ICTD Working Paper 9

The contribution of mining to economic and social development in Sub-Saharan Africa is under increased scrutiny and criticism. Minerals are non-renewable resources, and production represents a transformation from a sub-soil to a financial asset. Unless the gains are efficiently captured, saved and invested by the ultimate owner of the resource, the country in question could experience a net reduction in its national wealth.

Preliminary empirical evidence indicates that effective benefit-sharing in mining has been notoriously difficult to achieve. In this paper, we present a simple method to benchmark the degree of revenue-sharing in some major mining countries. This is utilised to estimate the amount of mining revenue foregone due to ineffective mining revenue-sharing in our case countries of Tanzania and Zambia during the period1998-2011. Using company-level data from the recently published Extractive Industries Transparency Initiative (EITI) reports in the two countries, we find that profit-based corporate tax made a very modest contribution to mining revenue, despite 5-10 years of operations under the current owners and a global mineral super cycle since 2005/6 (TEITI 2011; TEITI 2012; ZEITI2011; ZEITI 2012). Gross value-based corporate taxes, together with employee-based taxes, dominate the tax revenue collected from the mining sector.

The principal elements needed to secure improved revenue-sharing in mining are: i) robust fiscal design, including a progressive element to capture windfalls while encouraging cost-saving and production; ii) specialised tax administration for extractive industries and mining, to minimise the erosion of the tax base and to establish and enforce correct tax assessments; and iii) political will and accountability, together with government consistency, in order to secure the expected tax collection from mineral extraction over time with increased transparency of mining-related revenues.

Authors

Olav Lundstøl

Olav has eighteen years of continuous development economist experience in Latin America, Asia and Africa, working for both multilateral and bilateral agencies, and with an emphasis ranging from analysis, advice and management in the field of energy-extractives-climate, public financial management-taxation-audit, corruption-illicit financial flows and macroeconomic issues. He is the Policy Director of Tax and Capital Flight at NORAD.

Gaël Raballand

Gaël Raballand is a lead public sector specialist in the World Bank. He holds a PhD in economics and a degree in political science and international public law. He co-authored four World Bank books on transport and trade in Africa and has also been involved in several customs reforms in Sub-Saharan Africa.