sharing in governance of extractive industries

Towards Harmonizing Fiscal Regimes in the Mineral Sector in Africa: Challenges and Opportunities


The  African Minerals Development Center (AMDC)  report examines the management of Africa’s mineral resources, with a particular focus on optimizing revenue  mobilization through the harmonization of fiscal regimes, in particular royalties, across the continent.
The report, commissioned by the AU Heads of States presents different options for harmonization and their implications for supporting domestic revenue mobilization and regional value chains. The report reviews experiences from other countries and regions, with view to identifying good practices for designing and implementing effective fiscal regimes in Africa.

While some progress has been made in harmonizing policy and regulatory frameworks in the mineral
sector, the report argues that fiscal regimes along the mineral value chain on the continent remain
incoherent, inconsistent and patchy. The choice of regimes, the design and types of instruments employed
and their implementation constrain opportunities for greater domestic revenue mobilization as well as
the emergence of viable regional value chains in Africa for the structural transformation of economies.
The report concludes that there is no one-size-fits-all approach: harmonization is not equal to
uniformization. Each country is unique in terms of mineral endowment, political economy, history and
social context. Fiscal harmonization experiences across countries are dynamic, multidimensional and
multiscale. They range from convergence and alignment to cooperation, coordination and standardization.
Much like an orchestra, considerable efforts will be required to streamline the different “notes” to sync
harmoniously for structural transformation.

African countries are displaying an overall trend towards harmonizing their royalty tax system, albeit at
the low end of the continuum or base of the pyramid. The harmonization takes the form of convergence,
through spontaneous and voluntary actions. The passive and uncoordinated yet similar choices made by
countries are based on applying some common design features of the royalty system. The convergence
is down to policy diffusion across countries and the influential role of international financial institutions
in mining sector reforms on the continent.

The gap between tax policy and tax implementation remains a key area for harmonization through
cooperation and coordination. While the average mineral royalty rates in Africa remain comparable to
those in other countries and in some instances are even higher, the actual revenues collected are generally
lower. In fact, headline royalty rates are poor indicators of total government revenues collected from the
minerals sector. This raises questions about the efficiency of the mineral royalty systems currently in use
and the capacity of the tax authorities to implement the agreed headline rates.

Curbing sophisticated tax dodging practices by mining companies remains the biggest obstacle to closing
the gap between headline royalty rates and actual revenues collected by African Governments. Illicit
financial outflows and practices that inhibit domestic revenue mobilization in the mineral sector are
large, growing and complex. They are global and regional in nature, necessitating collective action by
countries. But design and compliance gaps in the institutional frameworks in countries translate tax
evasion and avoidance opportunities into harmful cross-border illicit financial flows.

There are opportunities to harmonize policies, strategies and taxes in ways that encourage the emergence
of viable regional value chains around mining. Governments will need to seek an optimal mix of “sticks”
and “carrots’’, proactively identifying win-win opportunities for developing linkages into and out of the
sector and facilitating the emergence of viable national, regional and global minerals value chains.
A top-down, uniform reform of royalty rates remains geologically suboptimal, economically inefficient
and politically infeasible.

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