Tax Justice and Extractive Transparency: Two faces of the same coin

Publish What You Pay is working on a Global Strategy which will serve to guide the movement from 2020-25. As part of this process we are reflecting on key questions facing the movement, through Think Pieces and webinars which will raise some key questions from the piece. Find out more about the PWYP Global Strategy process by watching this explanatory video.

This particular piece explores what tax justice means for transparency in the extractives sector.

—-

Tax Justice and Extractive Transparency: Two faces of the same coin

By Kwesi Obeng

There are three main revenue sources for a government – (i) tax revenue (ii) non-tax revenue and (iii) borrowing. But taxation is central to the development of any country. Successive major leaks in recent years from Swissleaks to Paradise Papers demonstrate how the network of global tax havens and the secrecy they engender continue to flourish and undermine resource rich countries’ ability to mobilise domestic revenue to underpin their development.

What is Tax Justice?
Tax justice is about ensuring that all individuals and companies pay the right amount of tax to ensure a sustainable and functioning democracy. It about enabling states to collect the domestic revenues needed to provide for the basic needs of their citizens, tackle inequality and promote social well-being. In effect, it is about ensuring that all tax payers pay their fair share of taxes to ensure sustainable development and a functioning democracy.

Why tax justice is important

A functioning state that can meet the basic needs of its citizens must rely ultimately on its own revenues to pursue its development agenda. Using the tax system, a state can mobilise domestic resources, redistribute wealth and provide basic essential services and infrastructure to tackle poverty and inequality. Effective tax structures can also create incentives to improve governance, strengthen channels of political representation and curb misuse of public funds.

The extractive sector and tax justice

Oil, gas and minerals are a finite resource. This makes it even more important that the revenues they generate are invested in public services, infrastructure and economic diversification. This is essential for intergenerational equity and to help economies to transition to low carbon economic pathways (as part of the response to climate change).

During the 2002-2008 commodity price boom, the turnover in the mining sector rose globally by a factor of 4.6, yet tax revenues earned by African countries, for example, went up by only a factor of 1.15.

In many resource rich countries, growth in the extractives sector has not led to increased revenue from taxation or benefits for citizens in terms of public services or poverty reduction. It has mainly benefited multinational companies and their shareholders and a few wealthy individuals.

In many countries the extractives sector is not paying its fair share of tax because of 1) overly generous tax incentives and 2) tax dodging or aggressive tax practices by companies and individuals.
1) Overly generous tax incentives offered by national governments

These can include reductions in, or simply very low, royalty and corporate income tax rates, exemptions from import taxes; generous rules regarding capital allowances and the treatment of losses for tax purposes.
Whilst tax incentives can attract investment, multinational companies also consider other factors like economic and political stability alongside these incentives and there is limited evidence to show that incentives have supported Governments to spur broad-based growth and development.

See chart below:
Think piece 2 - chart
Source: IMF
There is a lack of transparency about the tax incentives that Governments are offering and how they are weighing up the loss of tax revenue against the supposed benefits of extractives. This lack of transparency creates opportunities for corruption and can warp the governance of the extractives sector in a country.

2) Tax dodging and aggressive tax practices by companies and individuals
In many developing countries, the extractives sector is not creating significant numbers of jobs for local people – so they are not directly benefiting from the incentives that are offered. This makes it even more important that corporate income tax (CIT) is paid so that the tax revenues can be invested in public services and infrastructure.

However, large corporations often find clever ways to avoid paying their fair share of taxes in the jurisdictions where they make the profits due to weaknesses in the global tax architecture. In developing countries it is unrealistic to expect that weak and under-resources national revenue authorities can take on these companies who often have strong allies in Government.

“Multinational companies have a strong incentive to shift profit as a result of the differing tax burden between producing countries, home countries and tax havens. Through elaborate networks of subsidiaries, companies shift profits out of highly taxed producing countries to lower tax jurisdictions, while at the same time shifting costs into those same highly taxed producing countries.”
PWYP Canada report Million Ways to Lose a Billion

How can PWYP and the Tax Justice Movement work together?

In many countries, PWYP members are actively engaged in discussions around taxation. This thought piece (and the linked webinar) is an attempt to engage more members and coalitions in the debate about PWYP’s role in Tax Justice.

On tax incentives

  • PWYP can advocate at all levels for greater transparency in the tax incentives offered by national Governments and the disclosure of contracts and associated commitments between the Government and companies. (Chain for Change Step 4)
  • PWYP should also advocate for strengthened oversight and greater engagement of civil society and communities affected by mining in discussions about the anticipated benefits (and costs) of extraction.

On tax dodging and harmful tax practices

  • PWYP has the potential to mobilise transnationally (both in the country where extraction is happening and in the country where an MNC is registered) and to use information to ‘follow the money’ and highlight harmful tax practices.

Questions for PWYP members

  • Should PWYP form a more explicit partnership or alliance with the Tax Justice Movement?
  • Should PWYP invest resources in the key areas of overlap between its core focus on the extractives sector and the focus of the Tax Justice Movement on tax havens and the offshore sector?
  • Should PWYP (on an opt-in basis) strengthen coalition’s capacity to ‘follow the money’ and understand how the weaknesses of the international tax system affect their country?
  • Should PWYP document existing coalition experience of working on taxation issues?

Why South Africa’s Extractive Sector Needs Greater Transparency

Case study of Sedibeng Iron Ore mine, by Tafadzwa L. Kuvheya

South Africa is a major minerals producer and host to leading international mining companies. Mining accounts for approximately 18% of the national GDP. The costs and benefits of mining for South African communities, and the impacts of South African mining companies operating elsewhere in Africa, are matters of much concern to civil society.

In May 2017, a community activist and Publish What You Pay member from Kathu in Northern Cape mentioned to Publish What You Pay South Africa (PWYP-SA) that he has led Maremane mining community in trying to obtain information about the Social and Labour Plan for the Sedibeng Iron Ore mine to no avail. The community had started raising questions about the benefits of the mining activities by Sedibeng.

PWYP-SA offered to help find publicly available information about the Sedibeng mine. This case study describes the research undertaken and shows how difficult it can be in South Africa to obtain information relevant to local communities about extractive projects.

This case study is part of Publish What You Pay’s Data Extractors programme, a global initiative which trains PWYP members and activists from across our network to use extractives data. The findings of the report are valid at the time of publishing.

Policy brief on Double Taxation Agreements: the case of Zimbabwe

Double taxation arises when two or more tax jurisdictions overlap, such that the same item of income or profit is subject to tax in each. Double Taxation Agreements were therefore instituted as an international tax instrument for avoiding double taxation of the same income or capital to the same taxpayer in the same period in two jurisdictions and promoting international tax compliance and information sharing. However, in recent years, there has been increasing global debate regarding the effectiveness of double taxation agreements.

This policy brief provides an overview of DTAs within the international taxation framework with a particular focus on those signed by Zimbabwe and partner countries. It therefore interrogates the implications of DTAs on social and economic rights of citizens of Zimbabwe in particular and developing countries in general as well as key recommendations for Zimbabwe.

Abundant Resources, Absent Data

Australian companies have a long history in extractives, particularly in the mining sector, both domestically and abroad. Australia’s global presence far exceeds its size and it is one of the leading extractive industry players globally, with over 700 Australian Stock Exchange (ASX) listed companies operating in more than 100 countries. Australia also enjoys a strong and positive international reputation for mining expertise and governance.

This report analyses publicly available data in an attempt to draw a comprehensive picture of Australia’s extractive presence – by company, country and project. It shows stakeholders a regional snapshot of what a mandatory disclosure law would cover in the Australian context and how this would enable citizens and governments to ensure that they are receiving a fair deal for the extraction of the natural resources. It also demonstrates how Australian policy can support the sustainable development of natural resources in the countries it operates in. Using data, it argues for the introduction of a mandatory disclosure law which would align Australia with the global reporting standard set by the 30 countries who have already implemented it.

A copy of the dataset which accompanies the report can accessed here

PWYP Australia proudly releases this report through the PWYP Data Extractors programme. It demonstrates how important open data is to increasing transparency in the extractives sector, building evidence based policy, and ensuring citizens and governments around the world are benefiting from the extraction of their natural resources.

Many ways to lose a billion

Countries rich in oil, gas and minerals often fail to secure a fair share of their natural resource wealth. Revenue loss from the extractive sector is particularly significant given the large
number of countries that depend on natural resource revenues for a substantial portion of their annual budgets. Companies employ a wide range of strategies to minimize their payments to
governments. Their efforts to avoid tax are facilitated by weak institutions, inadequate policies and regulations, badly negotiated contracts, and insufficient government monitoring and auditing.

This report, by PWYP Canada, responds to a persistent question: is my government receiving its fair share of revenues from extractive sector projects? While no single report can specify what constitutes a fair share for every resource project, by identifying and illustrating the common pathways to government revenue loss in the extractive sector, this report will help stakeholders pinpoint mechanisms and policies that can safeguard critical revenues.

Taking away the tax effect of tax havens

Cross border taxation methods and reverse tax credit

This report introduces the reader to a much-neglected area of international taxation, tax credits, and shows how a more active utilization of tax credits and one of its accompanying features, withholding tax, can fix some of the issues we have with multinational companies not paying taxes.

In addition, the report shows how by reversing the principles of tax credits and applying them unilaterally to cross-border transactions on the cost side, one is able to effectively negate the negative effects of multinational companies not paying taxes.
An application of reverse tax credits on cross-border transactions can effectively restore the taxation of multinational companies to where it does not matter whether the companies use low- or no-tax jurisdictions anymore.

This report is thus about increasing the international tax toolbox, and reversing the situation where countries feel they have to participate in the downward spiral of tax competition. It shows that by tweaking international tax mechanisms, it is possible to unilaterally fix the tax situation of many multinational companies.
Reverse Tax Credit is for application with subsidiaries in a country with cross-border cost transactions, while a more active application of withholding tax and tax credits works wonders with cross-border transactions without active representation in the country.

Developing a handbook for using project-level data

Laws compelling extractive companies to report their payments to governments at the project level have been adopted in the EU, the US, Canada and Norway. The EITI has agreed to roll out project-level reporting across all 51 of its implementing countries. Early adoption of the regulations in the UK, France and Norway resulted in dozens of companies reporting in 2014 and 2015, with thousands more set to publish reports in the coming years.

A key aim of payment transparency is to deter governments and companies from misusing revenues from natural resource extraction in the first instance. However, it was also recognised that it will be possible to pro-actively use the data disclosures to hold actors to account for questionable transactions after they have taken place, which in turn should work to strengthen the regulations’ deterrent effect. Analysing project-level data can be relatively straightforward, but in many cases it is complex and technical. As such, as part of the PWYP Data Extractors’ programme, work was done to produce an accessible handbook for using project-level payment disclosures for accountability purposes.

This case study is part of Publish What You Pay’s Data Extractors programme, a global initiative which trains PWYP members and activists from across our network to use extractives data.

Why mandatory disclosures matter for Indonesia

The global transparency wave has reached Indonesia. Initiatives such as the Extractive Industries Transparency Initiative (EITI) are bringing more transparency to Indonesia and the mandatory disclosures laws of the EU have led to more data on extractive activities in Indonesia becoming available.

But the oil, mining and gas industries are still among the most corrupt sectors and accessing relevant data on the amount of production, marketing, shipment and payment of taxes and other company financial liabilities is difficult. In Indonesia, ranked 90th out of 176 in Transparency International’s Corruption Perception Index 2016, the data from the three EITI reports published so far (between 2009 and 2013) is incomplete and out of date. Disclosing data will therefore not be enough to ensure accountability. The data also needs to used in a meaningful way by a range of stakeholders, including civil society.

In this case study, our Data Extractor from PWYP Indonesia used the disclosure of companies’ “payments to governments” data as an entry point to begin comparing the payments recorded by the parent company (listed on EU markets) with those received by the Indonesian government.

This case study was written by Meliana Lumbantoruan from PWYP Indonesia and is part of Publish What You Pay’s Data Extractors programme, a global initiative which trains PWYP members and activists from across our network to use extractives data.

Is the United States getting a good deal on its natural resources? A taxing question

This case study began with a not-so-simple question: Is the United States getting a good deal for the depletion of its natural resources?

Publish What You Pay – United States (PWYP-US) has worked for 13 years to open the books of oil, gas and mining companies to create a more open and accountable extractives sector. More than a decade into this effort, many of the world’s largest oil, gas and mining companies now disclose their project-level payments to governments, either voluntarily or in compliance with legal requirements. Yet, a few major US oil companies
– namely ExxonMobil, Chevron and ConocoPhillips – remain strongly opposed to these simple financial disclosures.

Like the citizens in resource-rich countries around the world, citizens of the United States also need to know if they are getting a good deal on their natural resources. Thoroughly answering this question, however, is incredibly complex and involves the careful analysis of contracts, as well as relevant tax and royalty regimes governing the extractives sector. As a starting point, this case study focuses on how much some of the largest extractives companies paid in taxes to the US federal government in 2015.

This case study is part of Publish What You Pay’s Data Extractors programme, a global initiative which trains PWYP members and activists from across our network to use extractives data.

This case study was written by Jana Morgan Director of PWYP USA as part of her Data Extractor’s project

Towards a transparent and accountable mineral resources governance framework

PWYP Zimbabwe have published a compendium of research papers on key mining related matters in Zimbabwe.

Rampant corruption in the mineral sector threatens to erode the potential the sector has been contributing to economic recovery and drive socio-economic development in Zimbabwe. This compendium presents abridged versions of research papers from Publish What You Pay Zimbabwe coalition members in their effort towards contributing to a more transparent and accountable mining sector.

Transparency International Zimbabwe (TI-Z) argues that rampant corruption in the mining sector threatens to erode the potential the sector has to contribute to economic recovery. The Zimbabwe Coalition on Debt and Development (ZIMCODD) presents an analysis of the Auditor General’s reports from 2013 to 2015 to assess progress in the implementation of the Auditor General’s recommendations. The Institute for Sustainability Africa (Insaf) presents findings on the extent of compliance with stock exchange requirements on sustainability reporting by public listed mining companies operating in Zimbabwe. The Zimbabwe Environmental Law Association (ZELA) explores the opportunities and pitfalls of the 2016 Mines and Minerals Amendment Act. The compendium closes with an argument over the search for alternatives to mining by the Centre for Natural Resources Governance (CNRG).