Lessons from Magufuli. How Kenya Can Deter Tax Avoidance by Mining Companies

 

By gatuyu t.j

Acacia, a global mining company, is in trouble. Tanzania Revenue Authority has hit the company with a huge tax bill, after president Magufuli accused it of not being truthful in their tax affairs. The mining companies in Kenya should get alarmed. Most of them, such as Tullow Oil and Africa Oil, have corporate structures laced with mischief. They use entities incorporated in tax havens to hold mining rights. This is certainly a ploy to evade taxes. What else would it be? They should be stopped. But President Magufuli is justified.

Introduction

The Business Daily of July 22 reports that the Tanzanian President, John Magufuli, has threatened to close all mining companies in Tanzania. The bone of contention is the mining firms operating there had failed to account and pay a fair share of taxes accruing from their mining activities.  Acacia, a leading gold miner, has been the prime target.

This is a culmination of the trend. Since his ascendancy to power, President Magufuli has been on warpath, in efforts to streamline the extractives industry and ensure Tanzania gets returns. Even though critics have lashed at the president, arguing that his actions will scare away foreign investors, a critical look at the scenario reveal that President Magufuli may be justified.

President Magu
President Magufuli. Photo-Courtesy 

Tax evasion practices

Tax evasion by multinationals in extractive industry is a rampant in developing countries. Most of the multinationals operating in the sector employ aggressive tax avoidance strategies. This includes the use of intricate corporate structures as a way of reducing their revenue payments. This has become one of the banes for Africa, making the continent not to benefit from her vast natural resources.

A report by a joint team of African Union and the United Nations Economic Commission for Africa, which was chaired by Thabo Mbeki, reveals as much. It found out that in the year 2015 alone, African countries may have lost up to United States Dollars 50 billion through tax avoidance schemes. This therefore explains the ire by President Magufuli at companies such as Acacia, for not being truthful in their tax obligations.

As with Tanzania, the extractives industry in Kenya is equally prune to tax evasion practices. A study dated May 2016 by Oxfam, a global charity, titled “the Use of Tax Havens in the Ownership of Kenyan Petroleum Rights” reveals how mining firms operating in Kenya employ convoluted corporate structures as mechanism of holding petroleum rights in the country.

Most of the mining firms are registered in tax havens such as Mauritius, Jersey, Bermuda, Cayman Islands, British Virgin Islands, Netherlands, among others, which creates a room for such companies to erode their Kenyan taxable base and then shift profits to those offshore low tax jurisdiction entities.

For instance, the study states, 12 mining firms in Kenya own the right to mining blocks in Kenya through offshore subsidiaries incorporated in tax havens. Other 17 mining companies have made use of tax havens in their wider corporate structures.  Examples of such companies include British Tullow Oil (Netherlands), Africa Oil (Barbados), ERHC Energy (Virgin Island) Octant Energy Corp, Ophir Energy (Bermuda), Swiss Oil (Mauritius), Total (Netherlands), among others.

Use of tax havens may not be illegal as a matter of fact. However, it is a harmful tax practice and a tax evasion red flag. Tax havens obscures accountability and creates room for international tax evasion. Again, complex corporate structures used by companies such as Africa, Oxfam study indicates, oil are just smokescreens to avoid accountability.

With multinationals that are not shying away from employing aggressive tax planning practices, Kenyans should therefore be worries that the government may not collect any sufficient taxes from the mining industry when they are officially commercialized. This concern was raised in report of December 2016 by the Ministry of Energy and Petroleum on Social Assessment of the Petroleum Sector in Kenya, which called for raising accountability bar in the sector.

Minerals are finite and can only be extracted once. It is vital that the country should benefit from this resource to maximum possible extent. The governments should facilitate this by protecting revenue base from the incomes generated as taxation on one the most viable mechanisms for a country to reap from mining wealth.

Mechanisms to stop tax evasion

When mining firms employ harmful tax practices, such as use of tax havens, it results into a Potential tax leakages. This leads to missed tax revenues and the country fails to benefit from their vital natural resource. When the resource is depleted, the multinationals will vacate to explore elsewhere.

Kenya needs to avoid to pre-empt the scenario President Magufuli fighting.  This could be achieved in following ways. First, the country should streamline her taxation regime in the extractive industry before commencement of production to deter tax leakages at that stage.

Second, high disclosure requirements should be imposed for firms licensed in the petroleum extraction industry. Such high disclosure requirement is in line with international best practice. This will see veils of corporate structures employed by mining companies being lifted to reveal the ultimate beneficial owners of rights in the mining sector.

Third, Multinational companies operating in extractive industry should be required to adopt country-by-country reporting framework, where they publish financials of each country they operate in. This is one of the recommendations by the OECD as one of the action plans to combat international tax avoidance. This will increase public transparency on deter potential profit shifting. These efforts will go along in ensuring the country benefits from her mineral resources.

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