By Kathleen Brophy, Oxfam America, and Eneya Maseko Oxfam in Zambia
This post originally appeared on politicsofpoverty.oxfamamerica.org on September 29, 2017
How detecting and deterring “transfer mispricing” in Zambia’s billion dollar mining sector can boost government coffers in a time of fiscal crisis.
Corporate tax dodging is not a victimless act. When corporations employ aggressive means to avoid paying tax in developing countries, citizens inevitably foot the bill. Corporate tax avoidance deprives governments of desperately needed tax income for the provision of public goods and services forcing governments to choose between cutting public services or collecting additional tax from citizens. So, while companies report eight and nine figure profits, citizens face eroding hospitals and schools and struggle to pay higher prices for basic goods. However, when companies do this while in the process of extracting a high value, exhaustible commodity from beneath citizens’ feet, the offense is all the more egregious.
According to the Mbeki High Level Panel on Illicit Financial Flows, multinational tax avoidance in the oil and mining sectors across Africa is rampant. In countries like Zambia, where extractive industries contribute a significant portion of the country’s overall revenues, preventing aggressive tax avoidance is all the more critical for reducing inequality. This is especially true now in the context of Zambia’s fiscal crisis as the country turns to the IMF and capital markets for fiscal support.
According to a report by the Natural Resource Governance Institute, the mining sector in Zambia accounts for nearly 80 percent of all exports, contributes 12 percent of the country’s GDP and 30 percent of its tax revenue. Despite such positive statistics, ample evidence suggests that the Zambian government also loses a significant amount of mining sector revenue due to tax avoidance by multinational companies operating there as well as lax government regulations and enforcement. It doesn’t have to be this way. Governments are not powerless and can enact strong regulations to help prevent corporate tax avoidance. The situation in Zambia shows how relatively concrete actions taken by government could make a big difference.
Reforms necessary to address avoidance
One central tax avoidance tactic used in the Zambian context is transfer mispricing. Transfer mispricing involves the manipulation of prices used in a sale between two associated companies that serves to artificially shift profits out of a given country to reduce taxes owed. For instance, a subsidiary of a multinational mining company operating in Zambia could sell copper to an affiliated company in Switzerland at an artificially low price in order to minimize its income tax liability in Zambia and transfer the income to Switzerland, thus misrepresenting the true value of the minerals sold and depriving the Zambian government of tax revenue due.
The central challenge for regulators, tax authorities, and oversight institutions is to determine whether transfer mispricing has, in fact, occurred. The example above illustrates one basic challenge for regulators: to determine whether the price at which the mineral or another good was sold or a service rendered between related corporate entities was done at a fair market price.
In order to do this, tax authorities must be able to assess the validity of the transactions by comparing a transaction between two associated entities with other similar market transactions. For tax authority officials in Zambia to undertake this type of comparable analysis, tax authorities and oversight bodies must have the necessary information regarding all controlled transactions between Zambian-based mining companies and their associated entities. Without this basic information, the Zambia Revenue Authority is unable to monitor risky transactions and identify potential transfer mispricing.
Governments around the world commonly require transfer pricing documentation from companies so they must maintain, if not regularly submit, timely and accurate information about their related party transactions. However, there is currently no legal requirement in Zambia for the maintenance of transfer pricing documentation. This oversight is a significant obstacle to tackling transfer mispricing since government officials do not have the basic information they need to monitor and evaluate related party transactions.
Furthermore, Zambia’s Income Tax Act, which could be used to regulate transfer pricing losses, currently mandates that mineral prices used in transactions between related entities be based on a reference price from an international exchange market. Unfortunately, the law also allows companies to make adjustments to the price used in transactions to account for specific details that may affect the price downward, such as ore quality. While this is a reasonable allowance, it does pose risk for abuse. This allowance increases the regulatory burden for the government, as it must also be able to evaluate the complex mineral valuation formulas used by companies to underpin the prices used in transactions.
In order to verify the valuation used by companies, the Government of Zambia must independently assess mineral quality. Mineral valuation responsibilities, including the monitoring of mineral exports, are shared between the Ministry of Mines and the Zambia Revenue Authority, along with other agencies all part of an initiative called the Mineral Value Chain Monitoring Project. While agencies are coordinating their work through the initiative, the protocol for mineral valuation procedures between agencies and the agency with ultimate jurisdiction over the matter is still unclear.
Progress made while key gaps remain
Recognizing these challenges and the need to increase revenue collection from the mining sector, the Government of Zambia has recently expanded efforts to improve mining oversight and prevent transfer mispricing. For instance, the government revised the Income Tax Act, strengthening Section 97 which sets out general transfer pricing guidelines and establishes the use of the arms-length standard as the basis for pricing all transactions between associated entities.
Such efforts are in line with ongoing efforts by Oxfam Zambia and partners including the Zambia Tax Platform to strengthen revenue generation, tax policy and payment transparency in the country’s mining industry.
Oxfam welcomes the efforts of the Zambian government to protect the mining tax base by improving its legal and regulatory capacity to address transfer mispricing in the mining sector. Additionally, the government of Zambia must build on its existing practice, and require transfer pricing documentation in the forthcoming regulations (“statutory instruments”) to the Income Tax Act. The regulations for the Income Tax Act should also include clear protocols for coordination between government agencies for the independent valuation of minerals.
While the regulations have stalled for some time, it is important that they are passed without further delay so as to provide a strong basis for regulating transfer pricing in Zambia’s mining sector.
With these changes, Zambia will have a better chance of capturing much needed tax revenue from corporate tax payers, preventing the need to make regressive policy choices that hurt Zambians.
This post was co-authored by Kathleen Brophy, Program Officer for Accountable Development Finance at Oxfam America, and Eneya Maseko, Program Coordinator for Extractive Industries for Oxfam in Zambia.
In 2014, Niger announced it had successfully renegotiated uranium extraction contracts with French state-owned company Areva to secure a greater share of the wealth deriving from their uranium resources. Three years later, an analysis carried out by Oxfam based on data released by Areva calls into question the benefits for Niger in the contract renegotiation.
This analysis was carried out as part of the data extractor program developed by Publish What You Pay.
You can read more about Areva in Niger and more in the English version of “Beyond Transparency: Investigating the Investigating the New Extractive Industry Disclosures.” This report was published by Publish What You Pay France, Oxfam France, ONE, and Sherpa.
Understanding the context: why is Nigerien uranium so important for Areva?
Uranium is a strategic commodity for France. More than 75% of electricity produced in France comes from nuclear power. Most of the uranium used for nuclear combustion in France is supplied by Areva. Up to 1 in 5 lightbulbs in France would be lit up thanks to Nigerien uranium.
For years, civil society organizations have called out Areva for the uneven partnership with Niger. Despite vast resources in uranium, Niger has yet to convert this valuable resource into tangible wealth: the country still ranks second to last in the Human Development Index.
The renegotiation: a game-changer for Niger?
In 2013, Oxfam and ROTAB, a Nigerien NGO – both members of Publish What You Pay – launched a campaign denouncing the unbalanced partnership between Areva and Niger and calling for the renegotiation of the contracts. Oxfam and ROTAB specifically pointed that Areva’s contracts included a sweetheart clause enabling Areva to pay a lower rate of royalty than the applicable regime in Niger. Royalties make up the majority of uranium mining revenues to the Nigerien government.
In 2014, after months of pressure from civil society organizations around the world, Areva and Niger agreed to a new contract without the sweetheart clause. In June 2014, a Strategic Partnership Agreement signed between Areva and Niger stressed that Areva would be subject to the legal royalty regime, raising hopes of a fairer share of the revenues for Niger. This agreement was published on the Journal Officiel- the official gazette of the Republic of Niger where major legal official information are published.
In August 2016, Areva released for the first time the payments the company makes to governments where it mines uranium, as part of new EU regulations. In Niger, it was the first time the public had access to Areva’s payments since the renegotiation took place in Niger. And the results are surprising:
The following excerpt is from an article that was published on the Publish What You Pay International Secretariat site on August 31, 2017. You can read the full post here.
Advocacy backed by data
In November, Mukasri Sibanda traveled to Jakarta to join the inaugural ranks of our “ Data Extractors ” — individual members trained in the technical art of identifying, obtaining and analysing financial information from governments and extractive companies. “I realised that it is important to empower communities with data literacy skills to enable them to drive the change process in the governance of mineral resources,” he said.
He brought this knowledge back to Manicaland Province, where PWYP Zimbabwe began working with existing community organisations, like schools and health centre committees, and instilled them with a powerful new mission. For all the diamonds in their soil, there was no reason their classrooms should lack books and their clinics lack medicines. Cyanide runoff shouldn’t pollute their rivers and kill their cattle. And with all the economic activity mines create, local residents shouldn’t be jobless or forced to illegally pan for diamonds, drawing the wrath of air force helicopters.
By backing residents’ concerns with data, Sibanda said, “we are simply trying to level the playing field.” Ill-informed, angry people are easy for companies and politicians to ignore; a united front of community leaders bearing spreadsheets are far more persuasive. The community organisations have bought into the idea, gathering in mining towns across Zimbabwe to learn about budgets, taxes and corporate social responsibility.
“Normally data is used by civil society and rarely by the communities themselves,” said Darlington Farai Muyambwa, who is the PWYP Zimbabwe’s national coordinator. “For Zimbabwe, this programme has been unique in how it managed to create interest for data at the grassroots level.”
One of those community groups is the Marange Development Trust, which lobbies public officials and companies on behalf of the residents of the diamond-producing region. “Data really helps us to do exactly what we are supposed to do on our own instead of relying on other organisations on our behalf,” said Malvern Mudiwa, the group’s chairman. Recently, for instance, the Trust persuaded local authorities at the Mutare rural district council to share two years of financial reports. The documents were extremely vague: In a district where mining is the principal economic activity, there was no line item for revenue from mineral taxes. PWYP Zimbabwe and the Trust were forced to deduce mining company contributions themselves, revealing that the local government has “never received a cent of tax revenue from the mining companies,” Mudiwa said.
By Miles Litvinoff, Publish What You Pay - United Kingdom
This post originally appeared on publishwhatyoupay.org on September 11, 2017
The London Stock Exchange’s (LSE) Alternative Investment Market (AIM) was launched in 1995 for smaller and growing international companies looking to raise capital for expansion. AIM describes itself as “the most successful growth market in the world”. The UK government has sung its praises. Lesser known than the LSE’s Main Market where larger, more established international companies’ securities are traded, AIM has over the years helped more than 3,700 companies raise more than £100 billion.
Approximately 200 oil, gas and mining companies trade on AIM. Although generally smaller than LSE Main Market companies, AIM companies have grown over the years. AIM extractive companies’ combined market capitalisation runs into the billions of pounds, which can make them significant actors relative to the size of host country economies where many citizens are still desperately poor. They operate in 40 developing and transition countries, including 22 lower- and lower-middle-income countries as defined by the World Bank, and in all the BRICS.
Fraud and corruption
The LSE recently asked for views on proposed changes to the AIM rules, including rules of corporate governance. Investigations by Global Witness, Rights and Accountability in Development (RAID) and others have revealed significant cases of fraud, corruption and other abuses involving AIM extractive companies. The risks involved are acknowledged by the UK government: “The absence of good governance and the lack of transparency around [payments to governments] reduce the positive impact that extractive industries can have on economic development … [and] negatively impacts on, and increases the risk for, … companies and investors active in the extractives sector through civil unrest and poor business environment.”
Publish What You Pay UK responded to the recent LSE consultation by proposing that all LSE AIM-traded oil, gas and mining companies be required to annually report their payments to governments following the same rules that apply to the 90-plus LSE Main Market-traded and large private UK-registered extractive companies now disclosing their payments each year under UK law. AIM extractive company reporting should meet the same requirements. The UK regulations’ £86,000 disclosure threshold, applied per single payment or series of related payments, will prevent AIM extractive companies from being unreasonably burdened by having to report inconsequential payments.
Benefits of transparency
Benefits would be considerable. First, there would be consistency in addressing investor and reputational risk. The LSE already requires extractive companies to disclose payments to governments of more than £10,000 on applying for admission to AIM, as well as to annually report estimated reserves and resources. Regular payment reporting by AIM extractive companies will help citizens hold their governments to account for revenues received, better inform investors and improve the UK’s, the LSE’s and AIM’s reputation for corporate governance.
The LSE’s discussion paper recognises AIM investors’ need to fully understand the businesses in which they invest and the associated risks. Payment to government disclosure helps investors make informed decisions and promotes confidence in the market. This is why large numbers of European and North American institutional investors and fund managers support both the EITI and mandatory public country-by-country project-level reporting.
AIM needs to maintain appropriate levels of corporate governance as its traded companies grow in size and as expectations regarding corporate accountability rightly become more demanding. With a current average market capitalisation of approximately £50 million, AIM oil, gas and mining companies are far from small in the eyes of ordinary people, and not all AIM companies will plan to graduate to trading on the Main Market. These factors make it inappropriate to apply fewer transparency requirements to AIM extractive companies than to their Main Market counterparts.
Public country-by-country project-level reporting is increasingly accepted as the industry norm. As Tom Butler, chief executive of the International Council on Mining and Metals (ICMM), said in early 2017: “[T]he global trend is in the [pro-transparency] direction. The train has left the station. It is driven by investors and other stakeholders and the desire of the industry to maintain its social license to operate. One way to maintain that is for everyone to see that the taxes and other payments the mining industry makes are applied sensibly to the development of the country.”
No UK institution should be encouraging a race to the bottom in terms of corporate transparency standards.
It is high time, then, for the LSE to extend annual payment disclosure beyond Main Market-traded extractive companies to AIM-traded ones. In the UK government’s words: “Shareholders, investors, employees, competitors, civil society groups, the media and other external stakeholders view companies’ disclosure of payments … as an example of principled leadership. … Regular … [r]eports on payments and revenues can improve the creditworthiness of both companies and countries.”
Read PWYP UK’s submission to the AIM Rules Review 2017.
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