On Tuesday, 15 April 2014 a group of NGOs launched a report titled "Losing Out" about the hundreds of millions of dollars lost due to tax concessions granted by the Government of Sierra Leone to especially iron ore mining companies. Following is the Executive Summary of the report
This report is the first attempt in Sierra Leone to analyse the government’s ‘tax expenditure’ – i.e., the amount of revenues lost by the government’s granting of tax incentives and exemptions. It shows that these revenue losses are extremely large. This means that the government is spending far less than it could on the country’s urgent development priorities, such as health, education and agriculture.
Taxes raised from companies and individuals fund key public services needed to promote the welfare of the population and reduce poverty. But tax incentives granted by the government are a major reason for Sierra Leone’s low tax revenues. The UN estimates that Least Developed Countries need to raise at least 20 per cent of their GDP through taxes to meet the Millennium Development Goalsby 2015. Yet Sierra Leone is way off this target, currently raising only around 10.9 per cent of GDP in taxes. The major tax incentives provided by the government include exemptions on customs duties and payments of the Goods and Services Tax, along with reductions in the rate of income tax payable by corporations, which are being granted supposedly to attract foreign investment.
A transparent tax system supports good governance and the accountability of policy-makers towards the public. But the granting of special tax incentives in opaque deals, at the discretion of individual ministers, without public scrutiny, undermines good governance and can increase the risk of corruption. It is not suggested that any of the companies mentioned in this report have been involved in any illegitimate activity. Tax incentives are granted in many countries simply to promote political patronage, not socioeconomic goals.
In Sierra Leone, parliament and the public lack information about the tax incentives granted and are usually not aware of the details until after they have been agreed, and sometimes not even then. It is currently impossible for elected parliamentarians, the media and civil society to scrutinise and debate these deals properly to ensure that the country optimally benefits.
Revenue losses
Current tax incentives are resulting in massive revenue losses for Sierra Leone. Using figures obtained from the National Revenue Authority, we estimate that the government lost revenues from customs duty and Goods and Services Tax exemptions alone worth Le (Sierra Leonean Leone) 966.6bn (US$224m) in 2012, amounting to an enormous 8.3 per cent of GDP. In 2011, losses were even higher – 13.7 per cent of GDP. The annual average loss over the three years 2010-12 was Le 840.1bn (US$199m).
There has been a massive rise in revenue losses since 2009 – the result of tax incentives granted to the mining sector in relation to the major investments that took place during 2010-2012. However, the government is set to lose further revenues by providing significant corporate income tax incentives to mining companies. We estimate that the government will lose revenues of US$131m in the three years from 2014-16 alone from corporate income tax incentives granted to five mining companies – an average of US$43.7m a year. Nearly all of these losses are the result of the agreements with African Minerals and London Mining. If tax expenditure continues in its present trend, it is likely that Sierra Leone will lose more than US$240m a year from tax incentives in the coming years.
Development foregone
Tax expenditures could instead be spent on improving education and health services, investing in agriculture – the backbone of the economy –and in providing social protection to vulnerable groups. It will be impossible for the government to implement its poverty reduction strategy,the Agenda for Prosperity, without a large increase in revenue. Yet, in 2011, the government spent more on tax incentives than on its development priorities, and in 2012 spent nearly as much on tax incentives as on its development priorities.
In 2012, tax expenditure amounted to an astonishing 59 per cent of the entire government budget. Put another way, government tax expenditure in 2012 amounted to more than eight times the health budget and seven times the education budget.
Problems with tax incentives
Proponents of tax incentives often argue that they are needed to attract foreign investment but evidence from elsewhere in Africa suggests that in most cases they are not. A report by the African Department of the International Monetary Fund, focusing on tax incentives in East Africa, notes that ‘investment incentives – particularly tax incentives – are not an important factor in attracting foreign investment’. The countries that have been most successful in attracting foreign investors have not offered large tax or other incentives; more important factors in attracting foreign investment are good quality infrastructure, low administrative costs of setting up and running businesses, political stability and predictable macro-economic policy.
Government officials in Sierra Leone, interviewed for this research, thought that the tax incentives for the extractive sector were excessive and resulted in a huge loss of revenue. They argued that government should provide an improved enabling environment for foreign investment, such as good infrastructure, rather than providing incentives.
Government policy
There are three major problems with government policy on tax incentives. First, too many tax incentives are granted to individual companies at the discretion of a very small number of ministers and officials. Such a system can lead to an increased risk of corruption and the possibility that deals will be offered to companies that are outside or go beyond national legislation. In fact, Sierra Leone’s constitution requires tax waivers to be approved by parliament.
Secondly, related to this, transparency is extremely poor. Many of the tax incentives are negotiated behind closed doors between government and companies, with no effective parliamentary or media scrutiny. The government does not publish any figures on total tax expenditure. Thirdly, the government has produced no solid economic rationale for offering widespread tax incentives in Sierra Leone. Assumptions are casually made about the effectiveness of tax incentives, but no convincing case has been presented.
In our interviews, officials from the National Revenue Authority expressed frustration at the current fiscal regimes, saying that there was insufficient consultation between the agencies granting the tax incentives (the Ministry of Mines and Mineral Resources, in the case of mining) and those responsible for generating revenue, such as the National Revenue Authority. A deeper underlying problem is that tax revenue collections in Sierra Leone have often been politicised. Tax incentives are often seen as tools for delivering political patronage – providing benefits to key segments of society to maintain political influence. It is unclear if the government is committed to increasing or reducing tax incentives. For example, the Budget Speech for 2011, delivered in November 2010, outlined a ‘comprehensive range of tax incentives’ for investors while at the same time announcing a new Revenue Management Bill that would aim to reduce them.
Implementing the draft Revenue Management Bill is crucial in that it would require the government to publish a statement of its tax expenditure, detailing all tax exemptions, the beneficiaries and the revenue foregone. The Bill was meant to be effective from 2011, but progress towards enacting it has been very slow. Moreover, the government’s latest Letter of Intent to the International Monetary Fund, of September 2012, which outlines continuing tax reforms, says nothing about reducing tax expenditure. Similarly, the 2013 Budget Speech committed the government to ‘review the import duty exemptions regime’ but said nothing about generally reducing tax expenditure.
Recommendations
We recommend that the government should:
• enact the Revenue Management Bill into lawas soon as possible and ensure that the Billcommits the government to produce an annualpublic statement on its tax expenditure, thebeneficiaries and revenue losses
• ensure that the Revenue Management Bill includes an additional clause that mandates the Ministry of Finance and the National Revenue Authority to provide parliament with a cost benefit analysis of all tax incentives granted
• review all existing tax incentives granted with the purpose of reducing them, and ensure that parliament is able to play an oversight role in this
• abolish discretionary tax incentives (i.e., those given to individual companies or organisations). Any tax incentives granted must be in accordance with national legislation, and thesame for all companies/organisations in that sector. This means that all current mining agreements must be reviewed and revisedwhere necessary, to bring them into line with legislation
• ensure that fiscal regimes in specific sectors, especially mining and agriculture, are subject to proper parliamentary debate and approval and subject to cost/benefit analyses
• ensure that audits are undertaken to guarantee company compliance with fiscal regimes and sectoral tax incentives
• work with other governments in the Economic Community Of West African States (ECOWAS) to ensure that there is no regional ‘race to the bottom’ in lowering tax rates and increasing tax incentives to corporations.
We recommend that parliament should:
• press for the above measures, and especially ensure that the Revenue Management Bill is discussed and passed before the start of the next financial year
• build the capacity of the Finance and Public Account Committee so that it can play its oversight role regarding tax expenditures effectively.
We recommend that civil society organisations should:
• press the government and parliament to promote the above measures, and emphasise the importance of accountability and transparency on tax expenditures in their work.
(C) Politico 17/04/14
