Taxation and Management of Natural Resources in Africa

Table of Contents

1. Frontmatter

2. Principles and Concepts of Natural Resources Management

   1. Frontmatter

   2. Introduction: An Overview of Management and Tax Policy of Natural Resources

      Mohammed Amidu, Abdallah Ali-Nakyea, Joshua Yindenaba Abor

      Abstract

      Over two decades ago, Dominique Strauss-Kahn, a former president of the International Monetary Fund (IMF), writing the Preface to the book titled “The Taxation of Petroleum and Minerals: Principles, Problems and Practice” edited by Philip Daniel, Michael Keen, and Charles McPherson (2010) observed

   3. Natural Resources Tax Administration and Reforms in Africa

      Mohammed Amidu, Rester Togormey, Dominic Dokbilla Naab

      Abstract

      Taxation is a systematic process that includes policy, law, and administration. Tax administration encompasses assessment, collection, and enforcement of taxes legally due to the state. The tax systems of every country are made up of, on the one hand, the tax laws, and, on the other hand, the administrative structures or mechanisms or systems for the implementation of those laws. Thus, tax laws provide the mechanism or “what to do”, while the tax administration suggests “how to do it”. Effective tax administration facilitates and encourages voluntary tax compliance, deters tax evasion and avoidance, maintains public confidence in the integrity of the tax system, and ensures that tax legislation is administered fairly and uniformly. This chapter integrates the knowledge on natural resources tax administration and reforms in African economies in relation to identification, registration and assessment of taxpayers, imposition, collection, and processing and examination of tax returns, handling of administrative appeals, complaints and settlement of disputes, detection, and enforcement of any penalties for non-compliance of the tax laws. The chapter further presents valuable suggestions on how African economies can achieve effective tax administration of natural resources through reforms without compromising the principles of equity, certainty, economy and convenience.

   4. Assessing the Impact of Socio-Political Risk on Natural Resources in Africa

      Godfred Amewu, Saint Kuttu, Elikplimi Komla Agbloryor, Emmanuel Joel Aikins Abakah

      Abstract

      This chapter examines the link between social-political risk factors and natural resources of countries in Africa using a panel dataset of 30 African countries over a period of 22 years, 2000–2021. Employing a system generalised method of moments (Sys GMM), our results suggest that the aggregated risk (composite risk rating) negatively impacts natural resource rents. When the composite risk is decomposed into socio-political, financial, and economic risk factors, we find out that socio-political risk is the only risk factor that significantly impedes all the rents. We find government revenue to positively relate all rent variables. Moreover, our analysis confirms that other specific risk factors such as socio-economic conditions, internal conflict, risk for external liquidity, bureaucracy quality, and government stability impact rents differently depending on the classification. Socio-political factors are found to impact rents more compared to other risk factors, suggesting that most natural resource-rich countries must pay close attention to socio-political risk factors when drafting rent policies.

   5. Natural Resources Revenue Management Strategies in African Countries

      Obi Berko O. Damoah

      Abstract

      To date, the debate regarding the natural resource curse that is associated with developing countries that are blessed with natural resource abundance is inconclusive. This chapter addresses natural resource revenue management strategies in African countries. The background of the topic is presented by way of introduction. This is followed by a discussion on natural resource extraction and revenue management strategies. The Chapter argues that, concerning natural resource revenue management strategies, the permanent income hypotheses and bird-in-hand model remain dominant in the field. Following this, the specific models that have been crafted by governments in African countries to manage natural resource revenue are presented. From the literature, samples of these local strategies include, but are not limited to, the Petroleum Revenue Management Act (PRMA) (Ghana), the Petroleum Revenue Management (Amendment) Act, 2015 (Act 893) (PRMAA) (Ghana), the Nigerian Sovereign Investment Authority (NSIA), the Nigeria Infrastructure Fund (NIF), and the Fundo Soberano de Angola (FSDEA) (Angola). Consequently, the chapter ends with recommendations to improve the existing natural resource revenue management strategies in Africa.

   6. The Ethical Dilemma of Natural Resources in African Countries

      Justice N. Bawole, James K. Mensah

      Abstract

      This paper concentrated on the ethical dilemma of natural resource management in Africa. The paper draws on relevant literature on natural resources in Africa, ethical issues in natural resource management as well as the concept of ethical dilemma. The African continent is rich with natural resources which range from oil, natural gas, minerals, forest, water, arable land, and wildlife. However, not much benefit has been realized from Africa’s natural resources to the African people. The major issue that seems to be missing from the extant literature on African natural resources and development is the ethical dilemma concept. Ethical dilemma in the management of natural resources can have great negative impact on the management and use of natural resources. Ethical dilemma could lead to issues of bribery and corruption, corporate social responsibility, climate change, and sustainable development. It is therefore imperative for African countries to build ethical resilience in the management of natural resources to the benefit of the people.

3. Fiscal Strategies of Natural Resources Extraction

   1. Frontmatter

   2. Accountability and Transparency of Management of Natural Resources in Africa: Is the Information Sharing the Solution?

      Michael Effah Asamoah, Mawuena Akosua Cudjoe, Teddy Ossei-Kwakye

      Abstract

      The need for governments of African countries to account to citizens for the revenues generated, especially, for natural resources endowments, as well as doing so in a transparent manner is anchored on how information is shared with citizens. This responsibility entails ensuring accountability, transparency, and information sharing since governments hold the natural resources in trust for the people of their respective countries. The chapter explores the causal dynamic relationship between natural resources and information sharing. We use total rents, forests rent, mineral rents, and depletion rent to measure natural resources and data in the form of the Extractive Industries Transparency Initiative (EITI) in accountability of natural resources to capture information sharing. In the first part of the analysis, we employ the two-step dynamic systems GMM model to establish the empirical relationships between natural resources and information sharing over the period 2000–2020. At the combined level of natural resources, we found evidence in support of a positive relationship with information sharing. However, at the decomposed level of natural resources, we found mixed results for forest, minerals, and depletion rents. For evidence of a bi-directional relationship, we employed a probit model to examine the impact of natural resources on information sharing. The results support a two-way causal relationship for the combined natural resources and forests. The findings also thus complementary reactions between natural resources endowment and information sharing in Africa.

   3. Resource Rent and Capital Gains Taxes in Africa

      Abdallah Ali-Nakyea, Nasir Alfa Mohammed

      Abstract

      Resource rent and capital gains taxes are among the menu of fiscal instruments a resource-rich country may employ to derive its fair share of economic rents. These are mostly useful, particularly in times of resource price hikes and windfall profits or capital gains that may accrue to or derived by an investor from the realisation of a chargeable asset owned by the investor. This chapter explores the evolution of resource rent and capital gains taxes, highlights the underlying considerations for, and comparatively reviews the prevailing practice of introducing these types of taxes in a developing world context. The chapter makes useful recommendations to developing economies on how best to integrate resource rent and capital gains taxes into their fiscal regimes for the management of natural resources without compromising the optimal recovery of their natural resources.

   4. Taxation of Oil and Gas Revenue in African Countries

      Abdallah Ali-Nakyea, Nasir Alfa Mohammed

      Abstract

      The recognition of oil and gas as a predominant source of wealth in many developing countries is well established in the literature. For good or bad, the revenues generated from oil and gas can have a huge impact on the economic development and prosperity of developing economies. This chapter reviews the practice and implications of different resource taxes including royalties, corporate income tax, profit taxes, the resource rent tax, and acquisition of equity on oil and gas exploration and development in developing countries. Questions of the relevance and suitability of the different tax instruments for the countries implementing them are explored, and recommendations are proffered for African countries.

   5. Effective and Sustainable Management of Natural Resources in Africa: The Roles of Environmental Tax and Public Participation

      Osman Babamu Halidu, Mohammed Amidu, Edward Asiedu, Nicholas Asare

      Abstract

      The challenges faced by several African countries in the twenty-first century is closely linked to the management of their natural resources and the need to balance socio-economic development with environmental sustainability. Activities of the extractive sector and related industries have often had negative impacts on the environment, exacerbating the effects of climate change evident in the extent of deforestation, heightened pollution, poor waste management, oil drilling, and industrialization. Addressing these environmental damages and negative externalities is crucial, and environmental taxation can play a vital role in ameliorating the excesses of the extractive sector. Additionally, public participation could also be essential for enhancing public policies related to natural resource management and environmental conservation. This chapter specifically explores the extent to which environmental taxation and public participation can help to achieve the objective of improving natural resource management in Africa. It further explores the implications of environmental tax and public participation systems for policy, research, and practice related to the management of natural resources in the region. By analyzing these implications, the chapter aims to shed light on how environmental taxation and public participation can contribute to more effective and sustainable natural resource management in Africa. This analysis considers the importance of policy frameworks, research initiatives, and practical implementation in achieving these goals.

   6. Globalization, Institutional Quality and Management of Natural Resources in Africa

      Parrendah Adwoa Kpeli, Manfred Adu-Poku, Kingsley Kofi Owusu, Mohammed Amidu

      Abstract

      This study explores the interaction between globalization and institutional quality in the context of natural resource management. Data is analyzed from 37 African countries spanning a 21-year period (2000–2020) using System GMM. We examine three key variables: globalization, institutional quality, and natural resource management. The findings indicate that certain aspects of institutional quality combined with globalization influence total and depletion rent substantially. Additionally, law and order, legislative power, and globalization show significant influence on total and depletion rent. The interaction between globalization and institutional quality demonstrates significant and diverse effects on total natural resource rents, with varying relationships between bureaucratic quality and globalization, law and order, and legislative power. The study calls for the need to strengthen institutional quality, develop infrastructure and sustainable globalization strategies, diversification and economic transformation, and most importantly continuous monitoring and evaluation in natural resource management.

4. Implications: Stability, Creditability and Sustainable Development

   1. Frontmatter

   2. How Does Taxation of Natural Resources Promote Inclusive Development in Africa?

      Haruna Issahaku, Zangina Isshaq, Mohammed Amidu

      Abstract

      Natural resources are either a blessing or a curse, depending on how they are managed. In this chapter, we discuss how the taxation of natural resources can foster broad-based development in African countries by assembling and critically analysing the existing literature. First, we provide an overview of the taxation of natural resources in Africa and stylised facts about inclusive development in developing countries. Second, we explore the preconditions for effective taxation of natural resources for inclusive development and the channels through which taxes on natural resources affect inclusive development. Third, we review and discuss reported empirical evidence of the impact of natural resource taxation on inclusive development indicators such as poverty, inequality, employment, income, consumption, women and youth empowerment, financial inclusion, and rural development. We conclude the chapter with recommendations to guide the formulation and implementation of inclusive development-sensitive natural resource tax policies in Africa.

   3. Foreign Direct Investment and Tax Incentives in the Extractives Sector: The Good, the Bad, and the Ugly

      Joseph Dery Nyeadi, Ezekiel Davies, Joshua Yindenaba Abor

      Abstract

      Developing countries throughout the world have often sought foreign direct investment due to the obvious benefits that emanate from the inflows of foreign direct investment to their economies. This has led to the introduction of several stimulant factors such as tax incentives. These certainly have contributed significantly to the attraction of foreign direct investment into Third World countries. The sectorial distribution of foreign direct investment into third world countries tends to skew towards the extractive sectors like the mining and drilling industries over the years as the other sectors may not be lucrative enough for foreign investors. Notwithstanding the benefits these economies receive from foreign direct investment in the form of enhanced capital, technology transfer, improved managerial skills, general economic growth, etc., the same economies have experienced some retarding factors from foreign direct investment. Some of such negative consequences of foreign direct investment are crowding out of local businesses, increase in environmental hazards, and distortion of local currency stability due to mass repatriation of profits by foreign investors. Using a review approach, this book chapter focuses on unearthing both the brighter and darker sides of foreign direct investment inflows to developing countries. With stylized facts from developing countries, the study further justifies in detail the pros and cons of tax incentives in the extractive industry through foreign direct investment.

   4. Economics of Peace: Can Extraction of Oil and Gas Lead to Sustainable Peace?

      Zangina Isshaq, Mohammed Amidu, Aisha Mohammed Sissy, Edward Asiedu

      Abstract

      Natural resource endowments and their association with poor economic performance have been likened to a curse. We ask whether natural resources are inimical to peace. In this chapter, we examine the implications of natural resource exploitation for sustainable peace. Use data from the recently available Global Peace Index scores to estimate models for Sub-Saharan African countries. We estimate models that include as explanatory variables total natural resources rents, rents from gas, oil, and mineral resources. We consistently find that only mineral resources show statistical significance related to peace index scores. Mineral resource exploitation is not conducive to peace. We also find that institutional quality, especially political stability, voice, and accountability, contribute to peace. Our results imply that mineral resources need a well-designed exploitation framework that generates economic opportunity, which can only be achieved with institutions equipped to deliver it. African government must take this task seriously.

   5. How Does Taxation of Oil and Gas Hold up in Commodity Price Volatility?

      Godfred Amewu, Kwaku Addae-Ankrah, Randolph Nsor-Ambala, Joshua Yindenaba Abor

      Abstract

      Over the past decade, commodity prices have seen down-crashing prices in 2015 and 2020, as well as skyrocketing prices of crude oil during the post-COVID-19 recovery era. Several causes of these developments have been outlined in the extant literature. For instance, the recent surge in commodity prices in the aftermath of the 2020 pandemic is primarily due to a fuel scarcity emerging from the geopolitical tension, specifically, the Russia–Ukraine war, which tends to drive up oil prices and other commodities. While some of the causes of these price crashes are well known, others are complex. Generally, a combination of oversupply and weak demand, pandemics and political disturbances are major causes of these downward or upward commodity price crashes. However, the link between taxation in the oil and gas sector and commodity price volatilities could never be overemphasised. Various resource-endowed economies consider different policy issues when designing tax structures in the oil and gas industry. These taxes range from royalties to corporate taxes. While high tax rates could serve as a disincentive to investors in the industry, resulting in a shortfall in demand, low tax policies have the potential to induce over-investment and production. This chapter provides a review of commodity price crashes and the role of taxation within the oil and gas sector with an emphasis on emerging economies. The chapter covers tax rate management and tax practices, the oil and gas industry, and the taxation characteristics across oil and gas resource economies. It offers some insights into taxation and price volatility dynamics and policy implications.

   6. Can Extractive and Financial Sector Development Help Build Sustainable Infrastructure in Africa?

      Zangina Isshaq, Aisha Mohammed Sissy, Mohammed Amidu

      Abstract

      We examine the relationship between natural resource rents, bank credit, and infrastructure quality in Sub-Saharan Africa. We consider total natural resources rents and specific rents from extractive industries—oil, gas, and mineral resources—in our analysis. We employ instrumental variables, fixed effects, and dynamic panel data estimations in our analysis. Our results, in general, suggest a weak positive association between natural resource rents and infrastructure quality. Conditioning on institutional quality and financial development leads to different observations. When we consider natural resource dependence as a natural capital proportion of total wealth, we find that institutional quality has a negative coefficient on the interaction of institutions and natural resources rent in developing enablers of trade such as roads and other trade-related infrastructure to spur economic activity and prosperity.

   7. Corruption, Taxation of Natural Resources and Sustainable Development in Africa

      Saint Kuttu, Michael Gift Soku, Mohammed Amidu, William Coffie

      Abstract

      African nations grapple with balancing socio-economic growth and environmental preservation amid resource extraction. Taxation is advocated for revenue and environmental control. However, corruption poses a significant hurdle among duty bearers and citizens. Using a multidimensional regression strategy, this research explores corruption’s interplay with taxation policies and their impact on African sustainable development. The findings stress anti-corruption measures’ critical role in enabling effective taxation strategies for sustainable resource management across diverse African nations. Firstly, they indicate that robust anti-corruption measures significantly shape successful taxation policies for sustainable resource management. Moreso, the study underscores a strong link between reduced corruption, enhanced taxation strategies, and improved prospects for sustainable development across Africa’s sectors. Finally, it highlights the urgent need for cohesive policies and robust enforcement mechanisms to drive sustainable development in Africa’s natural resource sector.

   8. The Impact of Natural Resource Depletion on Climate Change Vulnerability and Income Inequalities in Africa

      Edward Asiedu, Mohammed Amidu, Osman Babamu Halidu

      Abstract

      The continent of Africa is endowed with abundant natural resources but faces significant challenges in sustainably managing these resources while addressing the growing threats of climate change and socioeconomic disparities. Thus, this study investigates how natural resource depletion affects climate change induced vulnerability and income inequalities in Africa. The study employs the novel Method of Moments Quantile Regression (MMQR), and panel data of 21 countries spanning from 1994 to 2020 to explore the nexus. The study finds that natural resource deletion has a positive and significant effect on both climate change vulnerability on one hand and income inequality on the other hand. This implies that natural resource depletion significantly worsens both climate change induced vulnerability and income inequality. Consequently, policy makers need to consider the interconnectedness of environmental systems, and ensure that sustainable resource management and preservation policies and practices must take crucial accounts of not only effective climate change adaptation and mitigation strategies but also environmental and equity concerns, which are crucial for promoting more equitable societies and reducing income disparities. The findings of this research contribute to a deeper understanding of the complex dynamics and provide insights for policymakers to devise effective strategies for sustainable development in the African region.

   9. The Future of Natural Resource Management and Policy in Africa

      Jabir Ibrahim Mohammed, Ophelia Amo, Joshua Yindenaba Abor

      Abstract

      This chapter discusses the future of natural resource management and policy direction in Africa. We provide insights on the management, strategies, challenges, ways to address the challenges of natural resource management, and the future of natural resource management. Our conclusion is that natural resource-rich countries, especially in Africa need strong leadership and institutional quality to ensure proper management of their resources. We also argue that strategic funding direction, educational outreach, and control of corruption are key pillars to ensuring a successful management of natural resources. Resource-rich countries must equally ensure that they put in better strategies such as strategic planning, extraction of resources and good fiscal regimes in managing their resources. The policy insight is that countries rich in natural resources must ensure that marginalized groups such as women, indigens and local communities participate in the decision-making process regarding the extraction and utilization of natural resources and revenues generated.