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Why the EITI does not stop at recommending contract transparency

Why the EITI does not stop at recommending contract transparency

17 September 2018

Transparency of contractual terms is important but to understand if the right tax is coming in, you also need production and export figures.

EITI data in combination with financial accounting data can aid tax authorities and civil society in the analysis of a range of tax risks on the resource value chain. In fact, EITI Reporting has highlighted how EITI data has been leading to enhanced domestic resource mobilisation (DRM) by improving government tax collection. Increased tax income means that governments can spend more on welfare and social programmes for citizens. 

In June, the United Nations (UN) Extractive Industry Tax Subcommittee published the UN’s handbook on Extractive Industries Taxation. The Handbook affirms that a climate of trust between investors, resource-rich governments and the people is the primary benefit of fiscal transparency in the natural resource sector. The handbook also recognizes how the EITI can generate public access to extractive industry contracts between investors and governments suggesting that these were the only relevant data to be disclosed to improve tax collection. This is a part but not the whole picture.

Beyond contract transparency?

The UN Handbook describes contract transparency as a “mean of ensuring community support and a long-term relationship focus” – in particular where resource rights are granted through private negotiations. However, the handbook does not explain how contract transparency can be a tool to mitigate malpractice in taxes.

Instead, the handbook recommends that governments should set fiscal instruments through laws rather than individual/negotiated contracts for the sake of transparency and accountability given that contracts “are more likely to keep secret” and therefore bring greater risks for corruption. This might well be wise, but the fact is that the most countries still use contracts. 

Access to contract terms is key to analysing a range of tax risks. In most cases, extractive industry contracts set up the precise fiscal terms that will apply to specific oil, gas or mining projects including tax incentives. In other cases, general Corporate Income Tax Laws and/or specific mining legislations (Mining Codes) will cover fiscal regimes for the extractives. In both cases, the 2016 EITI Standard requires countries to disclose a description of legal frameworks and fiscal regime that govern the extractive industries, and to document the government’s policy on disclosure of contracts and licenses that rules the exploration and exploitation of oil, gas and minerals. Contract disclosure itself is encouraged in the Standard and over 800 contracts have been published to date in EITI countries.

However, in addition to contract transparency, the 2016 EITI Standard currently requires disclosure of two areas of data vital for tax authorities.

  1. Production and export values and volumes: Production and export data disclosure is highly relevant when analysing tax issues in the extractives. In many cases it is not comprehensively reported by mining or oil/gas government agencies and it is not shared with tax authorities due to the lack of inter-agencies protocols for the exchange of information. The EITI currently requires disclosure of production and exports data (quantities and values) by commodity, and, when relevant, by state, for the fiscal year covered by the EITI Report.

Some National EITI multi-stakeholder groups have however decided to disclose information by company when available in government databases. For example, production values are already disaggregated per mining company in the 2015-16 EITI Peru Report. The Peruvian Ministry of Mines and Energy´s on the other hand collects data on production volumes per month/commodity/company. Together, this data provides the value of each copper tonne sold in 2015 and 2016 per company which helps tax authorities to analyse for example to how extent hubs set up by multinationals in other low-taxed jurisdictions have substance and were not created to influence copper quantities, the price and production costs of copper when sold to affiliates by the mining subsidiary in the host jurisdiction.

Moreover, EITI Reporting has contributed to inter-agency exchange of mineral production data (for example, Mozambique).

  1. Taxes and other government revenues: Comprehensive disclosures of government revenues from the extractive sector, together with the comprehensive disclosure of legal frameworks including fiscal regimes and contracts help governments in their natural resource management. For example, it enables governments to carry out financial modelling and forecasts for mining, oil and gas projects. Financial models can be used to analyse the economics of the project including costs (tax incentives and the reasonability in its design, for example), prices and tax-levels in multiple scenarios. Once the economics of the project are agreed, it is also used to forecast what the correct tax should be in a “perfect” scenario. For instance, even though the Toromocho Copper Mine commenced production in June 2015, the 2015-16 EITI Peru Report showed that Chinalco Peru did not pay Corporate Income Tax (CIT) in 2015 and 2016 for this mine. This together with the fiscal terms agreed in the contract signed between Chinalco Peru and the Peruvian Government and other financial information can help Tax Authorities and civil society to analyse the reasons why some mining companies did not pay taxes in Peru in 2015 and 2016.

This shows that currently there is a wealth of additional relevant information published under the EITI which enables tax administrations and all stakeholders to improve tax collection. In my next blog, I will look at two further areas of disclosure encouraged also by the 2016 EITI Standard, beneficial ownership and project level reporting, which will further support tax administrations.

You can find out more about how the EITI supports domestic resource mobilisation in our DRM brief here.