Tanzania’s mining sector plays a crucial role in the economy. In the 2024/25 national budget, it was reported that the sector’s contribution to GDP grew from 7.3 percent in 2021 to 9.0 percent in 2023. By March 2024, the sector had created 19,356 jobs, with 97 percent going to Tanzanians. However, a significant challenge remains: Illicit Financial Flows (IFFs) are undermining the sector’s potential.
What Are Illicit Financial Flows?
IFFs refer to illegally earned, transferred, or used financial capital that moves across borders. These flows deprive Tanzania of resources that are essential for development. For example, in a recent incident, 15.78 kilograms of smuggled gold worth around 3.4 billion Tanzanian shillings were seized at the Dar es Salaam port. This is just one instance of how IFFs damage the country’s revenue streams.
How IFFs Impact Tanzania’s Mining Sector
In Tanzania, IFFs occur in many ways. One of the most common methods is trade mis-invoicing. Companies either underreport the value of exports or overstate the cost of imports to evade taxes. This practice is especially common in industries like mining, oil, and gas.
Another strategy involves using shell companies and tax havens. These corporate structures hide the true ownership of wealth and allow profits to be shifted out of Tanzania. This deprives the country of vital tax revenue.
Transfer Pricing: A Major Issue
Transfer pricing is another method through which companies evade taxes. Multinational companies charge their subsidiaries inflated prices for goods and services. This shifts profits out of Tanzania, reducing the country’s tax base. As a result, the government struggles to fund essential public services like healthcare and education.
IFFs Are a Regional Problem
Tanzania is not alone in facing this challenge. Neighboring countries, such as the Democratic Republic of Congo (DRC) and Kenya, also lose billions of dollars annually due to IFFs. In Kenya, for example, the extractive industry loses an estimated USD 1.8 billion each year through trade mis-invoicing.
The Economic Impact on Tanzania
The consequences of IFFs in Tanzania are severe. Over the past decade, the country’s GDP growth has fluctuated. According to the World Bank, the growth rate was 7.0 percent in 2013 but had fallen to 4.8 percent by 2021. The low tax-to-GDP ratio, which remains between 12 and 14 percent, is a direct result of IFFs. This limits the government’s ability to invest in critical services.
Expert Insights
Economist Dr. John Euseby explains that tax avoidance in the mining sector is driven by high corporate tax rates and CSR requirements. Investors often see these as burdensome and seek ways to avoid them. Dr. Euseby emphasizes the need for better geological data to help small-scale miners avoid unnecessary tax evasion.
Hassan Kulwa, an artisanal miner and Deputy Information Officer for the Federation of Miners’ Associations of Tanzania (FEMATA), adds that complex tax systems also contribute to IFFs. Multiple taxes, fees, and levies drive miners to evade taxes. He believes that mineral associations, like FEMATA, could help reduce IFFs but are often excluded from government efforts.
Government Efforts and Recommendations
The government has taken steps to combat IFFs by establishing over 100 mineral markets across the country. This initiative aims to reduce smuggling by providing miners with legal selling points. Additionally, task forces are now monitoring mining sites to ensure accurate reporting of production levels.
However, experts like Professor Abel Kinyondo believe more needs to be done. The Global Financial Integrity Organization estimates that Tanzania loses $3.5 billion annually to IFFs. To address this, stakeholders recommend strengthening the Tanzania Revenue Authority (TRA) and improving tax auditing and compliance. Transparent regulations, especially regarding transfer pricing, are also essential.
Conclusion
Illicit financial flows pose a serious threat to Tanzania’s mining sector and broader economy. The government, alongside stakeholders, must continue to enhance tax enforcement and transparency. By doing so, Tanzania can ensure that its natural resources benefit all citizens and support the country’s long-term development.
