Sub-Saharan African (SSA) countries, including Malawi, are losing between $470 million (about K585 billion) and $730 million (about K599 billion) per year in corporate income tax from multinational enterprises (MNEs) tax avoidance.
This is according to a new research by the International Monetary Fund (IMF) into the extent of profit shifting in SSA mining titled ‘Tax Avoidance in sub-Saharan Africa’s Mining Sector’.
The report said the baseline estimate, which also includes SSA economies with mining, but not defined as resource intensive, suggests a revenue loss of about $600 million, based on tax rate differentials between African countries and offshore affiliates in the same MNE group.
The analysis also finds that rules to restrict profit shifting, for example, through limitations on interest deductions against corporate income taxes, can significantly reduce the extent of profit shifting.
Reads the paper in part: “Targeted policy actions could critically help resource-intensive countries in reducing tax avoidance in mining and foster revenue mobilization. A concerted effort to close off current profit shifting channels could pay dividends.
“Recommended actions include strengthening and simplifying transfer pricing protections, limiting interest deductions; improving tax treaty practices, limiting tax incentives, and strengthening investment negotiation practices.”
The IMF says countries will also need to engage closely with international efforts to reform corporate income taxation which can have implications on how mining MNEs profits are taxed.
The mining sector remains one area of realistic economic diversification, through which Malawi can increase its exports, attract foreign direct investments as well as diversify the government’s revenue base and achieve infrastructure developments.
Malawi produces cement, coal, crushed stone for aggregates, dolomite, limestone and some artisanal salt mainly for domestic consumption.
Currently, it is only gemstones and some limestone products that are serving the international markets and the rest of industrial mineral production services local market.
In an interview on Monday, Natural Resources Justice Network in Malawi chairperson Kossam Munthali observed that Malawi needs to have a clear mining framework on resource governance, which may include value realisation that hovers around exploration, production, environment protection and also on revenue management.
“Countries that have developed out of extractive sector have managed the revenue with a clear vision,” he said.”