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Wish you weren't here: transnationals on their tax holidays

15 April 2014 | Joseph Stead

Sierra Leone is not known as a holiday destination – it’s near the bottom of international rankings of countries in terms of poverty, health and deprivation and on average, its citizens do not survive to their 50th birthdays.

But for some multinational companies, the West African nation does offer spectacular holidays - from paying tax. In recent years, despite its people’s poverty, Sierra Leone has spent hundreds of millions of dollars on such give-aways.

A school in Gbap, Sierra Leone. Pic: Christian Aid / Heidi Bradner

Photo credit: Christian Aid / Heidi Bradner

Beneficiaries of the tax system

The biggest beneficiaries of all are foreign mining companies. They are in Sierra Leone to take its natural resources including diamonds, bauxite (used to make aluminium), iron ore and rutile (used, among other things, to make white paint).

Among the firms enjoying expensive tax holidays are two whose shares are traded in London: London Mining and African Minerals.

There is no suggestion that the companies have done anything wrong. But by letting them off many millions of dollars’ worth of tax, the Government is dramatically reducing the funding available for services that people need – and on which those living in poverty depend.

The statistics are shocking. According to Losing Out, a new report based on research by Sierra Leonean organisations, the government has given away more in tax breaks for foreign mining companies in recent years than it has spent on health and education.

In 2012 for instance, six foreign mining companies were let off US$150 million in sales taxes (similar to the UK’s VAT). Incredibly, this was considerably more than what the government actually collected in sales tax that year. Mining and exploration companies (including local ones) were also forgiven almost $70 million in customs duty.

By contrast, government spending on Sierra Leonean public services was pitiful – health services got $25.7 million in 2012, education got $32.2 million, roads $91.6 million and farming $30.2 million.

It’s worth noting that companies aren’t the only ones getting tax holidays – foreign embassies and non-governmental organisations (NGOs) do too. But since 2010, companies have cost the country by far the most.

Effectiveness of tax incentives

So why is the government turning away money which could improve life for people in Sierra Leone? The best-case explanation is that the Ministry of Mines offered tax holidays in the hope of attracting investment by foreign companies.

Unfortunately, the international evidence suggests tax giveaways are not much of a pull for foreign investors, who are more interested in factors such as political stability and the existence of good roads and other infrastructure.

Even the IMF is down on tax holidays. Indeed, the IMF, OECD, UN and World Bank warned G20 countries about the harmfulness of tax incentives back in 2011. They recommended that G20 governments set a good example by costing and reviewing their own tax give-aways – and encouraging G20-based companies to ensure that when tax incentives are negotiated, all the relevant parts of the government are involved.

But G20 countries have ignored these recommendations. So perhaps it is hardly surprising that in Sierra Leone too, the government has failed to justify the lavish tax holidays it has given some firms.

‘The government has produced no solid economic rationale for offering widespread tax incentives in Sierra Leone,’ warns Losing Out. ‘Assumptions are casually made about the effectiveness of tax incentives but no convincing case has been presented.’

Instead of a rigorous debate, and proper analysis of the costs and benefits of tax give-aways, foreign firms are getting their tax breaks from a small number of government ministers and officials, with little say for other ministries or Parliament, let alone the people of Sierra Leone.

Situations like this are ripe for corruption, although the new report does not suggest that any of the companies it names have paid bribes.

Losing Out is based on research by Sierra Leone’s Budget Advocacy Network and National Advocacy Coalition on Extractives (NACE), as well as Tax Justice Network-Africa. It was produced with support from Christian Aid, ActionAid and Ibis.

Plans for the future

Somewhat ironically, the Sierra Leone government itself has already identified that tax give-aways are potentially a problem - and even drafted a law to help combat it.  The Revenue Management Bill was proposed back in 2010, to help achieve transparency around tax incentives - but four years later, it still has not become law.

The report calls on the government to implement the Revenue Management Bill as soon as possible and to ensure that the Bill commits the government to producing an annual public statement on how much tax revenue it is giving away – and who is benefiting.

Alongside this, the report calls for a government review of all existing tax breaks, with the purpose of reducing them, and a ban on tax holidays being given to individual companies or organisations. Instead, tax holidays should be enshrined in law and granted to entire industries or sectors.

With such reforms, Sierra Leone’s Parliament, citizens and media will be able to properly and publicly debate the costs and benefits of tax incentives - not just suffer their consequences.

Joseph Stead is Christian Aid’s Senior Economic Justice Adviser

Find out more:

Losing Out is based on research by Sierra Leone’s Budget Advocacy Network and National Advocacy Coalition on Extractives (NACE), as well as Tax Justice Network-Africa. It was produced with support from Christian Aid, ActionAid and Ibis.

The original blog was published in the New Internationalist

 About the author

Joseph Stead - Christian Aid's economic justice adviser

Joseph Stead is Christian Aid's economic justice adviser.

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