The International Institute for Sustainable Development has urged African governments, including Malawi, to rethink mining tax incentives which it says are a significant source of potential revenue loss for African governments.
In its analysis on rethinking tax incentives in the mining sector in Africa, the institute observed that long seen as a mandatory tool to attract foreign investments, mining tax incentives have lost their allure.
The institute argues that while mineral resources represent a significant opportunity for domestic resource mobilisation, most African countries have failed to fully realise the expected revenues from the sector due to several external and internal factors, including poorly designed and overly generous tax incentives.
Reads the analysis in part: “African governments might achieve greater benefits by focusing on improving socio-economic infrastructure, providing comprehensive geological data, and fostering political and economic stability rather than relying solely on tax incentives.
“For a long time, the advice given to countries was to provide economic stimuli to compete for investment and to boost the economy. That narrative has since changed. Currently, there is a developing global consensus on the need to limit tax competition.
According to the institute, after decades of intense tax competition between countries, the international community, through the OECD/ G20 Inclusive Framework on Base Erosion and Profit Shifting, is finally addressing the race to the bottom by introducing a global minimum tax of 15 percent.
This set of rules will ensure that multinational companies are liable for a minimum effective tax rate of 15 percent no matter where they operate.
The global minimum tax has already come into effect in South Africa and Mauritius while several other countries on the continent are contemplating their adaptation approach.
The global minimum tax takes the pressure off developing countries to offer some of the most harmful incentives and to cushion their tax base.
In Malawi, mineral resources are usually extracted by private companies and individuals. Government taxes these resources to receive a share of the value generated from their extraction.
Among others, the applicable taxes include a 30 to 35 percent corporate income tax, a 16.5 percent value added tax, a 20 percent withholding tax with a 10 percent withholding tax on dividends and a 10 percent non-resident tax.
There is also a 15 percent resource rent tax on profits, a 15 percent import customs and excise duties and a five percent royalties for industrial minerals, according to the paper.
Among others, applicable investment incentives in the minerals sector include start-up capital expenditure accrued within four years of mining license being granted, which is entitled to 100 percent allowance in the first year of assessment, but can be spread out over 10 years.
In his paper titled ‘Proposed Investment Incentives for the Mining Sector’, minerals and geology expert Grain Malunga said generalised assumptions for the use of tax incentive programmes must be carefully analysed through mine specific considerations outside agriculture, manufacturing and tourism incentive lens. Commodity price risk can bring financial loss for producers and consumers.
“Global geopolitics has the ability to polarise nations leading to a decline in demand for new investments and marketability of mineral products,” he said.
Earlier, Minister of Finance and Economic Affairs Simplex Chithyola-Banda acknowledged the extraction sector’s exposure to exploitation which could undermine the sector’s economic benefits.
Mining, which is part of the Agriculture, Tourism, Mining and Manufacturing (ATMM) strategy is touted as a sector that can help to grow the economy in the short-to-medium-term.
The sector contributes about one percent to the country’s economy.
