Financial Transparency Coalition

A new IMF working paper entitled “Mining Taxation: an application to Mali” analyses the structure of the mining taxation system in Mali. It follows the regressive path set forth by the World Bank, consisting of attracting Foreign Direct Investments (FDI) by lowering royalty taxes in the gold mining sector at the expense of lower government revenues collected through these royalties.

International gold prices have sharply escalated in the last decade, yet International Financial Institutions (IFIs) are still advising African countries to lower profit taxes and royalties to gold mining firms. They are overlooking the issue of transfer pricing abuse by companies in the extractive sector, a practice consisting of selling goods and services between branches of the same company at knockdown prices in order to shift money out of the country and dodge taxes. This practice deprives developing countries from as much as USD 160 billion of lost tax revenues each year.

Consequently, African countries have lost millions of dollars in government revenues that could have been used to combat poverty and achieve the Millennium Development Goals (MDGs).

IFI recommendations are weak

Gold exports have been sharply and constantly increasing throughout the decade; according to the African Economic Outlook Report, the price of a gold ounce increased from $309.97 in 2002 to $871.71 in 2008. Yet, African countries have been recurrently advised by the IFIs to lower royalty rates. Consequently, while MNCs operating in the sector have spectacularly increased their benefit margins, African states have shortfalls when collecting their fair share of revenue.

Tax benefits and transfer pricing abuses: the way to underdevelopment

According to the IMF paper, in 2008 gold production in Mali was worth almost $150 million. Applying a royalty rate of 3%, the government would have raised $4.5 million. If the government had applied the previous 6% rate it would have reached $9 million. Moreover, if the rate applied had been 12%, as considered in the report “Golden profits on Ghana’s expense”, the revenue collected by the government in royalties would have been $18 million in 2008. The same report shows that another major gold exporter, Ghana, lost $36 million of gold revenue between 2007-2009 as a result of transfer mispricing and subsequent lower royalty rates.

Limited impact of the mining sector on Mali’s development

As Oxfam America has stated, “Mali’s gold exports have more than tripled in the last decade yet its citizens have so far seen little benefit from mining revenues”.  Indeed, Mali ranks 178 out of 182 countries in the 2009 Human Development Report, being the world’s fifth poorest country. The IMF paper acknowledges this and recognises that the gold mining sector has very limited positive spillovers to the Malian economy.

With such a combination of transfer pricing abuses, low royalties and low corporate profit tax plus a weak contribution to Mali’s development employment, the question arises: “Who is profiting from the exploitation of Mali’s principal natural resource?”; certainly not the Malian people.

Read full article here