welcomed as mineral-rich African countries work to stop long standing practices that drain of public coffers and set back development.

Co-authored by Thomas Lassourd, senior economic analyst at the Natural Resource Governance Institute (NRGI).