Transfer pricing and gold mining in Senegal

British satirical magazine Private Eye, which often carries excellent financial scoops in its back pages, has a story in the latest edition (No.1620, 16 April 2010) about how Australian mining company Mineral Deposits Ltd, which extracts gold from the Sabodala region in Senegal, West Africa, and ilmenite and zircon from quarries on the Grand Cote north of Dakar, declares no profits in that country.

Instead, according to Private Eye, profits are diverted to Mauritius, in the Indian Ocean, which - alas for it - has no gold, but happily for Mineral Deposits has a tax rate on corporate profits of zero percent [though according to Mauritian deputy prime minister, rumours that the island is a tax haven are a "myth" - and the OECD agrees. Needless to say, TJN isn't taken in by such denials].

We won't take you through the various steps in this process since the Eye has kindly explained these in full here. But here are a few highlights:

"Senegalese gold mining company Sabadola Gold Operations SA is owned through a Mauritius company, Sabadola Gold (Mauritius) Ltd, while zircon mining company Grand Cote Operations SA is similarly owned by a Mauritian company, Mineral Deposits Mauritius Ltd. In 2009 the Senegalese gold company paid A$12.4m in tax-deductible “technical assistance” fees to its Mauritian parent, while the zircon ilmenite mining company paid A$1m to its Mauritian parent for the same “service”. Strangely, no technical services or anything else are performed in Mauritius. A Mineral Deposits employee in Dakar admitted to the Eye it doesn’t even have an office in Mauritius."

Alongside 'technical services' or lack thereof, Mineral Deposits also leases the mining kit used by its Senegal operations through a Mauritian company. But that's not the end of it. As the Private Eye article points out, despite global borrowings of just $65 million across its entire operation, Mineral Deposits charged tax deductible interest payments of A$42 million to its Senegalese subsidiaries in 2009:

"Even these tricks pale next to the financial alchemy that last year created A$42m in tax-deductible interest payments by the Senegalese companies to the same Mauritian companies they paid technical assistance fees to. Such interest would require loans from the tax haven of around $800m, yet Mineral Deposits Ltd’s worldwide accounts show the company and all its subsidiary operations had borrowings of just $65m between them. The extra debt was simply created internally to shift profits around tax-efficiently."

This raises pretty large questions about the capitalisation of the Senegalese subsidiaries. And whilst on that subject, Mineral Deposits Ltd receives investment finance from private equity fund managers, including Actis, which was created back in 2004 when the British government's overseas development fund, the Commonwealth Development Corporation, re-branded its fund management operation.

The end result is entirely predictable. Despite the corporate commitments to sustainable development and all that bla-bla, despite high-level rhetoric about cracking down on tax havens, and despite bold words about helping poorer countries develop self-reliance through mobilisation of their own resources, its the poorest countries that suffer. In this instance, according to Private Eye:

"With the help of these schemes, in 2008 and 2009 Mineral Deposits paid just A$45,000 in tax (around £20,000), while benefiting from tax exemption to the tune of A$14.6m, which would provide quite a few Senegalese schools and hospitals."

As a final remark, we at TJN are frequently challenged by accountants and others to provide evidence of our concerns about trade mis-pricing and the inadequacies of transfer pricing rules. Here it is.