Base erosion and profit shifting in the mining sector: Protecting national revenue from hidden leakages

By Eric AYERTEY

Ghana’s mining industry has long been a cornerstone of the national economy. As Africa’s leading gold producer and one of the continent’s most attractive destinations for mineral investment, the country has benefited significantly from foreign direct investment, export earnings, employment creation, and government revenue generated from mining activities.

The sector’s importance to Ghana’s fiscal position cannot be overstated. According to the Ghana Chamber of Mines, producing member companies contributed GH¢17.68 billion in fiscal payments to the Government of Ghana in 2024, representing a 51.2 per cent increase over the previous year.

The sector also generated approximately US$7.05 billion in mineral revenue, of which US$4.99 billion, or 70.8 per cent, was retained within the Ghanaian economy through taxes, local procurement, wages, and social investments. These contributions demonstrate the critical role mining plays in supporting national development and economic growth.

Yet despite these impressive figures, concerns remain regarding the extent to which multinational corporations operating within the extractive sector may be engaging in Base Erosion and Profit Shifting (BEPS) practices that reduce taxable profits declared in Ghana.

While multinational enterprises contribute substantially to government revenue, aggressive tax planning strategies may deprive the country of additional resources needed to finance infrastructure, healthcare, education, and other development priorities.

The challenge for policymakers is therefore not simply attracting investment but ensuring that profits generated from Ghana’s natural resources are taxed where economic value is genuinely created.

Understanding Base Erosion and Profit Shifting (BEPS)

Base Erosion and Profit Shifting refers to strategies used by multinational enterprises to exploit gaps in international tax rules in order to shift profits from jurisdictions where economic activities occur to countries where taxes are lower or non-existent.

The Organisation for Economic Co-operation and Development (OECD) estimates that BEPS practices cost governments worldwide between US$100 billion and US$240 billion annually, representing between four and ten per cent of global corporate income tax revenues.

Developing countries are particularly vulnerable because they rely heavily on corporate taxation and natural resource revenues to fund public services and development programmes.

The mining industry is especially susceptible to BEPS risks due to its multinational structure, complex supply chains, large capital investments, and extensive cross-border transactions.

Why the Mining Sector Is Vulnerable

Mining operations typically involve multiple entities located across different countries. A mining company may extract minerals in Ghana, finance operations through a subsidiary in another country, market minerals through a trading hub located in a tax-friendly jurisdiction, and receive technical services from a parent company headquartered elsewhere.

Such structures create opportunities for profit shifting through several mechanisms.

Transfer Pricing Manipulation

Transfer pricing involves the pricing of transactions between related companies within the same multinational group.

For example, a Ghanaian mining subsidiary may sell gold to an affiliated marketing company abroad at a price below prevailing market rates. The foreign affiliate subsequently sells the gold at market value and records a larger share of profits outside Ghana.

Although transfer pricing itself is legitimate, manipulation of transfer prices can significantly reduce taxable profits reported within Ghana.

Excessive Interest Deductions

Mining companies often require substantial financing. Multinational groups may fund Ghanaian subsidiaries through related-party loans rather than equity.

Where interest charges are excessive, profits that would otherwise be taxed in Ghana are transferred abroad as deductible interest expenses.

Management and Technical Service Fees

Mining companies may pay management fees, technical service charges, administrative expenses, and consultancy fees to affiliated companies outside Ghana.

While genuine services should be compensated, excessive charges can reduce taxable profits reported locally.

Offshore Marketing and Trading Arrangements

Some multinational enterprises market minerals through offshore trading hubs located in low-tax jurisdictions.

In such arrangements, substantial profits may be recognised outside Ghana even though the underlying economic activity—the extraction of minerals—occurs within Ghana.

The Fiscal Importance of Mining to Ghana

Recent data from the Ghana Chamber of Mines underscores why profit shifting within the mining sector deserves serious attention.

In 2024:

• Mining companies paid GH¢10.3 billion in corporate income tax.
• Corporate income tax represented 58.2 per cent of the sector’s total fiscal payments.
• The mining sector accounted for 26.3 per cent of all corporate income tax collected by the Ghana Revenue Authority.
• Mineral royalties increased from GH¢2.8 billion in 2023 to GH¢4.9 billion in 2024.
• PAYE contributions amounted to approximately GH¢1.46 billion.
• Government dividend receipts from state participation in mining operations reached GH¢1.03 billion.
• The sector directly employed over 11,300 Ghanaians.
• Mining companies invested approximately US$28 million in community development projects.

These figures highlight the extent to which government finances depend on the performance and tax compliance of mining companies.

Given that more than one-quarter of all corporate income taxes collected nationally originate from mining companies, even modest levels of profit shifting could result in significant revenue losses.

The Hidden Cost of Profit Shifting

One of the greatest challenges in assessing BEPS in Ghana is the absence of publicly available estimates quantifying the exact amount of profits shifted out of the country.

However, the absence of precise estimates should not be interpreted as evidence that the problem is insignificant.

If only five per cent of the GH¢10.3 billion corporate tax base were eroded through aggressive tax planning, the resulting revenue loss could amount to hundreds of millions of Ghana Cedis annually. Such funds could finance schools, hospitals, roads, water projects, and critical social interventions.

Moreover, tax avoidance undermines public confidence in the fairness of the tax system, particularly when ordinary citizens and domestic businesses continue to bear their tax obligations.

Ghana’s Existing Mining Tax Framework

Ghana has established a comprehensive fiscal regime for mining operations.

Current key fiscal instruments include:

• Corporate Income Tax: 35%
• Mineral Royalty: 5%
• Government Carried Interest: 10%
• Withholding taxes on various payments
• National Fiscal Stabilisation Levy
• Pay-As-You-Earn taxes on employee income

In addition, Ghana has adopted transfer pricing regulations requiring related-party transactions to comply with the arm’s length principle.

These measures are intended to ensure that taxable profits reflect genuine economic activities conducted within the country.

Progress Made by the Ghana Revenue Authority

The Ghana Revenue Authority (GRA) has made considerable progress in strengthening tax administration and combating international tax avoidance.

Notable reforms include:

Transfer Pricing Audits

The GRA increasingly scrutinises related-party transactions and requires companies to maintain detailed transfer pricing documentation.

Thin Capitalisation Rules

These regulations limit excessive interest deductions arising from related-party financing arrangements.

Beneficial Ownership Reforms

Measures have been introduced to improve transparency regarding the ultimate owners of companies operating within Ghana.

International Cooperation

Ghana participates in international tax initiatives aimed at improving information exchange and combating tax avoidance across borders.

These efforts have strengthened the country’s ability to identify and challenge aggressive tax planning arrangements.

Lessons from Other African Countries

Several African countries have implemented reforms to address BEPS risks within the extractive sector. Countries such as South Africa, Zambia, Tanzania, and Botswana have strengthened transfer pricing enforcement, increased disclosure requirements, and enhanced the capacity of revenue authorities to audit multinational enterprises. These experiences suggest that robust tax administration, combined with transparent reporting requirements, can significantly improve revenue mobilisation without discouraging legitimate investment.

Policy Recommendations

To further protect Ghana’s tax base, policymakers should consider the following measures:

Strengthen Country-by-Country Reporting

Multinational enterprises should provide detailed information on revenues, profits, taxes paid, employees, and economic activities across jurisdictions.

Enhance Transfer Pricing Capacity

The GRA should continue investing in specialised economists, auditors, lawyers, and transfer pricing experts capable of analysing complex mining transactions.

Increase Transparency

Public disclosure of tax payments and related-party transactions would improve accountability and public trust.

Improve Inter-Agency Collaboration

Closer cooperation between the Ghana Revenue Authority, Minerals Commission, Bank of Ghana, Registrar of Companies, and Financial Intelligence Centre would improve oversight.

Leverage Technology and Data Analytics

Advanced data analytics can help identify unusual transactions and high-risk taxpayers for further investigation.

Promote International Cooperation

Since BEPS is inherently cross-border, Ghana should continue participating in international tax information exchange frameworks and OECD-led initiatives.

Balancing Revenue Protection and Investment Attraction

Addressing BEPS should not be viewed as anti-investment.

Foreign investment remains essential to the development of Ghana’s mining sector. Investors require certainty, stability, and a competitive business environment.

The objective of tax reform should therefore be to ensure that profits are taxed where value is created while maintaining Ghana’s attractiveness as a destination for responsible investment.

An effective tax system balances competitiveness with fairness. It rewards genuine investment while preventing artificial profit shifting arrangements that erode the tax base.

Conclusion

Ghana’s mining industry remains one of the country’s most important economic assets. The sector generated over US$7 billion in mineral revenue and contributed GH¢17.68 billion in fiscal payments to government in 2024 alone. These contributions support economic growth, employment creation, and national development.

However, the risks posed by Base Erosion and Profit Shifting cannot be ignored. While precise estimates of profit shifting within Ghana’s mining sector remain unavailable, international experience demonstrates that multinational enterprises can exploit gaps in tax systems to reduce taxable profits in resource-rich countries.

As Ghana seeks to strengthen domestic revenue mobilisation and reduce dependence on borrowing, protecting the mining tax base must remain a national priority. Strengthening transfer pricing enforcement, enhancing transparency, building technical capacity, and expanding international cooperation will help ensure that the wealth generated from Ghana’s mineral resources contributes fully to the country’s development aspirations.

Ultimately, the question is not whether multinational mining companies should earn profits in Ghana. Rather, it is whether those profits are being taxed fairly and appropriately in the country where the resources are extracted and the economic value is created.

Eric is an Accountant and Tax Consultant0244821335

[email protected]

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