This report is based on research undertaken between December 2015 and June 2017 by the Budget

Advocacy Network (BAN) with support from the Open Society Initiative for West Africa (OSIWA).

The report has been written by the Budget Advocacy Network.

Special thanks go to Abu Bakarr Kamara of BAN, Christian B. Hallum, staff of the Open Society

Initiative for West African and the Sierra Leone National Revenue Authority Without their support,

expertise and repeated comments, this report would not have been possible.

BAN, is fully responsible for the content of the report, including any omissions or errors.

Acknowledgment

BAN 2017 Page i

About Budget Advocacy Network The Budget Advocacy Network (BAN) is a Network of Civil Society Organisations in Sierra Leone

committed to work on budgets and budget policies to enhance policy making and implementation

for sustainable and equitable development. BAN was established in 2006. BAN consists of local

and international organizations such as the Christian Aid (CA) Campaign for Good Governance

(CGG) Network Movement for Justice and Development (NMJD), Western Area Budget Education

Network (WABEAN), Actionaid International Sierra Leone (AASISL), Search for Common Ground

(SFCG), and Transparency International (TISL).

Table of Content

BAN 2017 Page ii

Acknowledgement……………………………………………………………………………. …….i

Table of Content…………………………………………………………………………………….ii

List of Tables………………………………………………………………………………… ……iii

List of Figures………………………………………………………………………………. …….iii

Acronyms…………………………………………………………………………………… ……..iv

Executive Summary…………………………………………………………………………. …….1

1.0 Background and context………………………………………………………………………4

1.1 Objectives of the study………………………………………………………….............5

1.2 Structure of the report…………………………………………………………...............5

Section 2: Trends in FDI and Foreign Participation in Sierra Leone

Section 2: Trends in FDI and Foreign Participation in the Sierra Leone............................ ……5

2.1 An overview of the role of multinational activity in Sierra Leone……………....... ……5

2.2 Illicit Financial Flow (IFF) from Sierra Leone………………………………..................7

Section 3: Sierra Leone tax system and transfer pricing architecture…………………..... ……9

3.1 Overview of tax reform measures in Sierra Leone ……………………....………. ……9

3.1.1 Outcomes of reform measures in tax administration in Sierra Leone…..........10

3.1.2 Reasons for low revenue collection…………………………………….... ….12

3.2 Overview of transfer pricing architecture in Sierra Leone………………………. ……18

3.3 Overview of the Mining sector in Sierra Leone…………………………………….... 20

Section 4: Estimation of magnitude of transfer mispricing in Sierra Leone……………… ….21

4.1 Methodological approach………………………………………………………… …..21

4.2 Computation of revenue loss owing to trade mis-pricing using illicit financial

outflows………………………………………………………………………………… ….22

4.3 Computation of royalty revenue loss using arm’s length comparable uncontrolled

price method.................................................................................................................... …23

4.4 Development Forgone………………………………………………………………. …25

Section five: Summary and recommendations……………………………………………… …25

References………………………………………………………………………………………... 28

List of Tables

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Table 1: Tax/ revenue concessions granted mining companies in Sierra Leone………………..... 12

Table 2: : Duty-free Concession by Category of exemption, 2015 (in LeM)……………………. 16

Table 3: Growth in Duty waiver granted between 2014 and 2015………………………………. 17

Table 4: Estimation of revenue loss due to transfer mis-pricing in Sierra Leone from

2004-2014 in millions of US$…………………………………………………………………... 23

Table 5: Estimate of revenue loss from mispricing of minerals ………………………………… 24

List of Figures

Figure 1: Trends in FDI in Sierra Leone in millions of US$ …………………………………….. 6

Figure 2: Foreign equity ownership index (100= full foreign ownership allowed)……………..... 7

Figure 3: Illicit Financial Flows from Sierra Leone compared to average IFF from

ECOWAS…………………………………………………………………………………………. 8

Figure 4: Trade misinvoicing (outflows) against IFFs from Sierra Leone……………………….. 9

Figure 5: Component of illicit financial outflows in percentage of total illicit

financial outflows ………………………………………………………………………………... 9

Figure 6: Trends in Domestic revenue to GDP ratio…………………………………………… .. 10

Figure 7: Sierra Leone revenue GDP compared to other selected countries…………………… ...11

Figure 8: Trends in Tax-Mix in Sierra Leone……………………………………………………. 12

Acronyms

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AEO - African Economic Outlook

AML - African Minerals Limited

CGT - Capital Gains Tax

CWT - Contractor Withholding Tax

DTD - Domestic Taxes Department

EIU - Extractive Industry Unit

FDI - Foreign Direct Investment

GDP - Gross Domestic Product

GFI - Global Financial Integrity

GST - Goods and Services Tax

IFF - .Illicit Financial Flows

IMF - International Monetary Fund

MLA - Mining Lease Agreement

MNE - Multinational Entities

MNCs - Multinational Corporations

OECD - Organisation for Economic Cooperation and Development

PCA - Post Clearance Audit

Over the past decades Multinational

Corporations (MNCs) have taken a prominent

position in global international businesses. They

have expanded beyond their local territories with

branches, subsidiaries and stakes across the

globe.

Whilst transacting with others, it has often

become necessary for MNCs to do so with their

subsidiaries or part of their vertically integrated

chain, either domestically or internationally. The

prices set for such transactions are known as the

TRANSFER PRICE, determined for tax

purposes. It is not transfer pricing that is

therefore the problem; it is the potential for

transfer price manipulation that governments

fear and want to prevent through regulations. By

mis-pricing their internal transfers multinational

companies can shift profits out of the

jurisdictions where their production takes place,

to jurisdictions with lower tax rates, leaving little

to tax for the country that hosts the company.

This study therefore attempts to assess and

quantify the domestic revenue that is lost

through trade and transfer mis-pricing by MNCs

in Sierra Leone. It also identifies institutional

and policy changes geared towards addressing

transfer pricing practices among MNCs in Sierra

Leone.

The study takes two broad approaches to provide

an estimate of trade and transfer mis-pricing.

Firstly, we use the Trade Mis-invoicing Model to

estimate tax revenue losses from illicit capital

lflight. This model looks at trade mis-pricing,

namely the overpricing of imports and

underpricing of exports on customs documents,

which allow the illegal transfer of money abroad.

Executive Summary

Secondly, we use the Arm’s Length principle

to estimate transfer mis-pricing for three main

mining products for the periods 2013 and

2014 - a principle that presupposes that

national resources should be sold for not less

than the market value. The products include

Iron ore, Rutile, and Bauxite. We have used

the Comparable Uncontrolled Price (CUP)

method to establish whether the declared sales

price for these minerals for the purpose of

royalty payment, satisfies the Arm’s Length

principle.

The study notes that in addition to the

challenges of tax incentives to revenue

performance, transfer mis-pricing and other

forms of tax avoidance practices remain

channels through which Sierra Leone loses

huge tax revenue, annually. However, the

government transfer pricing rules are largely

untested and currently not being implemented

to clarify what approach to follow in the

implementation of the section dealing with

transfer pricing in the Consolidated Income

Tax Act 2000.

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Administratively, the revenue

administration has no specific unit dealing

with transfer pricing issues, and audits of

transfer pricing issues are not carried out

as part of general audits. Thus, the failure

to have in place the commensurate

administrative capacity to actively enforce

Section 95(1) of the Income Tax Act 2000

has led to revenue loss.

REVENUE LOSSES It is revealed in the study that the country has

seen a strong growth in Foreign Direct

Investment in recent years from as low as

US$8.62 million in 2003 to as high as US$950.5

million in 2011 before declining to US$225.1

million (in 2012) and US$144.1 million (in

2013). However, this growth in FDI seems to

have come with much stronger illicit financial

outflows and trade mis-invoicing outflows. It

was observed that the average Illicit Financial

Flows (IFFs) between 2004 and 2014 more than

doubled (i.e2.5 times higher) that of FDI for the

same period.

DEVELOPMENT FORGONE

RECOMMENDATIONS

We recommend that: Civil society should push for the fiscal

authorities to require multinational

corporations to publicly disclose country

reports which should entail their revenues,

profits, losses, sales, taxes paid, subsidiaries,

and staff levels, as a means of detecting and

deterring abusive tax avoidance practices.

Development partners should develop the

individual and institutional capacity on

transfer pricing of the revenue authorities in

Sierra Leone.

They should support civil society and

legislators in their efforts to participate in

tax dialogue, to monitor the operations of tax

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The cost of implementing the Government of Sierra Leone Education Sector Plan (ESP) is Le 4.1 trillion (US$951 million over five years. Of this

amount Le1.8 trillion (US$76 million) is required to achieve universal access and quality primary level education over five years. Of the total amount

budgeted for the ESP, government has identified a revenue source of US$570.1 million with a funding gap of US$381 million (Education sector Plan

2014-2018)

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The study estimates that an average of US $83.7

million was forgone as corporate tax between

2004 and 2014 through trade mis-invoicing .

And with the iron ore production since 2011,

revenue loss from such practices actually

increased from as low as US$ 14.1 million to

US$ 205.95 million between 2010 and 2013. This

estimated loss is considered conservative since it

does not capture other IFF channels such as

thin capitalisation.

Specifically, the study also estimates that

between 2013 and 2015 a total of US$3.69

million was lost in respect of mis-pricing of iron

ore sales, whilst US$1.28 million was lost due to

mis-pricing in Bauxite trade for the same

period. And for 2015, mis-pricing in Rutile

trade resulted in a loss of US$0.773 million in

respect of royalty payment.

The study argues that despite the figures being

conservative, the estimates highlight the

magnitude and extent of the issue of trade and

transfer mis-pricing on the mobilisation of

domestic revenue in Sierra Leone. If fiscal

authorities had been able to control such a

practice, additional revenues would have been

collected between 2010 and 2013 (US$205.95

million)

to fund over half of the financing gap of

US$381 million to implement the five-year

education sector plan. Or alternatively, saving

this amount would have been sufficient to

implement the Health Strengthening Strategic

Plan for 2015 with estimated cost of US$126.64

million to implement the five pillars in the

plan for 2015.

In terms of development forgone, US$3.96

million loss in respect of mis-pricing of iron

ore is 5 times the cost of procuring text books

and teaching and learning materials for all the

pre-primary and primary schools in 2015. The

mis-pricing in bauxite (US$1.28 million) is

more than the amount required to construct a

water supply system in Tiama Njala (as stated

in the 2016 Budget). The mis-pricing in Rutile

can improve Mile 91/ Yoni Bana water supply

source system hence reducing the challenges

citizens in that area are facing to access water.

Alternatively, the combined losses can procure

new ferries to ply between Freetown and

Lungi hence easing the huge challenges

citizens are facing to and from the airport

town and its environs.

1

administrators, and to hold government to

account for their revenue and expenditure

policies.

The NRA should create and capacitate a

transfer pricing unit within the Domestic Tax

Department (DTD). This will require

building the audit capacity in specialised

sectors such as mining, finance and banking,

telecommunications, etc.

Efficiently implement the transfer pricing

provisions in the Income Tax Act and issue

transfer pricing regulations to clarify what

approach companies should follow in

complying with provisions in the Act. ATAF

strongly encourages the strengthening of

domestic tax laws and tax policy to expand

the Africa tax base against international

harmful tax practices and Transfer Pricing

practices. In South Africa, the introduction

of new a Transfer Pricing Rule in 2012

resulted in a USD 3.2 billion increase in

revenue by 2013. In Zimbabwe in 2015,

changes in the domestic rules and transfer

pricing resulted in USD 105 million of tax

revenue.

The Government of Sierra Leone should

boost customs enforcement by providing

appropriate training and equipment to better

detect the intentional mis-invoicing of trade

transactions with support from Development

Partners. One particularly important tool for

stopping trade mis-invoicing, as it happens, is

access to real-time, commodity-level world

market pricing information. This would

allow customs officials to tell whether a good

is significantly underpriced or overpriced in

comparison to its prevailing world market

normal price. This variance could then

trigger an audit or another form of further

review for the transaction.

To institute a process of verifying the quality

and quantity of exports from the major

mining sites, particularly that for iron ore, in

order to counter trade mis-invoicing. As the

price of a ton of iron ore varies significantly

depending on quality, it is very important to

ensure a fair valuation, otherwise it might be

tempting for some exporters to continuously

declare lower grade in order to evade taxes.

Ensure that fiscal authorities are able to

actively participate in the G20 and OECD-

endorsed global movement toward the

automatic exchange of financial information

(i.e. Global Forum on Transparency and

Exchange of Information for Tax Purposes)

with support from development partners.

This will require technical assistance in data

management and use. As an entry point, the

African Tax Administration Forum (ATAF)

has developed a practical manual providing

guidance on how African countries can

implement effective exchange of information,

which fiscal authorities in Sierra Leone can

benefit from given that the country is a

member of ATAF.

Make country-by-country reporting public,

thereby ensuring that the National Revenue

Authority, civil society and other

stakeholders get access to relevant

information which can expose risks of profit

shifting.

Ensure that an intergovernmental body on

taxation is established under the auspice of

the UN to lead on reforming international

taxation .This will give the Government of

Sierra Leone a seat at the table instead of the

current situation where the OECD leads on

international taxation.

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For over a decade, Sierra Leone’s domestic

revenue as a percentage of Gross Domestic

Product (GDP) - averaging 10.9 percent - has

continued to remain below the average of 15

percent for Sub-Saharan Africa (SSA). Low

revenue performance implies less resources

available to be spent for development without

direct donor involvement. Two studies on Sierra

Leone, (Budget Advocacy Network 2013) and

(Jibao, 2014), have shown that tax incentives

granted to specific taxpayer groups through

targeted tax deductions, credits, exclusions and

tax holidays are responsible for such relatively

low revenue-to-GDP ratio.

In addition to the challenges of tax incentives to

revenue performance, transfer mis-pricing and

other forms of tax avoidance practices remain

channels through which developing countries

lose huge tax revenue annually. Over the past

decade Multinational Corporations (MNCs) have

taken a prominent position in global

international businesses. They have expanded

their businesses beyond their local territories

with branches, subsidiaries and stakes in

businesses across the globe. Whilst transacting

businesses with others, it has often become

necessary for MNCs to do so with their

subsidiary or part of their vertically integrated

chain, either domestically or internationally. The

prices set for such transactions are referred to as

the transfer price determined for tax purposes.

There are both internal and external motivations

for MNCs to establish transfer prices for

intra-firm trade in goods, business services

and/or intangibles, which have been well

established in the Literature. Many foreign

affiliates are run as profit centres [Eden (2010)];

as a result, the rewards of the top management

team in these affiliates depend on their affiliates’

profits. The setting of transfer pricing can

therefore be internally driven, as a way to both

motivate managers and monitor subsidiary

performance. Externally, MNCs have to pay

corporate income taxes on their domestic and

foreign source income, necessitating that they set

transfer prices for cross-border trade flows.

Customs authorities also require transfer prices

for intra-firm imports of parts, components and

finished goods, either for customs duties or rules

of origin purposes.

For instance, Sierra Minerals - the only bauxite

company - has a 20-year agreement to sell 90%

of its bauxite to its owner Alum SA refinery

registered in Romania and China. The bauxite is

purchased by an aluminium company registered

in the British Virgin Islands (a country regarded

as a Tax Haven), affiliated with the parent

company (Alexandra 2015). Whilst this report is

not making an accusation that Sierra Minerals

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The findings from BAN (2013) confirm that

revenue loss from customs duty and Goods

and Services Tax (GST) exemptions amounted

to US$224 million (8.3% of GDP) in 2012. In

addition, estimated annual average loss over a

three year (2010-2012) period was US$199

million. The analysis further projected an

annual average revenue loss of US$131 million

in the form of corporate income tax incentive

granted to mining companies from 2014 to

2016.

Transfer mis-pricing, as distinct from

transfer pricing, is the over- or under-

invoicing of related party transactions in

order to avoid government regulations (e.g.

under-invoicing to avoid paying the Goods

and Services Tax or to exploit cross-border

differences in these rates - for example,

shifting deductible expense to the high tax

location and revenues to the low tax location

in order to reduce overall corporate tax

payments). In the extractive industry, mis-

pricing can occur in the form of understating

the value of minerals sold to related parties

or independent intermediaries. Such practice

in the extractives industry would lead to

potential reduction in Royalties (where linked

to transaction value; Corporate Income tax;

Excess Profit Tax; and Withholding Tax).

1.0 Background and context

is engaged in transfer mis-pricing, it nevertheless

notes that such an arrangement risks under-

invoicing given that the local company is selling

to a related party that is registered in a country

with a very low corporate tax rate.

However, issues relating to Illicit Financial

Flows (IFFS) especially trade mis-pricing have

not received much attention in the country, thus

Budget Advocacy Network and partners have

commissioned this study to understand the

magnitude, nature and direction of transfer and

trade mis-pricing in Sierra Leone.

1.1 Objectives of the study Specifically, the study attempts to:

Determine the revenue that is lost to transfer

and trade mis-pricing practices and weigh it

against benefits brought by the lured investors

and the development forgone;

Assess transfer mis-pricing governance,

financing and politics/policies;

Review Sierra Leone’s transfer mis-pricing

Patterns and Architecture;

Establish the various modes of transfer mis-

pricing being used by the MNEs;

Provide information, using pictograms and the

latest data available, on the breakdown of

available transfer mis-pricing and patterns in

Sierra Leone;

Provide recommendations necessary for

developing an advocacy strategy that will

guide a coalition of CSOs working on tax in

their lobbying and advocacy work in Sierra

Leone.

1.2 Structure of the report Following the background and context is an

overview of the importance of multinational

activity in Sierra Leone over the past five years -

i.e. trends in FDI in Sierra Leone, foreign

participation authorised in different sectors,

exports and imports. The next section assesses

the tax system as well as the main drivers of

transfer mis-pricing in Sierra Leone. The

legislative framework to curb the practice is also

discussed in this section. This is followed by an

assessment of capacity and resources of the

National Revenue Authority (NRA) to

understand and implement transfer-pricing rules.

Another section estimates the magnitude of

transfer mis-pricing. The final section

recommends and concludes.

2.1 An overview of the role of

multinational activity in Sierra Leone

Foreign Direct Investment (FDI), it has been

argued, is very relevant in boosting the

development agenda of developing countries.

Proponents of the FDI-development nexus argue

that Multinational Corporations (MNC) and their

affiliates have over the years helped create

millions of jobs, transferred technology,

upgraded skills, fostered competition, and

contributed to the fiscal standing of many

economies.

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Illicit financial flows are different from capital flight, a term that includes both licit and illicit capital. Licit capital flight is recorded and tracked,

significantly lowering the probability that it has a corrupt or criminal source. In contrast, IFFs are by nature unrecorded, and cannot be used as public

funds or private investment capital in their country of origin. The vast majority of illicit financial outflows is due to trade mis-invoicing (see Global

Financial Integrity Report, 2014).

2

2

It is not transfer pricing that is therefore the

problem; it is the potential for transfer price

manipulation that governments fear and want

to prevent through regulations. The risk of

transfer mis-pricing is likely to increase as

multinationals become more active in the

country particularly through subsidiaries. The

dominant role of multinationals in Sierra

Leone over the past decade makes the country

vulnerable to transfer pricing manipulation.

Section 2: Trends in FDI and

Foreign Participation in Sierra

Leone

Through capital spillovers, FDI has encouraged

the adoption of new production technologies;

and foreign investment has also helped break up

cozy local oligopolies and cartels (World Bank,

2010). Critics of FDI however argue that its

impacts are often limited and in some cases

detrimental owing to the consequences of

crowding out local competition, enclave

production with limited forward and backward

linkages, and “race to the bottom” effects often

related to labour and environmental issues

(World Bank 2010). Whilst it is beyond the

scope of this study to analyse in detail the pros

and cons of FDI, it is noted that the dominant

role of multinationals in developing economies

makes the region mostly vulnerable to transfer

pricing manipulation.

In Sierra Leone the importance of FDI has

grown over the years from as low as US$8.62

million in 2003 to as high as US$950.5 million

in 2011 before declining to US$225.1 million in

2012 and US$144.1 million in 2013. But it

started increasing again in 2014 (Figure 1).

Year-on-year since 2008 FDI doubled and

between 2010 and 2011 it actually quadrupled.

In terms of GDP, the net FDI increased from

3.1% in 2003 to a high 38.7% and 32.9% in 2011

and 2012 respectively before declining sharply

to 12.9% and 5.8% in 2013 and 2014

respectively (IMF, 2014). When compared to

total FDI in the Economic Community of West

African States (ECOWAS), Sierra Leone's share

of FDI also increased from as low as 0.2% in

2003 to 4.7% in 2011 before plummeting to

1.3% and 1.0% in 2012 and 2013 respectively;

its shares however increased to 3.1% in 2014.

The significant growth of FDI in 2011 is due to

the massive injection of foreign funds by the

African Mineral Limited resulting from the Iron

Ore renaissance.

A policy granting full foreign ownership of

business entities has been used by most

developing countries as a strategy to attract FDI

and foreign subsidiaries in their respective

countries. However, such a policy increases the

risk of transfer mis-pricing as it allows

multinationals to control their subsidiaries to the

same extent as their equity proportion (total

control), compared to situations where

government is a key stakeholder of the company.

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The study does not however conclude categorically that an increased activity of MNCs immediately leads to increased transfer mispricing, but argues

that such dominance of MNCs could pose a risk of transfer which requires policy makers to strike the right balance between FDI and tax losses.

With the rebirth of Iron ore in 2011, the country realized a huge inward investment as well as the significant rail and port infrastructure investment to

support the operation of the project, via its subsidiary African Rail and Port Services (SL) Ltd.

3

Figure 1: Trends in FDI in Sierra Leone in millions of US$

4

Source: UNCTAD stat, 2015

3

4

In Sierra Leone, the Investment Promotion Act

(2004) provides for equal treatment of foreign

and domestic investors with respect to ownership

of local companies. Sierra Leone allows a large

percentage of foreign ownership across multiple

sectors (see Figure 2). Overt statutory ownership

restrictions are imposed on only a small number

of industries. As at 2010, foreign capital

participation was prohibited in the air and sea

port operation sectors, in particular, as these

facilities were owned and operated directly by

the government through the Ministry of

Transport and Aviation. Since 100 percent of net

profits can be repatriated, full foreign ownership

in key sectors (mining, telecommunications etc.)

may be facilitating resource drain from the

country.

2.2 Illicit Financial Flow (IFF) from

Sierra Leone The United Nations adopted the Sustainable

Development Goals (SDGs) in September 2015,

which includes, in Goal 16.4, a target that

countries will “by 2030, significantly reduce

illicit financial and arms flows, strengthen the

recovery and return of stolen assets and combat

all forms of organised crime.” This statement,

coupled with that seen in the Addis Action

Agenda, underscores the international

community’s recognition of the severity of the

illicit flows challenge and its embrace of efforts

to tackle illicit flows in order to promote

development and vigorous societies [ Kar and

Spanjers (2015)].

Illicit Financial Flows is defined in the Global

Financial Integrity (GFI) report as illegal

movements of money or capital from one

country to another. GFI classifies such flows as

illicit if the funds crossing borders are illegally

earned, transferred, and/or utilised. If the flow

breaks a law at any point, it is illicit (Kar and

Spanjers, 2015).

In Sierra Leone, IFFs in cumulative terms

amounted to US$1.58 billion between 2003 and

2014 with an unweighted annual average of

US$558 million for the same period.

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The port is now privatized and a private company Bollore, a foreign firm now owns capital in the port operation.

These funds typically originate from three sources: commercial tax evasion, trade misinvoicing and abusive transfer pricing; criminal activities,

including the drug trade, human trafficking, illegal arms dealing, and smuggling of contraband; and bribery and theft by corrupt government officials.

5

Source: World Bank 2010

Figure 2: Foreign equity ownership index (100 = full foreign ownership allowed)

6

5

6

0%10%20%30%40%50%60%70%80%90%

100%

100%

75%

100% 100% 100% 100% 100%

80%

100% 100% 100%

Report on illicit financial flows commissioned

by the African Union/Economic Commission

for Africa conference of Ministers of Finance,

Planning and Development in 2012 estimates

that currently Africa is losing US$50 billion

annually in IFF; and it is estimated that

Africa needs an additional $30–$50 billion

annually to fund infrastructure projects

(Foster and Briceno-Garmendia (2010) in

AU/ECA 2015).

Figure 3 shows that Sierra Leone’s IFF has been

fluctuating; it decreased from US$152 million in

2003 to US$94 million in 2004; increased

continuously to US$309 million and US$891

million in 2005 and 2006 respectively before

dropping sharply again to US$45 million in

2007. Sierra Leone recorded its highest ever IFF

in 2009 and 2010 with an IFF of US$1.915

billion and US$1.791 billion slightly below

ECOWAS average of US$1.939 billion and

US$1.980 billion respectively.

It was observed from this study that for Sierra

Leone, there is a strong positive correlation

between FDI and IFF with an estimated

correlation coefficient of 0.68 (r=68) between

2004 and 2014. More importantly, the average

IFFs between 2004 and 2014 more than doubled

(i.e.2.5 times higher) that of FDI for the same

period.

GFI measures illicit financial outflows using two

sources, namely, deliberate trade mis-invoicing

(gross excluding reversals or GER) and leakages

in the balance of payments (hot money narrow or

HMN). Trade mis-invoicing (outflows) is the

primary measurable means for shifting funds out

of developing countries illicitly (Kar and Spanjer

2015).

In the case of Sierra Leone, on average trade

mis-invoicing (outflows) had accounted for

about 95.7% of IFFs whilst leakages in the

balance of payment accounted for the remaining

4.3%.

Figure 4 depicts that since 2004 a greater

portion of illicit financial outflows from Sierra

Leone is due to trade mis-invoicing.With regards

the component of IFFs, Figure 5 depicts that

about 94% of trade mis-invoicing outflow

between 2004 and 2014 was due to import over-

invoicing in Sierra Leone, whilst the share of hot

money narrow to IFFs is 4% and only 2% is

accounted for by export under invoicing.

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The correlation result shows that there is co-movement between FDI and IFF in Sierra Leone and this relationship is significant at 5% level of

significance.

Illicit capital flight amounts to stealing from already poor countries. illicit flows have a negative impact on the countries’ development efforts: the

most serious consequences are the loss of investment capital and revenue that could have been used to finance development programmes, the

undermining of State institutions and a weakening of the rule of law ( Ministerial statement issued after the meeting of the ECA Conference of African

Ministers of Finance, Planning and Economic Development in March 2014 in Abuja.

7

Source: Kar and Spanjers computation (2015)

Figure 3: Illicit Financial Flows from Sierra Leone compared to average IFF from ECOWAS

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3.1 Overview of tax reform measures

in Sierra Leone One major administrative reform that took place

in the Sierra Leone tax system was the creation

of a semi-autonomous revenue administration.

Following an in-depth study on the hitherto

revenue generating departments of the Income

Tax and the Customs & Excise a semi-

autonomous revenue administration called the

National Revenue Authority (NRA) was created

in 2002 by an Act of Parliament. This Act

mandated the NRA to collect both direct and

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Both export under-invoicing and import over-invoicing lead to an understatement of corporate profits. Whilst the former undervalues export sales the

latter raises import costs, lowering corporate profit whilst shifting a significant portion abroad. There may be an added incentive to over-invoice

imports in Sierra Leone as import duty for most MNCs are exempt from both import duty and GST, and much lower for raw materials and other

production inputs.

Note that under invoicing accounts for about 95% of total trade mis-invoicing inflows in Sierra Leone between 2004 whilst the remaining 5% is due to

export over invoicing.

9

Figure 4: Trade misinvoicing (outflows) against IFFs from Sierra Leone

Source: Kar and Spanjer’s computation (2015)

Figure 5: Component of illicit financial outflows in percentage of total illicit financial outflows

10

Section 3: Sierra Leone tax system

and transfer pricing architecture

indirect tax revenues. Following this creation, a

modernisation reform programme which came

through recommendations by a 2004 IMF Fiscal

Affairs Department Mission began. Since the

modernisation of revenue administration

initiative was recommended and embraced by

fiscal authorities in the country, several

programmes have been implemented. Reforms

have ranged from the formation of the Non-Tax

Revenue department (NTR) in 2004, the

introduction of Taxpayer Identification Numbers

(TINs) in 2009, the launching of the Automated

System for Customs Data (ASYCUDA++) and

the implementation of the Goods and Services

Tax (GST) in 2010, establishment of the

Domestic Tax Department (DTD) in early 2011

and Post Clearance Audit Unit (PCA) in 2011,

the introduction of the Domestic Tax

Information System (DTIS) in 2013,

introduction of small and medium term regime

in the same year (2013), and the establishment of

the Extractive Industries Revenue Unit (EIRU)

in 2014.

3.1.1 Outcomes of reform measures in

tax administration in Sierra Leone

The trends in domestic revenue to GDP

resulting from major reform measures

undertaken by the National Revenue Authority in

Sierra Leone are shown in Figure 6.

Figure 6 shows that in the first few years of the

formation of the Revenue Authority, revenue

collection surged from a low 7% of GDP prior

NRA to peak at 12.0% in 2003, but subsequently

declined to about 10.1% in 2007. It gradually

increased to 10.7% in 2009 before remission

again to 9.3% in 2010. This scenario is not

uncommon as experience from other countries

that have implemented administrative reforms

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This unit is meant to serve as a fiscal safety net and to reduce intrusive examinations through risk audit based approach. In principle, this task is performed on all persons/companies involved in the accomplishment of customs formalities (import & export). The exercise is done to ascertain the correctness and completeness of all declarations and to further assess compliance with laid down Customs laws and regulations. As a trade facilitation tool, the PCA is anchored on a comprehensive annual audit plan.

Domestic Revenue defined as tax and non-tax public revenues excluding grant

11

Figure 6: Trends in Domestic revenue to GDP ratio

Source: National Revenue Authority Revenue Report 2015

11

23

12

11.8 12 11.811.1 11

10.110.5 10.7

9.3

11.412.2 12.5

10.610.1

0

2

4

6

8

10

12

14

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

similar to those introduced in Sierra Leone in

2002 show similar trend. Recognising this trend,

fiscal authorities in Sierra Leone embarked on

conscious efforts to continuously deepen the

reforms whilst at the same time consolidating the

earlier successes through further expansions in

the revenue base and modernisation of the

operations of the authority to avoid the risk of a

relapse into inefficiencies, corrupt practices and

complacency on the part of the champions of the

reform.

With that, domestic revenue to GDP increased

steadily to a high 12.5% in 2013 but declined to

10.6% and 10.1% in 2014 and 2015 respectively,

owing to the twin shock of the Ebola outbreak

and a drop in global commodity prices in the

same period. The drop in commodity prices

resulted in the administration of two major

mining companies – African Minerals Limited

and London Mining. Figure 6 further indicates

that at 10.1% in 2015 Sierra Leone tax-to-GDP

ratio is far below the tax-to-GDP ratio of low

income countries average of 15%,

and lower than most countries in Africa (see

Figure 7).

In terms of tax mix, Figure 8 also depicts that

since 2010 revenue from income, profit and

capital gains has increased steadily whilst the

share of customs and other import duties to total

domestic revenue has declined. Revenues from

mining royalties and licenses increased steadily

between 2011 and 2013 but slightly declined in

2014 and 2015 due to the drop in commodity

prices; domestic indirect taxes, especially from

GST/VAT, have also shown an increased share

since 2010. Thus, in terms of tax mix, it is

observed that the importance of direct taxes has

grown over the years and now accounts for an

average 42% of domestic revenue collection.

However, revenue forgone through relatively

high level of both legal and illegal revenue

concessions and exemptions and trade mis-

pricing (outflows) has the potential to erode the

strength of domestic taxes in the country.

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It is understood that this has developed through to a desire to attract investors to Sierra Leone, but many decisions have been made without a proper

analysis of the benefits versus costs of granting such concessions.

13

Figure 7: Sierra Leone revenue GDP compared to other selected countries

Source: IMF, Fourth Review (2015)

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0

5

10

15

20

25 21.8

1619.1 19.2

15.8

10.1

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One major reason for such relatively low

revenue-to-GDP ratio is the tax incentives

granted to specific taxpayer groups through

targeted tax deductions, credits, exclusions and

tax holidays in the tax system of Sierra Leone.

Sierra Leone provides investment and mining

companies with numerous arrays of tax

incentives. These tax incentives, either provided

through tax laws, any other law or any

administrative order or agreement (called by

whatever name), that allow special exclusion,

exemption, or deduction from the tax base or

which provide special credit, preferential rates

of tax or a deferral of tax liability that includes

tax holidays, duty exemptions, exemptions from

royalty, etc. have revenue implications. In

addition, the system under which these tax

incentives are provided in Sierra Leone to

mining companies is on a case-to-case basis

without any unified approach or any broad

policy framework and uniform legal basis (See

Table 1).

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Figure 8: Trends in Tax-Mix in Sierra Leone

Source: MRP/National Revenue Authority Revenue Reports (2010-2015)

Revenue Handled

General Legislation

African Minerals Limited 2010

Koidu Holdings Limited 2010

London Mining Company Limited 2012

Sierra Minerals Holding Limited 2012

Sierra Rutile 2002 (& 2004 Amendment)

Tonguma Limited 2012

Lease Rent US$500,000 As in law US$200,000 in 2011 & adjusted annually by 3% (USD XXX in 2014

As in law As in law US$400 in 1989 & adjusted annually by 5% (USD XXX in 2014

As in law

Table 1: Tax/ revenue concessions granted mining companies in Sierra Leone

Sierra Leone is the world third producer of iron ore, also rich in Diamonds, Titanium Ore (Rutile), Illumenite, Bauxite, Gold, Manganese, Cocoa,

Coffee, Fish, Ginger. Also has rich agricultural soil for the production of sugar and ethanol operates numerous large scale mines. 14

14

3.1.2 Reasons for low revenue

collection

Tax Incentives and duty free concessions

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Revenue Handled

General Legislation

African Minerals Limited 2010

Koidu Holdings Limited 2010

London Mining Company Limited 2012

Sierra Minerals Holding Limited 2012

Sierra Rutile 2002 (& 2004 Amendment)

Tonguma Limited 2012

Royalty Precious stones (inc. special stones) – 6.5%; precious metals – 5%; Other minerals – 3%

As in law Precious stones – (excl. special stones) – 6.5%; Special stones – 8%

As in law As in law 0.5% through 2014; 3.5/4% from 2015

Precious stones – (excl. special stones) – 6.5%; Special stones – 8%

Corporate Income Tax (CIT)

30% 25% 35% or as in law if lower

Years 1-3-6%; Years 4-10 – 25%; Year 11 onwards – 30% or as in law if lower

As in law Exempt through 2014; 37.5% or as in law if lower from 2015

25%

Resource Rent Tax

- - - - - - -

Capital Allowance

SL 40-20-20-20 As in law As in law As in law As in law As in law As in law

Loss Carry Forward

10 years from start of production

As in law Unlimited Years 1-10-limited such that tax is not less than 15% of tax due if no loss carry forward; No carry forward thereafter

As in law Unlimited As in law

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Revenue Handled

General Legislation

African Minerals Limited 2010

Koidu Holdings Limited 2010

London Mining Company Limited 2012

Sierra Minerals Holding Limited 2012

Sierra Rutile 2002 (& 2004 Amendment)

Tonguma Limited 2012

Turnover Tax 3.5% if chargeable income is below 7% of turnover (and no acceptable audited account is submitted)

Exempt Exempt Exempt Exempt 0.5% through 2014; 3.5% from 2015

Exempt

Contractor Withholding Tax (CWT)

Residents – 5%; Non-residents – 10%

Exempt As in law Years 1-6-5%; Years 7 - 10 – 10%; As in law thereafter

Exempt Exempt Years 1-7 - 5%; As in law thereafter

Dividend Withholding Tax (DWT)

10% 5% As in law Years 1-6-5%; Years 7 - 10 – 10%; As in law thereafter

Exempt Exempt through 2014; 10% from 2015

Years 1-7 of production - 5%; Years As in law thereafter

Interest Withholding Tax (IWT)

15% Exempt As in law Years 1-5-5%; Years 6 - 10 – 10%; As in law thereafter

Exempt Exempt through 2014; 10% from 2015

As in law

Management Fees Withholding Tax (MWT)

Residents – 5%; Non-residents – 10%

5% Exempt Years 1-6-5%; Years 7 - 10 – 10%; As in law thereafter

Exempt 10% Years 1-7-5%; Years As in law thereafter

Duties & Taxes on Capital Imports

Variables rates but minimum of 5%

Exempt 5% or as in law if lower

Years 1-8-1%; Years 9 - 10 – 2.5%; As in law thereafter

As in law Exempt through 2014; 5% from 2015

5% or as in law if lower

Duties & Taxes on Other Imports

Variables rates but minimum duty of 5% & GST of 15%

Exempt 5% or as in law if lower

Years 1-5-20% of prevailing rate; As in law thereafter

As in law Exempt through 2014; 5% from 2015

As in law

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Surface Rent Not specified – to be agreed between company and landowners

Not specified – agreed by mutual consent (xxx in 2014)

Not specified – agreed by mutual consent (xxx in 2014)

Not specified – agreed by mutual consent (xxx in 2014)

Not specified – agreed by mutual consent (xxx in 2014)

Not specified – agreed by mutual consent (xxx in 2014)

Not specified – agreed by mutual consent (xxx in 2014)

Community Development Fund

0.1% of gross revenue

As in law 0.25% 1% 1% 0.1% 0.25%

Source: Tax Policy Unit of the Ministry of Finance and Economic Development database 2015

What is more worrisome is the fact that

currently there is also no formal structure in

place to monitor the potential benefits of tax

incentives granted to businesses such as job

creation, skills, technology transfer, etc.

Besides, since these incentives, particularly

those granted to mining companies, are granted

on individual basis, not a uniformed legal basis

and broad policy framework, decisions to grant

these incentives could favour one set of

investments or concessionaires over the others.

This, however, violates the efficiency criteria for

any tax system requiring it to be neutral; create

neither major distortions in consumption and

production. More importantly most of the

agreements, especially those benefiting the

mining and commercial agricultural companies,

were never made public until recently –

agreements widely believed to contain some

fiscal stabilisation clauses.

The Ministry of Finance and Economic Development has since 2014 developed a Handbook on investment incentive guidelines and duty waiver

procedures. The handbook summarises all investment incentives and import duty concessions that are provided for in current legislation, Income Tax

Act 2000 (as amended), the Finance Acts 2010 and international conventions to which Sierra Leone is a signatory.

In the most recent past Sierra Leone has published the mining agreements for the five biggest mining operators in the country.

15

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international level, greater transparency can help

to address issues such as misuse of transfer

pricing, financial reporting by Multinational

Enterprises and tax evasion. Encouraging

transparency in exemptions and tax incentives

(for instance, exemptions on aid-funded goods or

tax holidays for Multinational Enterprises) is

consistent with encouraging debate on tax

simplification objectives and efforts to reduce

discretionary decision making (OECD, 2012).

In Sierra Leone a Revenue Management Bill was

drafted and meant to be enacted since 2011, but

progress has stagnant. This bill requires the

government to publish a statement of its tax

expenditure, detailing all tax exemptions, the

beneficiaries and the revenue forgone. It also

commits the Minister of Finance and Economic

Development to review all tax expenditures and

ensure that they meet the objectives of the

budget, including revenue mobilisation.

Furthermore, the Government of Sierra Leone

committed itself in the Open Government

Partnership National Action Plan (2016-2018) to

publish all tax incentives granted twice during

the year. However, no progress has been made

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16

Transparency can improve accountability and

answerability in various ways. At the country

level, the public disclosure of revenue statistics

and budgets can help build accountability for

taxes paid and public services delivered. At the

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so far in adhering to this commitment.

Import duty and GST concessions

Excessive granting of duty waivers continues to

undermine revenue generation in Sierra Leone.

Table 2 shows that import duty and GST waived

for the Fiscal Year 2015 amounted to Le375.9

billion from Le372.3 billion in 2014 representing

a one percent increase. This amount represents

69% and 17% of the total revenue reported by

Customs Services Department (CSD) and NRA

The ‘Others’ category which comprises constructions companies, MDAs, Private Sector and other beneficiaries alarmingly increased by 38% from

Le173.3 billion in 2014 to 239.5 billion in 2015. This category has been one of the major beneficiaries of duty free concession accounting for 47% and

64% of total duty waiver in 2014 and 2015 respectively.

17

respectively. Of this total duty waived, import

duty accounted for Le180.3billion (representing

48%) as against Le195.5 billion import GST

(representing 52%).

Of importance is the fact that duty waiver

categorised as “others” continues to increase

significantly. Table 3 depicts that duty waiver

granted this category increased by 38% between

2014 and 2015. However, owing to the decline in

mining operation in the same period, duty waiver

granted mining companies reduced by 87%.

Organisations Type of Tax Amount Waived Total

Embassies Import Duty 7,487 12,574

Import GST 5,087

Public Int. Organisation Import Duty 39,776 80,618

Import GST 40,842

Non Governmental. Organisation

Import Duty 13,598 30,834

Import GST 17,236

Mining/Expl. Co Import Duty 7,318 12,331

Import GST 5,013

Others Import Duty 112,156 239,543

Import GST 127,387

Grand Total Import Duty 180,336 375,906

Import GST 195,570

Source: MRP/NRA draft annual report 2015

Table 2: Duty-free Concession by Category of exemption, 2015 (in LeM)

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Informal Economy

Another challenge facing revenue administration

in Sierra Leone is the high level of participants

in the informal sector. Workers and companies

operating outside the reach of the law or tax

administration are a major obstacle to

broadening the tax base and collecting income

taxes. In Sierra Leone, the informal sector is

estimated to account for 42.9% of GDP (Elgin

and Oztunali, 2012), slightly higher than that of

sub-Saharan Africa average of 40 percent.

Taxation of the informal sector may be labour

intensive but could drive broader governance

objectives by linking more people and traders to

the state. Interviews with officials in the

Domestic Taxes Department of the NRA indicate

that taxing this sector is a way of building a

culture of tax compliance among SMEs. One

main opposition to the taxation of the informal

economy, however, is sometimes raised on

equity grounds, as the operators of informal

sector firms are frequently low-income, thus

making taxation of such firms potentially

regressive. And the concerns are exacerbated if

The NRA through the MRP Department has conducted a comprehensive Skills Audit on its Employees in 2015. Final report is pending review and

comment from different departments within the authority (NRA draft annual report 2015).

19

efforts to tax this sector also increase the risk of

relatively coercive or corrupt behaviour by tax

officials. (Joshi, Prichard and Heady - 2012).

Weak Capacity of revenue authority

Furthermore, weak capacity generally

characterised by poor governance is identified as

one of major factors underlying low revenue

uptake in Sierra Leone. Whilst published data

was not available on staff numbers and

competencies, weak capacity gap - such as

inadequate skilled staff, inadequate Information

Technology infrastructure, inadequate

knowledge and expertise in transfer pricing

issues, etc. - was identified by senior officials of

the Domestic Taxes Department of NRA to have

undermined the potential of the revenue

administration to correctly ascertain the actual

declared profit of companies. Exacerbating this

capacity problem is the influence of

globalisation which has seen the impact of

borders decline due to the establishment of

Multi-National Enterprises (MNEs).

The huge foreign investment in Sierra Leone of

Organisation 2014 2015 Variance % Variance

372,288 375,905 3,617 1

Embassies 9,564 12,574 3,010 31

Public Int. Org 71,501 80,619 9,118 13

Non Govt Org 19,911 30,837 10,926 55

Mining/Expl. Co 98,008 12,333 (85,675) (87)

Others 173,304 239,542 66,237 38

Table 3: Growth in Duty waiver granted between 2014 and 2015

19

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US$1.58 billion between 2004 and 2014 due

particularly to the influx of mining companies

has come with challenges of transfer pricing and

thin capitalisation (see next section for

estimation of magnitude of transfer mis-pricing).

Such trend does put more pressure on the

existing limited capacity of tax administrators

and policy makers generally in Sierra Leone.

Thus, what is needed now in the Sierra Leone

Revenue administration is not to push for more

taxation, rather to push for better taxation. Such

efforts hold the potential to stimulate further

growth and investment whilst also allowing for

increased levels of tax collection.

3.2 Overview of transfer pricing

architecture in Sierra Leone The ability of tax administrations to identify and

address transfer pricing risks is highly dependent

on the existence of commensurate legislation and

sufficient expertise backed up with adequate

capacity within the revenue administration.

Sierra Leone has basic provisions in place

dealing with transfer pricing in Section 95 (1)

of the Consolidated Income Tax Act 2000 (as

amended). The Mines and Minerals Act 2009

reinforces the transfer pricing provision in the

Consolidated Income Tax Act 2000. The Mining

Lease Agreements (MLA) do also make

provision for arm’s length, though vary by

mining companies. For instance, the previous

MLA with African Minerals Limited (AML) ,

now Shandong Company, requires royalties to be

calculated consistent with the market value; the

former agreement with London Mining goes

further to specify that the “market value” shall

be the sale value receivable by LMC in an arm’s

length transaction, free on board (FOB). The

The section states that in any transaction between taxpayers who are associates, the Commissioner may distribute, apportion or allocate assessable

income, deductions or credits between the taxpayers as is necessary in an arm’s length transaction.

Section 154 of Mines and Minerals Act 2009 states that where a mineral rights holder are to sell mineral products to their affiliates this must be done

according to the arm’s length price that they would otherwise get if the parties had not been affiliated. This requirement applies only to holders of large

scale mining license.

The Finance Act 2016, has however, sets out basic documentation requirements for MNC to follow, repealing sections 95 of the ITA 2000. Modalities

to enforce the implementation of these documents requirements are yet to be put in place.

19

MLA with Sierra Minerals also specifically

referenced the OECD Transfer Pricing

Guidelines as a basis for calculating the arm’s

length price on transactions with affiliates

(Readhead, 2015).

Despite these provisions in the different pieces

of legislation and agreements, the country does

not have in place appropriate and functional

transfer pricing documentation rules and until

the enactment of the Finance Act 2016 the

country had no rules or regulations requesting

MNCs to submit the following documents that

could aid transfer pricing implementation:

The method used to determine the transfer

price and the reasons for its selection;

The application of the method including the

calculations made and price adjustment

factors considered;

The global organisational structure of the

enterprise;

Details of the transactions under

consideration;

The assumptions, strategies and policies

applied in selecting the method and; such

other background information as may be

necessary regarding the transaction.

Annual disclosure requirements for related-

party transactions;

Effective documentation requirements with

penalty and/or burden of proof for transfer

pricing.

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19

20

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Currently the Field Audit Unit and the newly

formed Extractive Industry Revenue Unit

(EIRU) manage transfer pricing issues but their

capacities need to be enhanced. Furthermore, the

level of coordination between the EIRU that

reports directly to the Commissioner General

and the Field Audit which reports to the

Commissioner of Domestic Tax Department

needs to be enhanced and strengthened also.

There are no indications however about any mechanism put in place at the NRA to curb trade mis-invoicing outflows, which is very critical in the

determination of appropriate taxable income of firms in the country, is one main channel through which profit is shifted out of the country.

Section 154 of Mines and Minerals Act 2009 states that where a mineral rights holder are to sell mineral products to their affiliates this must be done

according to the arm’s length price that they would otherwise get if the parties had not been affiliated. This requirement applies only to holders of large

scale mining license.

In 2014, a total of 106 audits were completed as against 180 audits set as target (a shortfall of 74), with a revenue of Le 2.7 billion recovered.

Within ECOWAS only four countries – Burkina Faso, Liberia, Nigeria, and Senegal are members of the OECD’s Global Forum on Transparency and

Exchange of Information for tax purposes.

International tax cooperation is based upon reciprocity, requiring tax administrations to have robust information systems.

22

The exchange of information on transfer pricing

issues is critical but remains a challenge for

developing countries. This is mainly due to

limited access to existing tax information

between tax authorities. Sierra Leone is yet to

become a member of the OECD’s Global Forum

on Transparency and Exchange of Information

for Tax Purposes. Clearly the capacity challenge

within the revenue administration, particularly

the manual nature in which information is kept

in Sierra Leone revenue administration,

undermines their potential membership to such

exchange of information arrangement.

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25

24

The PCA unit established in the Customs

Services Department has however made some

gains with regards to fighting trade mis-

invoicing (inflows). A total of 123 audits were

completed as against a target of 120 audits for

the 2015 fiscal year (exceeding its target by

2.5%). The audit exercise recovered revenue to

the tune of Le 1.5 Billion. The amount of

monies recovered in 2015 was largely from

penalties for misclassifications, variation in

historical values, under assessment, and wrong

freight among others (NRA draft Annual

Report 2015). With regards domestic taxes

audit, the audit team was only able to complete

48.5% of the audit for the Small Medium

Taxpayers, whilst 53.7% of general audit

planned for Large Taxpayers was completed in

2015.

ATAF strongly encourages the

strengthening of domestic tax laws and tax

policy to expand the Africa tax base against

international harmful tax practices and

Transfer Pricing practices. In South Africa,

the introduction of new Transfer Pricing

rule in 2012 resulted in a USD 3.2 billion

increase in revenue by 2013. In Zimbabwe

in 2015, changes in the domestic rules and

transfer pricing resulted in USD 105 million

of tax revenue. Other domestic revenue

gains that resulted from adjustment to tax

policy and laws include Uganda (USD 423

Million) and Rwanda (more than USD 400

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Administratively, the revenue administration

has no specific unit dealing with transfer

pricing issues, and audits of such issues are

not carried out as part of general audits.

Added to the lack of unit to handle transfer

pricing issues, a lack of transfer pricing

expertise is also identified as one of the

reasons for the non-implementation of

transfer pricing rules set out in the different

pieces of legislation.

25

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3.3 Overview of the Mining sector in

Sierra Leone Sierra Leone recorded double-digit GDP growth

rates of 15.2% and 20.1% in 2012 and 2013

respectively. This impressive growth was largely

driven by iron ore mining, agriculture,

construction activities and an expanding services

sector (AEO country report, 2015). Whilst

agriculture - which includes forestry, fishing

and hunting - continued to account for more than

half of GDP in 2014, its relative weight has been

declining (50.5%) in 2014, down from 58.2% in

2009) indicating a structural shift towards

mining and quarrying (20.2% in 2014 up from

3% in 2009). Manufacturing accounted for mere

1.6% of GDP in 2014, largely unchanged since

2009 (AEO, 2015). In terms of its revenue

contribution, the mining sector increased from a

low 1% of total domestic revenue in 2007 to a

high 10.6% in 2013 (or 1.4% of GDP) but

slightly declined to 9.0% of total domestic

revenue in 2014 due to the decline in the world

market prices for commodities. Owing to the

massive concessional rates and tax holiday

granted some MNCs the country relies mostly

on royalties to generate revenue from the major

mining companies.

Legislative-wise, the volume of laws and

regulations adopted by Sierra Leone over the

past few years in relation to its mining sector is

fairly extensive. This reflects a trend of

government in developing economies to develop

a more detailed and comprehensive legal

framework for their extractive industries, often

on the basis of laws and regulations adopted in

more developed economies (Alix, 2015).

African Minerals started production on its Tonkolili iron-ore project in the north in quarter four, 2011.

This sector is largely exempt from taxation, thus do not form a taxable base of the country.

African Minerals Limited, Koidu Holdings Ltd., London Mining, Sierra Minerals Holding, Sierra Leone Rutile Ltd and Tonguma Limited (see Table

1).

See Alix Y. 2015. Mining in Sierra Leone: an overview of the current legal framework- online article.

Mechanism to enforcement such disclosure cause in the ACT is yet to be formulated and aplied by the Revenue Authority.

26

Over the past decade Sierra Leone has adopted a

number of laws and regulations which include

the following:

In 2003 the Government of Sierra Leone with

support from UK Department for

International Development and World Bank,

issued a “Core Minerals Policy” with 10

strategic objectives, including attracting

private investments and ensuring Sierra

Leone’s wealth supports national economic

and social development.

In 2004 the Investment Promotion Act was

passed, aimed at giving foreign investors a

number of guarantees in terms of

expropriations, transfer of funds and dispute

resolution. And in 2006, the country joined

the Extractives Industries Transparency

Initiative (EITI);

In 2008, the Environment Protection Agency

Act was passed. This act provides that mining

projects can only be undertaken following the

preparation and approval of an environmental

impact assessment and the issuance of an

environmental impact assessment license;

In 2009, a new Mineral and Mines Act

replaced the 1994 Act which among other

major changes includes mandating mines title

holders to deliver to tax authorities certified

copies of all “sales, management, commercial

and other financial agreements of fifty

thousand United States Dollars or equivalent

concluded with any other person, including

affiliates”.

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30

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28

29

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In 2014 all mining concessions were uploaded

on a government website for public use.

Added to the aforementioned, it is worth stating

that more recently the Government has been

developing a new core minerals policy expected

to be completed by end of 2017. The

Government, with support from donors, has also

finalised a Benchmarking Report on the

extractive sector using Natural Resource Charter

framework.

4.1 Methodological approach Owing to the paucity of data, and the secrecy

surrounding the operation of mining companies,

as well as the non-availability of comparable

transaction data, it is difficult to estimate transfer

mis-pricing using the input method. However, in

this study we used two broad approaches to

provide an estimate of trade and transfer mis-

pricing. Firstly, we used the trade mis-invoicing

model to estimate tax revenue losses from illicit

capital flight. The trade mis-invoicing model

looks at trade mis-pricing, namely the

overpricing of imports and underpricing of

exports on customs documents, which allows the

illegal transfer of money abroad. Data for the

computation is collected from the Global

Financial Integrity report (2015). The revenue

losses due to trade mispricing are computed in

this study using aggregate figures reported in the

GFI, and based on the following assumptions:

The non-dutiable import accounts for an

unweighted average of 64.9% of total

Estimating the extent of shift of profit from Sierra Leone to possible tax havens thereby lowering corporate revenue is difficult because of paucity of

data on the volume of transaction (input purchases) of mining companies in Sierra Leone with other related subsidiaries companies registered in tax

heavens.

See Foreign Trade Statistics Bulletin-2013 produced by the Economic Statistics Division of Statistics Sierra Leone.

UNECA, Third Meeting of the Committee on Governance and Popular Participation.

31

imports in Sierra Leone between 2011 and 2013

(SSL2013) and such trend is expected to be

similar in 2014 and 2015. It is also assumed that

these categories of imports are mostly inputs and

equipment meant to promote investment, and

therefore mostly deductible in computation of

profit for corporate tax purposes. Thus it is

assumed in this report that 64.9% of trade mis-

pricing is due to transactions of companies and

businesses granted duty and GST concessions.

Companies paying import duty and GST have no

incentive to over-invoice import and therefore

could not engage in import over-invoicing.

Trade mis-pricing conservatively makes up

about 60% of IFFs making for possible

errors in GFI that could arise due to missing

data for some years covered in the report. In

Sierra Leone, data from GFI indicates that

trade mis-invoicing accounts for 95.7% of

IFFs and import over-invoicing accounts for

94% of trade mis-invoicing (See Figure 5).

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Section 4: Estimation of

magnitude of trade and transfer

mispricing in Sierra Leone That the only incentive for companies to

over-invoice their import is that it can

increase their costs and therefore shrink

taxable profit. Most or all of these profits

are shifted to other tax jurisdictions with

lower corporate tax rate. Thus all income

saved from import over-invoicing would

be taxed at the concessional corporate

income tax (CIT) rate of 25% given most

of the major mining companies are taxed

at concessional corporate rate of 25%

since 2010. We do however note that

Sierra Rutile Company was granted

corporate tax exemption from 2002

through 2014 (see table 2).

BAN 2017 Page 22

4.2 Computation of revenue loss owing

to trade mis-pricing using illicit

financial outflows Using the aforementioned assumptions Table 4

depicts that total illicit financial outflows from

Sierra Leone between 2004 and 2014 ranged

from US$94 million to US$ 1.915 billion and

that illicit financial flows from trade mis-pricing

alone range from US$56.4 million to US$1.149

billion in the same period. The average total

illicit financial flows for the period amounted to

US$558 million and the average US$334.8

million for the same period. These figures are

already high but are likely to be grossly under-

estimated.

Global Financial Integrity records the figures for some years as zero, due to a lack of data which affects the average. For instance, 2009 and 2012 were

recorded as zero due to data non-availability.

Thin capitalization refers to securing debt financing through a holding company located in a low-tax jurisdiction. Specifically, the subsidiary in the

high tax-jurisdiction borrows from the holding company and gets to subtract the interest paid to the holding company from its profits (ATAF, transfer

Pricing in the Extractive Industry: a taxing exercise for Sub-Saharan Africa, 2014).

The cost of implementing the Government of Sierra Leone Education Sector Plan (ESP) is Le 4.1 trillion (US$951 million over five years. Of this

amount Le1.8 trillion (US$76 million) is required to achieve universal access and quality primary level education over five years. Of the total amount

budgeted for the ESP, government has identified a revenue source of US$570.1 million with a funding gap of US$381 million (Education sector Plan

2014-2018).

The five pillars are: Patient and health worker safety with estimated cost of US9.08 million; Health Workforce (US$32.50 million); Essential Health

Services (US$63.04 million); Community Ownership (US$8.64 million); and Information and Surveillance (US$13.77) given a total of US$126.64

million for 2015.

34

If fiscal authorities had been able to control

such practice, additional revenues would

have been collected between 2010 and 2013

(US$ 205.95million) to fund over half of the

financing gap of US$381 million to implement

the five-year education sector plan. Or

alternatively, saving this amount would have

been sufficient to implement the Health

Strengthening Strategic Plan for 2015 with

estimated cost of US$126.64 million to

implement the five pillars in the plan for

2015.

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Tax revenue loss from trade mis-pricing is

computed on the assumption that if IFFs

stemming from trade mis-pricing were

retained in Sierra Leone and duly declared to

tax authorities, they would be taxed at the

concessional corporate income tax (CIT) rate

of 25%. With that, an unweighted annual

average of US$83.7 million was lost as

corporate tax between 2004 and 2014, and

with the mining boom since 2010 revenue loss

from such practices actually increased from as

low as US$14.1 million to US$205.95 million

between 2010 and 2013. As stated earlier, this

estimated loss is considered conservative since

it does not capture other methods of tax

avoidance which MNCs can use to limit their

tax payment such as thin capitalisation. 35

Despite the figures being conservative, the

estimates highlight the magnitude and extent

of the transfer mis-pricing issue on the

mobilisation of domestic revenue in Sierra

Leone.

BAN 2017 Page 23

4.3 Computation of royalty revenue loss

using arm’s length Comparable

Uncontrolled Price Method We also used the arm’s length principle to

estimate transfer mispricing for three main

mining products for the periods 2013 and 2014.

The products include: Iron ore, Rutile, Bauxite

and Diamond. We have used the comparable

uncontrolled price (CUP) method to establish

whether the declared sales price for these

minerals for the purpose of royalty payment

satisfies the arm’s length principle. We focused

on royalty because data on intra-company

transaction is not available to assess corporate

tax loss for specific company. Issue of access to

comparable prices is a challenge when using

the Arm’s Principle, thus for this study we have

used the fair market price from international data

(Mundi index database) to benchmark the

declared price for royalty.

The Comparable Uncontrolled Price (“CUP”) method compares the price charged for property or services transferred in a controlled transaction to the

price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances.

Under the ALP approach, transactions between group companies are compared with transactions between unrelated companies under comparable

circumstances. Where there is no comparable transactions, an alternative comparism maybe made with unrelated companies that perform similar

functions, own similar assets and bear similar risks.

We do note that such databases provide a very imprecise pool of financial data for comparability purposes. It is also acknowledged that such databases

as do exist currently provide very limited financial data on companies operating exclusively or primarily in individual developing countries, including

countries in much of Africa, Eastern Europe and South America. This is largely because of the limited number of sizeable independent companies, the

absence of a requirement for the public registration of statutory accounts or difficulties in obtaining access to statutory accounts where there is a public

registry for statutory accounts.

We note that product comparability is key; in this case we shall endeavor to factor-in the grade or quality of export of minerals to both related and

unrelated parties from Sierra Leone.

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IFFS 2004-2014 (in millions of US$)

Mispricing (60% of IFFS)

Revenue loss (25% of pricing value

Average from 2004-2014 558 334.8 83.7

Minimum 94 56.4 14.1

Maximum 1915 1149 287.25

Average from 2010-2013 (Commodity boom) 1373 823.8 205.95

Table 4: Estimation of revenue loss due to trade mis-pricing in Sierra Leone from 2004-2014 in millions of US$

Source: author’s computation using data from GFI report 2015.

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BAN 2017 Page 24

Table 5: Estimate of revenue loss from mispricing of minerals

Import reported by country

ofDestination (China

Export Declared by whom Companies in Sierra Leone

Average price

Revenue loss

Year Mineral Volume to China(Tons)

Value to China(US$) million (FOB)

Volume to China Tons)

Value to china(US$ million) (FOB)

Un-weighted Average Market price (US$/Ton

Average declared price (US$/ton

Difference in value in millions of US$

3% Royalty Revenue forgone in million U$

2013

Iron ore ore for London mining

and AML both.

11,982,519 1,389.75 15,174,731 1,168.44 116.0 77.0 221.31 0.66

2014 19,029,035 1,649.74 18,859,571 742.07 86.7 39.3 907.68 2.72

2015 2,567,126 147.60 1,390,768 47.92 57.5 34.5 99.68 0.30

Total 33,578,680 3,187.09 35,425,070 1,958.42 1,228.67 3.69

Volume to Romania (Tons)

Value to Romania (USD)in million

Volume declared to Romania(Tons)

Value declared to Romania

Unwighted Average Market price (US$/Ton

Average declared price (US$/ton

Difference in value in millions of US$

Revenue forgone in millions of US$

2013

Bauxite

589,147 25.39 543,378 16.79 43.1 30.9 8.60 0.258

2014 1,115,221 54.54 1,145,332 38.83 48.9 33.9 15.71 0.471

2015 1,333,338 61.62 1,303,033 43.16 46.2 33.1 18.46 0.554

Total 1.28

Mineral

Volume World Wide(Tons)

Value World Wide(USD)

Decleared Volume to worldwide (Tons)

Decleared Value to worldwide in SL (USD)

Difference in value in millions of US$

Revenue forgone

2015 Rutile 165,805 113.18 116,871 91.08 22.10 0.773

Source: author ‘computation using data from National Mineral Agency database and index Mundi

BAN 2017 Page 25

It also attempts to identify institutional and

policy changes geared towards addressing

transfer pricing in Sierra Leone. The study notes

that in addition to the challenges of tax

incentives to revenue performance, transfer mis-

pricing and other forms of tax avoidance

practices remain channels through which Sierra

Leone loses huge tax revenue annually. In the

past decade, the importance of FDI has grown in

Sierra Leone from as low as US$8.62 million in

2003 to as high as US$950.5 million in 2011

before declining to US$225.1 million and

US$144.1 million in 2012 and 2013 respectively,

but started increasing in 2014. However, this

growth in FDI seems to have come with much

stronger illicit financial outflows and trade mis-

invoicing outflows. It was observed that the

average IFFs between 2004 and 2014 more than

doubled (i.e.2.5 times higher) that of FDI for the

same period. However, the government transfer

pricing rules are largely untested, and currently

there is no issued practice note to clarify what

approach to follow in the implementation of

sections dealing with transfer pricing in the

Consolidated Income Tax Act 2000.

Administratively, the revenue administration has

no specific unit dealing with transfer pricing

issues, and audits of transfer pricing issues are

not carried out as part of general audits. Thus,

the failure to have in place commensurate

administrative capacity to actively enforce

Section 95(1) of the Income Tax Act 2000 has

led to revenue loss.

The study estimates that an unweighted average

of US$83.7 million was forgone as corporate tax

between 2004 and 2014 from trade mis-

invoicing. And with the Iron ore mining boom

since 2010, revenue loss from trade mis-pricing

practices actually increased from as low as

US$14.1 million to US$205.95 million between

2010 and 2013. This estimated loss is considered

conservative since it does not capture other tax

avoidance methods used by companies such as

Thin Capitalisation. In terms of transfer pricing

practices for royalty payment, the study

Again, estimates in Table 5 should be considered

as very conservative given that data on

worldwide export for most of the minerals are

not available, and not all major minerals are

considered. Furthermore, data for 2011 and 2012

when there was increased production of Iron

Ore is not available. However, Table 5 reveals

that the value of minerals have been declared at

controlled prices i.e. less than the average

market prices resulting in loss of revenue from

royalty payment. The Table shows that between

2013 and 2015, a total of US$3.69 million was

lost in respect of mis-pricing of iron ore, whilst

US$1.28 million was lost due to mis-pricing in

Bauxite trade for the same period, and for 2015

mis-pricing in Rutile trade resulted in a loss of

US$0.773 million in respect of royalty payment.

The royalty lost from two minerals i.e. Iron ore

and Bauxite exported in 2014 was three times

more than the shortfall of US$1.07 million that

was required for the Non-tax Revenue of the

NRA to meet its target on mines revenue.

4.4 Development Forgone In terms of development forgone, the US$3.96

million loss in respect of mis-pricing of iron ore

is five times the cost of procuring text books and

teaching and learning materials for all the pre-

primary and primary schools in 2015. The mis-

pricing in bauxite (US$1.28 million) is more

than the amount required to construct a water

supply system in Tiama Njala (as stated in 2016

Budget). The mis-pricing in rutile can improve

Mile 91/ Yoni Bana water supply source system

hence reducing the challenges citizens in that

area are facing to access water. Alternatively, the

combined losses can procure new ferries to ply

between Freetown and Lungi hence easing the

huge challenges citizens are facing to and from

the airport town.

The study attempts to assess and quantify the

domestic revenue that is lost through transfer

mis-pricing by Multinational Entities (MNEs).

Section 5 : Summary and

Recommendations

BAN 2017 Page 26

• Often most international partners exclusively

intervene in capacity building efforts in

revenue administrations in developing

countries. For instance in Sierra Leone, the

National Revenue Authority (NRA) has

benefited significantly from DfID in the

implementation of its modernisation plan.

Whilst this approach is relevant there is also

need for development partners to engage other

stakeholders such as civil society and

legislators in their efforts to participate in tax

dialogue, to monitor the operations of tax

administrations, and to hold governments to

account for their revenue and expenditure

policies.

• The National Revenue Authority (NRA)

should create and capacitate the transfer

pricing unit within the Domestic Tax

Department (DTD). This will require

building audit capacity in specialised sectors

such as mining, finance and banking,

telecommunications, etc.

• NRA should efficiently implement the

transfer pricing provisions in the Income Tax

Act and issue transfer pricing regulations to

clarify what approach companies should

follow in complying with provisions in the

Act. ATAF strongly encourages the

strengthening of domestic tax laws and tax

policy to expand the Africa tax base against

international harmful tax practices and

Transfer Pricing practices. In South Africa,

the introduction of new Transfer Pricing rule

in 2012 resulted in a USD 3.2 billion increase

in revenue by 2013. In Zimbabwe in 2015,

changes in the domestic rules and transfer

pricing resulted in USD 105 million of tax

revenue.

estimates that between 2013 and 2015, a total of

US$3.69 million was lost in respect of mis-

pricing of iron ore sales, whilst US$1.28 million

was lost due to mis-pricing in Bauxite trade for

the same period, and for 2015 mis-pricing in

Rutile trade resulted in a loss of US$0.773

million in respect of royalty payment. The study

argues that despite the figures being

conservative, the estimates highlight the

magnitude and extent of the transfer mis-pricing

issue on the mobilisation of domestic revenue in

Sierra Leone. If fiscal authorities have been able

to control such practice, additional revenues

would have been collected between 2010 and

2013 (US$ 205.95million) to fund over half of

the financing gap of US$381 million to

implement the five-year education sector plan.

Or alternatively, saving this amount would have

been sufficient to implement the Health

Strengthening Strategic Plan for 2015 with

estimated cost of US$126.64 million to

implement the five pillars in the plan for 2015.

RECOMMENDATIONS We recommend that:

• Civil society should push for the fiscal

authorities to require multinational

corporations to publicly disclose country

reports which should entail their revenues,

profits, losses, sales, taxes paid, subsidiaries,

and staff levels as a means of detecting and

deterring abusive tax avoidance practices.

This report should be analysed and discussed

by civil society and legislators. Legislators

alone will not have enough qualified people to

adequately analyze the information necessary

to make informed policy changes, thus

publicly available country reporting will also

allow experts from academia, civil society

and the media to lend their analytical support

to the transfer mis-pricing problem.

The cost of implementing the Government of Sierra Leone Education Sector Plan (ESP) is Le 4.1 trillion (US$951 million over five years. Of this

amount Le1.8 trillion (US$76 million) is required to achieve universal access and quality primary level education over five years. Of the total amount

budgeted for the ESP, government has identified a revenue source of US$570.1 million with a funding gap of US$381 million (Education sector Plan

2014-2018)

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BAN 2017 Page 27

• Government should make country-by-country

reporting public, thereby ensuring that the

revenue authority, civil society and other

stakeholders get access to relevant

information which can expose risks of profit

shifting.

• Government should ensure that an

intergovernmental body on taxation is

established under the auspice of the UN to

lead on reforming international taxation

(giving the Government of Sierra Leone a seat

at the table as opposed to the current situation

where the OECD leads on international

taxation.

• The Government of Sierra Leone should boost

customs enforcement by providing

appropriate training and equipment to better

detect the deliberate mis-invoicing of trade

transactions with support from Development

Partners. One particularly important tool for

stopping trade mis-invoicing as it happens is

access to real-time, commodity-level world

market pricing information. This would allow

customs officials to tell whether goods are

significantly under- or over-priced in

comparison to their prevailing world market

norm prices. This variance could then trigger

an audit or another form of further review for

the transaction.

• Government should institute a process of

verifying the quality and quantity of exports

from the major mining sites, particularly that

for iron ore inorder to counter trade mis-

invoicing. As the price of a ton of iron ore

varies significantly depending on quality, it is

very important to ensure a fair valuation,

otherwise it might be tempting for some

exporters to continuously declare lower grade

in order to evade taxes.

• Government should ensure that fiscal

authorities are able to actively participate in

the G20 and OECD-endorsed global

movement toward the automatic exchange of

financial information (i.e. Global Forum on

Transparency and Exchange of Information

for Tax Purposes) with support from

development partners. This will require

technical assistance in data management and

use. As an entering point, the African Tax

Administration Forum (ATAF) has developed

a practical manual providing guidance on how

African countries can implement effective

exchange of information processes, which

fiscal authorities in Sierra Leone can benefit

from given that Sierra Leone is a member of

ATAF.

BAN 2017 Page 28

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