Keypoints:
- Africa risks losing mineral wealth through profit shifting
- Stronger tax authorities can protect mining revenues
- Critical minerals offer leverage for fairer investment deals
AS the world races to secure cobalt, copper, lithium, graphite, manganese, nickel and rare earths – minerals essential to electric vehicles, batteries, renewable energy and advanced technologies – some African countries are finding themselves at the centre of a new global scramble for resources.
But there is a danger that the continent could repeat an old mistake: exporting its natural wealth while allowing much of the resulting profit to accumulate elsewhere.
African governments must therefore look beyond the size of the investment cheques being offered by multinational mining companies.
They must ask a more fundamental question: how much of the wealth generated from Africa’s minerals will remain in Africa?
Taxation holds the key
Taxation is central to the answer. It is not enough to collect royalties and corporate taxes while sophisticated multinational structures move taxable profits across borders.
The UN Conference on Trade and Development has estimated that about $88.6bn leaves Africa annually through illicit financial flows, including commercial and tax-related practices. Under-invoicing of commodity exports alone has been estimated to cost the continent tens of billions of dollars.
The precise figures vary according to methodology, but the scale of the challenge is undeniable. Africa is losing resources at precisely the time its governments desperately need revenue for infrastructure, education, healthcare and industrialisation.
Multinational companies do not necessarily have to break the law to exploit weaknesses in the international tax system. One major technique is transfer pricing.
A mining company can sell minerals or services to another company within the same corporate group. If the price is manipulated, profits can be shifted from the African country where the mineral is extracted to a jurisdiction with lower taxes.
There are other methods. A subsidiary may borrow heavily from a related company abroad, using interest payments to reduce taxable profits.
Companies can charge African operations for management, technical, procurement or consultancy services supplied by related entities elsewhere. Complex corporate structures can also exploit differences between national tax systems and tax treaties.
These transactions are not automatically illegal. The concern is aggressive tax avoidance and artificial profit shifting – arrangements designed to make profits appear where taxes are lowest rather than where the economic value is created.
Tax authorities need sharper tools
African governments must become much smarter about this. They need tax authorities capable of understanding multinational corporate structures, analysing transfer pricing arrangements and challenging transactions that do not reflect economic reality.
The African Tax Administration Forum has already helped African tax administrations strengthen their capacity to tackle transfer pricing, aggressive tax planning and illicit financial flows. Its work in the mining sector has identified risks involving marketing arrangements, related-party debt, procurement and management services.
This matters because mining is particularly vulnerable to profit shifting. The value of a mineral can change dramatically between extraction, processing, marketing and final sale.
Without the expertise and information needed to follow that value chain, African tax authorities can end up taxing only a small part of the wealth generated.
African countries must also share information and cooperate more closely. A multinational enterprise operates across borders. African tax authorities cannot afford to remain confined within national boundaries.
Investment should not mean surrender
This is not an argument against foreign investment. Africa needs investment, technology, expertise and access to global markets. But investment should not mean surrender.
The unprecedented demand for critical minerals gives African governments an opportunity to negotiate from a position of greater strength.
If Europe, the United States, China and other major economies want secure access to Africa’s minerals, governments should insist on transparent contracts, fair taxation, local processing, skills transfer and greater domestic value addition.
They should also be cautious about excessive tax holidays and investment incentives. There is little sense in attracting billions of dollars in mining investment only to discover that the host country receives a fraction of the economic value because profits have been shifted elsewhere.
Africa needs a stronger voice on tax
The UN process towards a Framework Convention on International Tax Cooperation could reshape elements of the global taxation system.
For Africa, it represents an important opportunity to press for rules that better reflect the interests of developing countries.
African governments should push for greater transparency, effective information exchange, stronger measures against profit shifting and a fairer allocation of taxing rights.
Most importantly, countries where minerals are extracted and genuine economic activity occurs must have a meaningful right to tax the resulting wealth.
Africa has heard promises about the transformative power of natural resources before. Oil, gas, gold, diamonds and copper have generated enormous wealth, yet too often the producing countries have struggled to turn that wealth into broad-based prosperity.
The critical minerals boom must be different
The critical minerals revolution must be different.
Minerals in the ground are not development. Foreign investment is not development. Export earnings alone are not development.
Development comes when countries convert natural wealth into public revenue, productive industries, decent jobs and better lives.
The world wants Africa’s critical minerals. Africa should welcome the investment, but it must make sure it gets a fair return.
The continent must negotiate not as a desperate supplier of raw materials, but as the owner of resources that the global economy urgently needs.
If African governments fail to strengthen their tax systems, the critical minerals boom could become another great giveaway.
If they get it right, these minerals could help finance the industrial transformation that generations of Africans have been promised.
This time, Africa must ensure that the wealth leaves the ground – but not the continent.
Desmond Davies is the Editor of Africa Briefing Magazine. Read this column in the September–October edition of Africa Briefing Magazine, alongside analysis and commentary on the forces reshaping Africa’s economies, politics and global partnerships
