The relationship between EITI and tax justice
The relationship between EITI and tax justice
"Render unto Caesar the things that are Caesar's" [Matthew 22:21]
In the corridors and panels of the Global Conference, there was a buzzing debate about the extent to which the EITI should be used internationally to address tax justice issues and specifically the balance between government and company take. Some argued that it was beyond the EITI mandate. Some argued that it was harmful for business. Others argued that it was stepping on sovereignty issues. Let me provide four reasons why the EITI should internationally promote well informed national debates about whether companies are paying the right levels of tax, focusing specifically on why I think that it would be helpful to well-managed and honest companies.
1. The debate is not only about raising proceeds for the State, but ensuring a level playing field.
From the outset, it is important to distinguish between tax avoidance (legal) and tax evasion (illegal). Action is needed on both fronts. Governments need to monitor whether the tax system is generating a reasonable return to the State.
Whilst EITI Reports do not reveal much directly about the complex web of tax avoidance and transfer pricing, they do reveal some important information on who is paying tax and who is not, which can be scrutinised against contracts, production figures and the tax regime. By combining this information, the EITI can help identify where there is a discrepancy between what companies should be paying and what they are paying. Liberia, for example, is using its EITI process to undertake a ‘should-be-paid’ audit [www.leiti.org.lr/doc/leiti4rp2.pdf].
In Zambia, the 2010 EITI Report shows that more than 700k tonnes of copper was produced in 2010. In that year, the average copper price was about US $7,500 per tonne. This should therefore have generated total revenue from copper sales of over US $5.2bn. The EITI reports US $500m government revenue of which US $100m was in employment taxes and US $400m in royalties and other production and profit taxes. The latter thus constituted only 7.5% of estimated export proceeds. Royalties accounted for 3% of that. Most of the rest came from the corporate tax. Yet only two firms paid significant corporate tax in Zambia that year. The rest were still on tax holidays, or claimed to have made losses in Zambia (despite the high prices). The Zambian government has since introduced a law to monitor the inflow and outflow of foreign exchange. They have done this in an attempt to ensure that the current tax arrangements are properly implemented and thus provide a level playing field for operating companies.
Similarly, in Tanzania, only one mining company paid corporate tax in 2009/10 whilst gold prices increased six fold in the previous decade. That company is no longer operating in Tanzania...
It cannot be good for business in general to have some playing by different rules, whether they are acting illegally or not. The EITI Reports reveal important information to inform this debate. As UK Business Secretary, Vince Cable, said about the UK implementing the EITI: “This is about levelling the global playing field and boosting transparency, not about getting in the way of business and meddling in their affairs”.
2. The tax debate is out there. Companies are increasingly putting out full details of their tax payments to ensure that the debate is better informed. The EITI can help companies shape the debate at the national level, based on sound data, and reduce shrill accusations and reputational risk.
I recently heard Paul Collier say that the debate on tax and transparency has moved “more in the past six months than in the previous six years”. He went on to ironically congratulate Starbucks for their contribution to this progress (the reporting of their tax payments to the UK government caused a major debate on tax avoidance).
Last month, the Africa Progress Panel estimated that “firms that shift profits to lower tax jurisdictions cost Africa US $38bn a year”. As Chair of this year’s G8, David Cameron has seized upon this and other such reports, and promised to focus this year’s summit on tax, transparency and trade, in order to increase tax justice. He has put implementation of the EITI in the UK as a central element of that agenda.
With country-by-country and project-by-project reporting soon required by legislation in the US , Europe, and Canada, an increasing number of companies have stolen a march on the agenda by publishing their tax payments. All extractive companies listed in the US and Europe have in some way planned for these rules come into force. In launching Rio Tinto’s 2012 Taxes Paid report, their then CFO Guy Elliot said “Rio Tinto welcomes constructive debate on natural resource taxation policy as part of the overall contribution to economic development that responsible mining investments can make”. He went on to explain how tax policy should be designed to take cyclical elements and respect for contracts into account. On publishing Tullow’s 2012 corporate responsibility report, which includes all its tax, royalty and other payments to governments around the world, Chair Simon Thompson ‘welcomed’ the legislation and argued that full project-by-project disclosure was the way forward, because it "created an absolute level playing field so that … there are no commercial sensitivity issues as a result". Like Shell, Statoil and Newmont who, amongst others, have recently produced similar reports, these companies are seeking to shape the debate rather than respond to it.
3. The EITI can help simplify and improve the tax system to attract investment.
In many countries, the tax system is too complex and/or too punitive, deterring and driving out investment. The tax increases in Kyrgyzstan appear to have left the government with less, not more, revenue. Companies want a secure, stable and clear environment on tax, investment and contracts. It is clearly the responsibility of government to monitor and ensure that the tax system is working as intended. The EITI should not undertake the work of the tax office and the auditor general (among others). Rather, the EITI should be used to bring all of this information together, to make it more accessible, and to put it into a broader context, so as to promote better stakeholder understanding of what is happening in the sector, what can be expected over long timeframes, and what changes are needed to promote better outcomes. Greater stakeholder awareness can help spur reforms that will promote investment, job creation, economic development and increased government revenues.
4. A national tax debate gives meaning to the EITI Principles.
Whilst there is a lot of focus on Starbucks and Apple, citizens rightly have different demands towards companies that extract natural resources – which ultimately belong to the citizens – than companies that sell coffee or computers. That is recognised in the EITI Principle 1 which states that “the prudent use of natural resource wealth should be an important engine for sustainable economic growth” and Principle 4 that “a public understanding of government revenues and expenditure over time could help public debate and inform choice of appropriate and realistic options for sustainable development”. The 2011 Evaluation by Scanteam challenged the EITI to become more relevant in order to achieve these principles. The strategy review over the past two years culminating in the EITI Standard was designed specifically to make the EITI more understandable, more relevant, and more reliable. The EITI Standard aims to facilitate a relevant process in each country. As President Obama said when launching the EITI process in the US, he wanted to ensure “that taxpayers receive every dollar they’re due from the extraction of natural resources”. More countries are using the EITI in this way.
In the Democratic Republic of Congo, according to the EITI report, less than $200m came into the government coffers in 2008 and 2009 put together. Less than US $1 per person per year looks like a small return from a sector that is considered to have sustained a war that has so far killed an estimated 5 million people. Of course, the above does not mean that the companies are responsible for the deaths nor even of tax avoidance, but it a clear indication that they have a strong interest in being part of the national tax policy debate. In a fraught atmosphere, the EITI provides a platform and builds trust for this debate.
In conclusion, the EITI must remain a process for facilitating transparent businesses that employ thousands of people, create growth, and pay taxes. To do so, it needs to encourage and inform national debate about tax justice.