Gold mining in Mali: Who profits?

Published by MAC on 2010-06-26
Source: Eurodad

Gold mining in Mali: Who really profits?

By Maria Victoria Garcia Ojeda

Eurodad

16 June 2010

A new International Monetary Fund (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).

Mining companies in Mali are not paying enough taxes

Following IMF recommendations, Mali's government decided to reduce the royalty rate applied to gold mining companies from 6% to 3% in order to encourage investment in this sector.

The government of Mali's current fiscal regime set for the gold extractive sector consists of a mixed taxation system based on royalties, a profit tax and depletion allowance on profits.

The latter implies that gold mining companies have a tax waver of up to 28%. This waver is supposed to act as an incentive to stimulate investment in this industry, based on the rationale that resources such as gold will eventually deplete.

This is hard to justify for a highly profitable extractive sector such as gold mining. In addition, under the mining codes of 1991 and 1999, mining firms can benefit from a five-year profit tax holiday, which has up until now contributed to an even greater loss of revenue for the country.

As a fidh report shows, these mining codes were the result of applying World Bank advice to privatize the mining sector and attract international investors. Interestingly, the IMF paper acknowledges that "the state has not been able to collect its full share of revenues" due to this measure, and in fact recommends eliminating tax holidays granted to mining companies in Africa.

Globally, as Christian Aid's report "Undermining the poor: mineral taxation reforms in Latin America" demonstrates, tax incentives have generally led to a loss of tax revenues for developing countries whereas there is no conclusive evidence that it has contributed to attract further foreign investment. Yet, while the latter seems to be generally acknowledged by IFIs, the IMF paper still recommends lower royalties as a way to attract foreign investment,

Do developing countries lack the technical expertise to manage fiscal systems?

The IMF paper recommends lowering corporate tax on profits, arguing that "tax administration is much simpler in a royalty system because it is only necessary to measure the quantity of gold extracted and apply a price. However, for implementing profit taxes the authorities need to audit a company's accounts".

It is true that many developing countries' tax authorities lack the technical expertise and means to hold firms fiscally accountable, but this is just one side of the problem.

On the other side, international financial accounting standards do not oblige companies to report their profits made and taxes paid on a country by country basis, thus paving the way for transfer pricing abuses, which in turn affect levels of tax revenues for the State.

In any case, obstacles in the developing country should not impede profit taxing. On the contrary, they exemplify the urgency to strengthen developing countries' tax administration capacities and expertise and to adopt a new international accounting standard obliging Multinational Companies (MNCs) to disclose their accounting information on a country by country basis, which would allow governments like Mali's to raise their fair share of revenue that could be used to finance their development.

IFI recommendations are weak

The IMF paper argues that Mali would receive a fair share of revenue if the royalty rate were about 3.5% and warns that beyond that rate firms would reduce investment, leading to a decline in government revenues.

While higher than the existing 3% rate, this proposed rate would be well below the previous 6% rate.

It does not seem plausible that a royalty rate of 6% would crowd-out investments in the sector as international prices of 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. Broadly, the tax revenues in Mali in 2008 remained 14.4% of GDP- well below the already conservative 17% required by WAEMU (West African Economic and Monetary Union).

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. This means that by applying a 3% rate Mali has missed out on between $4.5 and $13.5 million.

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.

It also shows that illicit flows from Africa accelerated by 25% between 2000 and 2008, which coincided with a boom in natural resources prices and international trade. Much of these flows are driven by transfer pricing abuses by MNCs.

In fact, it is common practice for companies operating in the extractive sector in developing countries to practice transfer pricing abuses that allow them to hide their profits made in a particular country, and consequently to avoid paying taxes.

This situation can easily be extrapolated to the case of Mali and even beyond. Transfer pricing abuse represents a real problem for African countries as a whole. According to a GFI report, from 1970 to 2008 the volume of these illicit flows approached $1.8 trillion, growing at an average rate of 11.9% per year.

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.

Gold represents more than 75% of Mali's total exports but it accounts for only 8% of the country's GDP.

Similarly, royalties, profit taxes and dividends accounted for only 17% of total government revenue in 2008 despite the very high prices of gold.

Furthermore, the impact of the mining sector on employment is extremely low. Just 1% of the total labour force including both formal and informal employment is employed in this sector. The added value of gold mining remains very weak.

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

Perhaps multinational mining companies operating on Mali's soil can provide an answer to this pertinent question.