By Mukasiri Sibanda, Zimbabwe Environmental Law Association (ZELA)
This post originally appeared on mukasirisibanda.wordpress.com on June 29, 2017
In an environment where a chorus from communities, CSOs and government on improved transparency in the mining sector is strong and persistent, what accountability opportunities and challenges does Caledonia’s Extractive Sector Transparency Measures Act (ESTMA)Report present? This blog explores if there is added value from Caledonia’s ESTMA report to the Publish What You Pay campaign in Zimbabwe. Basically, the ESTMA Report produced by Caledonia largely focuses on Blanket Mine located in Gwanda rural district of Matebeleland South province.
What is in the Report and opportunities to enhance accountability?
Reporting period and timeliness of information
The reporting period is an important aspect of any report. It reveals the timeliness of information and how easier it is to be compared with other independent reports based on their reporting periods. Caledonia’s ESTMA reporting period runs from 01 January to 31 December 2016. This reporting period fits perfectly with the reporting cycle of the public funds as prescribed by the Financial Management Act (Chapter 22:09). Ideally, this makes it easier to compare Caledonia’s ESTMA Report with other public funds like the local government fund and Rural Electrification Levy (REL).
Accuracy of information & social audit opportunities
Quality assurance of information is necessary considering that corporates have been accused a number of times for “creative accounting.” So, the attestation by the reporting entity and the independent auditor that the report is factual, complete in all material respects as required by ESTMA gives a fair measure of comfort to the users of information.
There is an opportunity for PWYP Zimbabwe to carry out a social audit and give its own opinion on accuracy of information shared by Caledonia’ ESTMA report. This process involves triangulating payments made to government by Caledonia with data on what government received from Caledonia’s Blanket mine. Even if PWYP Zimbabwe fails to get the requisite cooperation from government, it can still form its own opinion that it could not attest as to the accuracy and completeness of the Caledonia’s ESTMA report. This will form a good basis for a campaign for greater transparency on what government is getting from mining companies.
Improved transparency on payments made to government
From the report, one can easily track the various payments made by Blanket Mine to different government departments in 2016. This entails taxes and royalties paid to the Zimbabwe Revenue Authority (ZIMRA), fees paid to local government and ministry of mines and payments made Zimbabwe Electricity Supply Authority (ZESA) such as the Rural Electrification Levy (REL) and infrastructure improvements.
Tax revenue a reliable source of development finance
From the Report, tax revenue is a predictable and reliable income stream when compared to dividends. Narrowing down to local public funds for development, tax was paid to Gwanda rural district council whilst no dividends were paid to Gwanda Community Share Ownership Trust. Without a doubt, Community Share Ownership Trusts have heightened community interest in areas where they have been successfully launched. PWYP Zimbabwe should therefore guard against possible diversion of community interest in transparency and accountability of local taxes paid by mining companies.
Since Blanket Mine is on an expansion drive and PWYP Zimbabwe should check if this is translating to improved payments to local government. This data is critical to show if the taxes paid to local government by mining companies are regressive or not. Certainly, the fact that labour, a production factor which has been supplanted by technology is being used as a basis for calculating local tax paid by mining companies. Hence PWYP Zimbabwe can leverage on ESTMA report data to show cause why local tax policy should be reformed.
What the report tells us about government’s intentions to scrap royalties
Clearly, royalties dominate payments made to government by Blanket Mine. It is worrying that early this year, the Minister of Mines intimated early this year that government is mulling scrapping royalties for the gold sector. If this comes to fruition, mineral revenue flows from mining will be hit hardest thereby weakening government’s ability to invest in social protection of poor and vulnerable groups of society.
Mining contributes significantly to Rural Electrification Levy
Increasing access to electricity is one of the priorities of the Sustainable Development Goals (SDGs). Looking at the ESTMA report, mining companies are significant contributors to the rural electrification levy, $466,322 was paid by Blanket Mine in 2016. Therefore, PWYP Zimbabwe should include transparency and accountability of public funds such as the rural electrification levy
Legal reforms on disclosure, lessons for Zimbabwe
It is important to note that the disclosure on payments made to government by Caledonia’s project on Blanket mine came because of Canadian law, the ESTMA. At the domestic level, mineral revenue transparency deficiency need legal reforms. This is so even though the Constitution clearly provides for public access to information in general under Section 62 and specifically for the mining contract negotiation and contract performance under Section 315 subsection 2 (c) and the Zimbabwe Stock Exchange Listings Requirements for mining companies.
It is interesting to note that the draft Mining and Minerals Amendment Bill has a provision for mandatory primary listing of all large-scale mining companies. If passed, automatically, the Bill will be a game changer to enhance public transparency in the mining sector. However, the Canadian experience shows that legal reforms to promote disclosure of payments made to government by mining companies is a necessity. Government can even take further legal steps of ensuring that even non-listed mining companies disclose per project the various payments made to government.
Without government’s disclosure of payments received from mining companies, public reconciliation of mineral revenue remains a pipe dream. Whilst one can easily pick the various payments made by Blanket Mine to government from the ESTMA Report, data on what government receives from mining companies is barely available and accessible to the public.
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.
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