Sector Programme
Extractives and Development
PLANTA DE FUNDICION DODE RUN - Kopie

Good Governance Tax Compliance in the Extractive Sector

An effective tax framework – strengthened through tax policy reforms and rigorous tax audits – is a critical prerequisite for exploiting the full tax potential of a country. In order to enhance domestic resource mobilization in partner countries, Germany supports the capacity building of tax authorities to identify tax risks and to investigate suspected cases of aggressive tax avoidance and tax evasion.

Background

The OECD estimates that developing countries lose about 16 percent of their annual tax revenues through aggressive tax avoidance strategies of multinational companies. In resource-rich countries predominantly this is true for the mining, oil and gas sector. The shortfall of revenue makes it difficult for countries to mobilise own resources urgently needed for their sustainable development and the implementation of the Agenda 2030 in line with the Addis Ababa Action Agenda (AAAA).

An effective tax framework – strengthened through tax policy reforms and rigorous tax audits – is a critical prerequisite for exploiting the full tax potential of a country. The domestic resource mobilization capacities of resource-rich countries are particularly threatened by the exploitation of tax loopholes and profit shifting (Base Erosion and Profit Shifting (External link), BEPS) by multinational extractive corporations. The manipulation of the tax base often takes place through so-called (internal) transfer pricing.

Transfer pricing refers to the pricing of goods and services that are sold within the various business units of an enterprise. Where transfer pricing practices are misused for tax avoidance purposes, profits are shifted between individual entities of an enterprise, often to entities in regions with low tax requirements. The country in which the profit was originally generated loses out on revenue that could play an important role in its development and the achievement of the SDGs.

Sector Programme Commitment

To strengthen the capacities of tax authorities in partner countries with active extractive sectors, the Sector Programme “Extractives and Development” in cooperation with the African Tax Administration Forum (ATAF), developed the Transfer_Pricing_Risk_Tool in 2017. Effective risk assessment mechanisms are essential, especially for developing countries with limited audit resources, to distinguish between abusive and standard industry practices. The toolkit addresses this challenge by offering a user-friendly, straightforward, step-by-step guide on how to determine whether high-risk transactions in the extractive sector should be subjected to transfer pricing audits. It also provides the detailed information tax authorities need to identify and evaluate transfer pricing issues.

Focusing on capacity building of tax authorities, trainings based on the toolkit were subsequently conducted for ATAF member countries in Côte d'Ivoire, Cameroon, Liberia, Zambia, and Tanzania, and two trainings were organized with the Inter-American Center of Tax Administrations (CIAT) in Panama. In 2019, the Sector Programme “Extractives and Development“ facilitated a regional dialogue among tax authorities from seven countries in Southern Africa, with the aim of improving information-sharing among authorities.

Good Governance
Mining vehicles

Anti-Corruption Internal link

Corruption risks extend along entire mineral value chains in the extractive sector, from bribery in the acquisition of licences to the misappropriation of public funds. Corruption distorts competition, reduces government revenues and undermines development-oriented budget allocation. Get more information on the topic of anti-corruption here.

Good Governance
Engineers at an open pit mine in Peru

Extractive Industries Transparency Initiative (EITI) Internal link

The Extractive Industries Transparency Initiative (EITI) advocates for greater financial transparency and accountability of public revenues in the extractive sector. Read here how the Extractives and Development Sector Programme is involved.

Good Governance
Woman at a diamond mine

Good Financial Governance and Extractives Internal link

Good financial governance (GFG), i.e. the responsible handling of public finances, can contribute to an independence from international donors in the extractive sector. Standards and principles on transparency, accountability and rule of law, should be applied. Read here how the Extractives and Development Sector Programme is taking action in this regard.

Good Governance
Gold

Illicit Financial Flows Internal link

Combating illicit financial flows is an important concern of German development cooperation. The adoption of the EU Conflict Minerals Regulation will give new impetus to the issue of illicit financial flows in the extractive sector.

Local Value Addition
ANTAMINA 6

LION - Local Investment Opportunities in Natural Resource Projects Internal link

LION models procurement expenditures of mining companies to provide local decision makers and suppliers with information on the huge procurement demand in the mining sector.

Local Value Addition
Abbau mit schweren Maschinen

Local Procurement Reporting Mechanism (LPRM) Internal link

Sustainable economic growth requires the diversification of the local economy, the establishment of supply chains and the targeted promotion of small and medium-sized enterprises. To strengthen local procurement in the long term, the Mining Local Procurement Reporting Mechanism (LPRM) was developed.