Tax justice - an important agenda for Publish What You Pay in Eurasia
By Tatyana Sedova and Emil Omarov on May 14, 2022
On 24 April 2018, Publish What You Pay (PWYP) hosted a webinar on tax and extractives as part of our ongoing engagement with PWYP members around the world to inform the PWYP 2020-2025 global strategy. Members of the movement and other civil society organisations from Azerbaijan, Kazakhstan, Kyrgyzstan, Mongolia and Tajikistan participated in the webinar.
Ingilab Ahmadov, (Director, Eurasia Extractive Industries Knowledge Hub), opened the discussion, presenting key ideas and his own vision. Nurlan Dzholdoshev (PWYP Coalition in Kyrgyzstan), Sobir Vazirov (PWYP Coalition in Tajikistan) and Tur-Od Lkhagvajav, Tserenjav Demberel (PWYP Coalition in Mongolia), then shared their views.
Tatiana Sedova, PWYP Global Initiatives and Impact Coordinator (EITI) and Emil Omarov, PWYP Regional Coordinator Eurasia, discuss the key points of the webinar, the importance of tax justice for this region and how these issues can be reflected in PWYP’s future strategy.
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Tatiana: We know that the governments of countries receive the bulk of extractive revenues, particularly from tax receipts. In the case of resource-dependent countries, this comes primarily from taxes on the extractive industries. To what extent is the topic of taxation in the extractive industries important for members of our movement in Eurasia?
Emil: That is absolutely correct - tax revenues play the most important role in the development of each country. The topic of transparency and tax justice is nothing new for the members of PWYP - many of our members have been working on issues of fiscal transparency, beneficial rights, among others, for a long time. I assume that everyone would agree that PWYP should work on tax justice from the perspective of the extractive industries, in order to ensure that profits from extraction are used to reduce poverty and increase prosperity in our countries.
Tatiana: The principles of taxation were drafted for the first time by Adam Smith, and he specifically referenced the principle of justice: “every citizen should pay taxes according to their means.” And what does fair taxation mean in the context of the extractive industries? For us it includes citizens, companies and the state. As Ingilab noted: “taxation is a two-way street”. The state focuses on maximising budget revenues, whereas doing business should be attractive to the investor, and companies should generate reasonable profits so that they want to work in a specific country. Investors also frequently mention the importance of stability, predictability and simplicity of working conditions. In the absence of similar equal and transparent working conditions and due control by the state, companies start looking for loopholes to maximise their profits through different tax avoidance methods.
Emil: Recently, the release of Swissleak’s investigation and the publication of the Paradise Papers have demonstrated how the global offshore network works, and how the secrecy it guarantees provides opportunities for tax avoidance schemes to prosper, and undermines resource-rich countries’ opportunity to proactively use domestic revenue to stimulate their development. PWYP Canada’s report Many Ways to Lose a Billion analysed the risks and some of the schemes through which governments miss out on taxes owed, leading to significant loss of revenues from the extraction of natural resources. The report also offers some solutions on how civil society can participate in the process.
In general, the topic of tax justice has generated significant interest among our partners. As Tur-Od noted, taxes represent the main source of budget revenues. Most of the populations of our countries remain poor, while the elite (5-10%) is getting richer and richer. This is directly related to corruption. The statistics in Mongolia look as follows: there are 3,600 licences and 1,700 companies. However, 20 companies pay almost 90% of all the taxes. Is this a tax system fair for citizens or only for the government? How do you fight tax avoidance? These are the questions put forward by our members.
Tatiana: Incidentally, webinar participants noted that companies are “smarter and more creative” than governments are, and are able to find a number of tax avoidance methods - through an increase in their costs (showing lower profits), and through transfer pricing, and so-called thin capitalisation (the debt to equity ratio when arrears on a company’s debts are paid through its subsidiaries in our countries (Ukraine introduced this concept).
Emil: Yes, if we return to the example of Mongolia - Global Financial Integrity’s statistics show that Mongolia lost 148 million dollars each year from 2005-2012 - there is no information for the period since then. This is not only because of tax avoidance, but also because of other illicit financial flows. According to the NGO’s data, based on the Oyu Tolgoi mine, this project alone led the state to miss out on 230 million dollars, and this is only about withheld tax.
Tatiana: A vast amount of information became accessible through the reporting under the Extractive Industries Transparency Initiative (EITI). A number of countries where there are PWYP members are participating in the implementation of the initiative, including in Central Asia (these countries are Kazakhstan, Kyrgyzstan, Tajikistan, Mongolia and Ukraine). The EITI reports provide detailed information based on an overview of the sector and legislation, fiscal regimes, tax and non-tax payments of extractive companies, and data reconciliation. However, colleagues noted during the webinar that this isn’t enough: as a rule, the reports direct us to minor (more likely, technical) differences. The EITI data should also be reconciled with other sources - alternative reports, journalist investigations. Nurlan noted that we need to learn how to work with available information, how to analyse and apply it, proactively training local communities in the regions where extraction has an impact, thereby reducing social tension. Sobir proposed including the issue of tax system fairness in the EITI agenda, modifying reporting standards and drafting a roadmap on how to disclose this.
Emil: Yes, Sobir also noted that we mustn’t lose sight of the issues of justice, tax avoidance, transfer pricing, etc. At present, there is virtually no analysis on the effectiveness of the tax system. Not only should extractive companies pay everything that is required - it is important that the tax regime is effective both for the state and for companies. For example, a number of companies are trying to operate within the framework of Tajikistan’s existing tax regime of investment agreements - the issue is the extent to which such an agreement was needed, and the extent to which a company is responsible for and performs its obligations before the state. PWYP members should work more on “hidden pitfalls” and collaborate with each other, as the knowledge and experiences from other countries are very useful.
Tatiana: In fact, it is very important that we exchange experiences and build up analytical and expert knowledge. Nurlan touched on this and on the skills required to conduct analysis. This also concerns the potential of the state authorities to carry out tax modelling and calculation. Tax policies will otherwise seem unfair, both from the standpoint of companies, the state and the general public - there is not enough analysis and a shortfall of experts. Our movement is seen to have a role in increasing this kind of expertise.
Emil: There was a very interesting discussion on how PWYP can contribute to the global movement of tax justice, and on which specific issues PWYP coalitions believe it is important for PWYP to focus on. Webinar participants noted that PWYP should not only to continue work on tax justice issues, but needs to also champion them and make tax justice one of the strategic priorities for the global coalition. In terms of our work on the disclosure of contracts, investigative journalists could be good partners.
Tatiana: This was a very interesting discussion that we hope to continue with all PWYP coalitions. We welcome ideas and comments that can be shared in the next few weeks.
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We would like to say thank you to the webinar participants for their questions and comments. The webinar was broadcast on the PWYP Facebook page. You can find a recording of the webinar on our YouTube page.
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The PWYP blog section showcases the diverse views and experiences of PWYP members and partners around the world. All views and statements in this blog section represent those of the authors, and do not necessarily reflect those of Publish What You Pay.