How foreign mining firms cheat Africa out of billions
International Monetary Fund (IMF) has raised a red flag over tax avoidance by foreign mining companies doing business in Africa, saying countries such as Kenya lose up to Sh73 billion in tax revenues annually.
The findings show that sub-Saharan Africa nations, desperate to attract investors lowered tax obligations for mining firms, hence losing tax revenues. The other loophole used by mining corporations was profit shifting.
“New research shows that governments in sub-Saharan Africa are losing between Sh45 billion and Sh73 billion per year in corporate income tax revenues as a result of profit shifting by multinational companies in the mining sector,” IMF said.
Legislative rates
The IMF staff research shows that Kenya is one of the countries that have lowered tax rates for foreign mining firms relative to the legislative rates.
The report shows that mining firms pay 20 per cent tax compared to the 30 per cent statutory threshold for corporates.
Countries such as Kenya whose finances have been shredded by Covid-19 and high debt burden need this tax revenues to climb out of their problems, IMF argues.
Some of the key mining companies in Kenya are Base Resources which extracts titanium ore for export, Acacia Mining which has interests in gold mining in western Kenya and Tata Chemicals Magadi which has its operation in the Lake Magadi region in the Great Rift Valley.
Tata Chemicals is Africa’s largest soda ash producer and one of Kenya’s leading exporters with an annual production of about 360,000 tonnes of Soda Ash.
Profit shifting is a technique used by multinational corporations to pay less tax than they should that involves a multinational corporation moving the profit it makes in the country where it manufactures products or sells good and services into to a tax haven.
By shifting profit into a tax haven, the multinational corporation underreports the value of its profit in the countries where it produces or sells goods and services and so pays less or no tax in that country.
“Furthermore, governments have reduced corporate income tax rates in many sectors, including mining, amid competition to attract investment and efforts to boost economic development,” the IMF said.
Minimum taxation
In October, 2021, member countries of the Organisation for Economic Corporation and Development (OECD) agreed on a 15 per cent minimum taxation for multinational organisations.
However, IMF says Kenya is part of the countries that are yet to join the agreement.
“With Estonia, Hungary and Ireland having joined the agreement, it is now supported by all OECD and G20 countries. Four countries - Kenya, Nigeria, Pakistan and Sri Lanka - have not yet joined the agreement,” says IMF.
The agreement is primarily geared towards helping in instances where multinationals not just in the mining sector, but also technology firms such as Uber, Google, Facebook, Netflix fail to pay their fair share of taxes.
Kenya is targeting to tax online companies doing business in Kenya but do not pay taxes especially during the Donald Trump’s regime where American companies were protected from taxes.
Kenya has ramped up taxes especially digital service taxes helping to increase the cost of doing businesses for local companies yet has been unable to capture activities of multinational companies .
The Finance Act 2020 introduced Digital Service Tax (DST) as a tax that is payable on income derived or accrued in Kenya from services offered through a digital market place.
DST is payable at 1.5 per cent of the gross transaction value and is due at the time of transfer of the payment for the service to the service provider.
For residents and companies with a permanent establishment in Kenya, the DST will be an advance tax to be offset against the income taxes due in the course of the financial year.
In the case of non-residents and companies without a permanent establishment in the country, the Digital Services Tax will be a final tax.
