Taxation and Illicit Financial Flows in the Gold Mining Sector

The chapter reviews recent developments in the experience and quantification of illicit financial flows (IFF) in the gold mining sector in Africa. It is argued that the methodology and data used in the quantification of the most frequently employed technique i.e. the so called Bhagwatti method of calculating export undervaluation is flawed not only because of the recognised weakness of the international trade data but also because it focuses only on one aspect of IFF and does not attempt to address issues pertaining to actual under-measurement or misspecification of volumes. It is argued that estimates of tax evasion activities can only be accurately determined through forensic economic and accounting techniques and not through macro-economic or trade data. This chapter considers the analysis and conclusions derived from numerous recent international studies on the magnitude of illicit financial flows (IFF) in the African mining sector with a particular emphasis on gold production and trade in South Africa. At the heart of the debate, the chapter considers the United Nations Conference on Trade and Development (UNCTAD)—South Africa Chamber of Mines dispute over estimates of under-invoicing of gold. It is argued that the methodology used for estimating the magnitude of IFF is inappropriate and the data too weak to draw the sort of strong conclusions that have been made by an international organisation such as UNCTAD which have provided very large estimates of only one form of IFF in the gold mining sector. The use of trade data alone to estimate IFF in the mining sector in effect implies that the vast array of techniques available to financially sophisticated mining companies to undertake base erosion and profit shifting (BEPS) are not considered.