UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1821-ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

International Development Committee

Tax in Developing countries

Tuesday 24 April 2012

tim scott, emmanuel mutati, graham mackay and christopher lenon

eddie rich, john CHRISTIENSEN and Dr odd-Helge FJELDSTAD

Evidence heard in Public Questions 73–157

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the International Development Committee

on Tuesday 24 April 2012

Members present:

Malcolm Bruce (Chair)

Richard Burden

Richard Harrington

Mr Michael McCann

Pauline Latham

Jeremy Lefroy

________________

Examination of Witnesses

Witnesses: Tim Scott, Global Head of Tax, Glencore International plc, Emmanuel Mutati, Board Chairman, Mopani Copper Mines PLC, Graham Mackay, Chief Executive, SABMiller plc, and Christopher Lenon, Chairman, Tax and Fiscal Affairs Committee, Business and Advisory Committee to the Organisation for Economic Co-operation and Development, gave evidence

Q73 Chair: Good morning, and thank you very much for coming to assist us with this inquiry into tax in developing countries, particularly in relation to resources and development. Before we start, for the record, will you introduce yourselves?

Tim Scott: My name is Tim Scott. I am the Head of Tax at Glencore.

Emmanuel Mutati: My name is Emmanuel Mutati. I am Chairman of the Board of Mopani Copper Mines in Zambia.

Graham Mackay: I am Graham Mackay. I am Chief Executive of SABMiller.

Christopher Lenon: I am Chris Lenon. I am speaking as the Chair of the Tax Committee of the Business and Industry Advisory Committee to the OECD.

Q74 Chair: Thank you very much. As I think you appreciate, what we are really looking at is the ability of developing countries to develop their tax base from all sources: inward investment and resource development, as well as general economic activity within their countries. Obviously you represent investors within developing countries. As I think you know, we went to Zambia as a case study, but it is important to understand that this is not a focus on Zambia per se. It is a case study, and we are interested in the wider implications elsewhere.

Again, as you know, we visited copper mines, including the Mopani mine in the copper belt of Zambia, and we appreciate the fact that those visits were facilitated-I think that the Committee found them very interesting. Perhaps to get us started, the real issue is the extent to which you can attract investment and also secure sufficient revenues for the country in question. If you are an outside investor, clearly you want to be able to invest and make a profit-that is understood. However, the country that has the resources wants to gain a tax and a revenue flow from that. Do you think that tax policies can and should deliver that kind of balance?

Emmanuel Mutati: I think it is possible that tax policies can deliver an attraction of investment. If we go back a few years, when the copper industry was under the parastatal company, and declined from 700,000 tonnes of finished copper to 230,000 towards 1999, obviously the Government were then receiving much less tax. A decision was then made by the Government to privatise the industry, and the new investors entered into development agreements with the Government, with a tax regime that attracted investment. That was a tax regime agreed between the Government and the new investors, with a stability period of about 15 years. That was the kind of tax regime that brought in investment for Glencore in particular. By mid2008, we had already invested $1 billion in the property. To date we have invested $2 billion. In Zambia, to last year, there has been a total investment of $5 billion, but along the line-

Q75 Chair: By the copper industry in general?

Emmanuel Mutati: By the copper industry, yes. Employment has grown, for Mopani for instance, from 10,000 at privatisation to 16,300 people. However, along the line, the Government reviewed the tax regime in 2008 and decided to introduce a windfall tax, which was a top-line deduction. That discouraged investment, and then there were not as many people who were interested to come through and invest in Zambia. We believe that if there is a favourable tax regime in the country and stability, which offers confidence to investors, there is a lot of potential in Zambia to invest more. This could then assist the Government to develop the nation and to be less dependent on foreign aid.

Q76 Chair: Perhaps we can hear from SABMiller as well. The sort of tension you experience is that you are seen to be investing and developing, but because you can offset taxes and so forth, not always do the country or the people see the revenue flow. That is really what we are getting to: how do you get the balance right? How do you achieve the right incentive to invest, and then enough visible tax flow for the community to see the benefit?

Graham Mackay: I suppose the first thing I would say is that these are not problems or balances that are unique to the emerging markets.

Chair: No.

Graham Mackay: They occur right here, in America and in the EU. Our perspective is somewhat different from that of the mining sector because we are a consumer company, and the resources that you mentioned earlier are essentially the people of the country to whom we sell consumer goods. What we see is a very unbalanced tax system in many emerging markets, in the sense that we as multinationals are under intense scrutiny all the time, locally as well as internationally or globally, and of course we pay a very large proportion of all the taxes collected in many of the countries in which we operate. It is very easy and profitable, or seen to be easy and profitable, for the local tax inspectorate to focus on us and to, in effect, camp with us, and to inspect our doings and our books all the time. That is what we are used to.

What we see, though, is the need for easier, simpler, more accessible regulation, which encourages local industry, in our industry segments but also in others, to register, come into the formal tax net, and be part of the economy in some sort of formal way. In many of the countries in which we operate, there is little of that, and in fact big, formal companies such as ourselves are the only taxpayers, by and large. We think tax reform, or tax capability, is crucially important for these countries and will make an enormous difference. There has to be the will to institute simple, accessible tax systems that allow businesses to register and be part of the formal economy.

Q77 Chair: I think that that is understood. It is equally understandable, I suppose, that when people in a poor country see what they see as rich businesses, one way or another they tend to see that as the first target. Clearly the objective is to build a tax base across the piece. I don’t know what kind of advice you would give.

Christopher Lenon: My background is in resources as well, with Rio Tinto. It seems to me that the challenge we have is that we live in very volatile times. If you look at commodity prices, be they in mining, food or whatever, they have fluctuated dramatically over the last 10 or 15 years. The challenge is to find the balance between stability for the investor, for the Government and for the country in terms of the income flows they receive, and the volatility that you have, because we are all operating in a global market where prices are set at a global level.

The other point that was made earlier was that we often talk about fairly significant levels of investment. Clearly from the investor’s perspective, one of their concerns is to recover that investment and then to earn income that meets whatever hurdle rate they have in terms of that investment. They will seek stability in order to recover and then receive the return after that. It is finding a balance between that and what the host Government seeks in terms of taxes.

As Graham has said, these are not just issues for developing countries. They are issues for every country. It is trying to find that balance between the stability that both the investor and the Government seek, and the volatility that we live in. The key thing there is that unless countries have sophisticated tax administrations, they will always struggle in this area. That is why we believe that capacity development for tax administrations in developing countries is the absolute first priority in terms of moving to a more stable situation.

Chair: I think the UK Government, through DFID, does put money into capacity building in countries, but I think you are implying that more could be done in that area to assist development.

Q78 Richard Harrington: Gentlemen, thank you very much for joining us today. I would like to say that I visited Africa for the first time in my capacity in this Committee. From a business point of view, I had had no dealings with Africa at all. However, from my perspective, the huge effect that both the SABMiller operation that we saw in Southern Sudan, and the mine we saw in Zambia, had on people’s lives is very much to your credit. In the case of Southern Sudan, there is almost nothing else-no other form of private enterprise at all. We saw salaries in the mine in Zambia that were 10 times that of others that we had seen in the country. A lot of the criticism that we heard beforehand has to be put into perspective with that in mind.

From a tax perspective, however, which is the purpose of this inquiry, rather than the greater social benefits that you may or may not have, the argument seems to be between very simple revenuebased taxes and the more complex type of corporate taxes that we are more used to in more developed countries. The latter would seem to cause most of the controversy from the opponents’ point of view, because of all the transfer pricing, capital allowances, and things that more sophisticated tax environments are used to. I realise that it has a lot to do with the extent, but as a matter of principle, would you agree basically that revenue–based taxation is a lot simpler to deal with, a lot easier to calculate, and a lot more appropriate in the less developed economies? I don’t know if you would like to answer first, Mr Scott.

Tim Scott: I think there is a place for it. The problem with a uniquely revenuebased taxation system is that it is not going to take account of relative levels of profitability of an investment, and therefore the tax take and the return to investors are not correlated.

Q79 Richard Harrington: Is that not really a question of the level at which the taxation is-whether it is 1% or 12%-rather than the actual principle?

Tim Scott: Correct. In principle these kinds of taxes exist, and we see the point in them.

Q80 Richard Harrington: It seems to me that for the Exchequer of these countries, it is much easier to administer a very simple revenuebased thing. From your point of view, provided the percentage is acceptable, it means that there are fewer arguments about your accounts and all the complexities of it, and it really is just a question of extent rather than principle.

Tim Scott: That’s right. I would say, on the other hand, that the more complex, as you say, taxation of profits is not something that we have found ZRA in particular, or tax authorities in other developing or developed countries, to have phenomenal problems with.

Q81 Richard Harrington: We understand from what we were told in Zambia that the current level of the revenue tax that you are facing has gone up dramatically to 6%.

Tim Scott: Yes.

Q82 Richard Harrington: Is this 6% sustainable, from your point of view?

Emmanuel Mutati: It isn’t really. We feel it is on the high side. I think that 3% was more sustainable-where it was before.

Q83 Richard Harrington: People forget that 6% sounds a small amount from the top, but if you take it to the bottom line it is 30% or 40%, I would imagine, on crude figures.

Emmanuel Mutati: Yes.

Tim Scott: Where we stand at the moment, even without paying profits taxes because of capital allowances and recouping past cost, we are looking at an effective tax rate of above 50%.

Q84 Richard Harrington: Which presumably is not sustainable for the future as far as reinvestment and everything is concerned.

Tim Scott: It’s a lot of money, and we pay it, but new investors will look at this and factor it into their investment decisions.

Q85 Richard Harrington: Presumably you make representations about this to the Government of Zambia on a regular basis. Presumably they see the figures as well.

Emmanuel Mutati: They do. We have made representations. In the past it has not been easy. We would like to mention to this meeting that in fact the new Government are much more amenable to discussions on these issues. We have already had meetings with the Minister of Finance, and when the Government start their programme for next year’s Budget, they will invite the mining industry to look at the tax issues.

Q86 Chair: Given the reservation that Mr Scott has set out, although you will always argue that it is too high, as long as it is not really too high, isn’t it much better for both parties to have some degree of certainty? You know what you are paying, they know what they are getting, and you don’t have this endless wrangling and changing-bringing in new taxes and altering the taxes. At the end of the day, you may say, "Grin and bear it," but at least you both know where you are.

Tim Scott: Absolutely. Stability in the level of taxation is more important in some ways than the level of taxation. It is when there is instability and the posttax returns cannot be calculated that investors cannot make the kind of decisions that they need to make.

Q87 Richard Harrington: I must say that we all commented afterwards how little both your firm and the employees seem to get back for their taxes. Most of the things that people’s taxes pay for in this country you have to provide to your own employees-health, education and the other things. In terms of the infrastructure that you will probably need to get your product to market, it all seems very undeveloped. I can understand that some resentment must build up.

Tim Scott: Resentment is not the right word at all. We are perfectly happy. We invested in Zambia knowing exactly what we were doing, how much it would cost pretax, and with our calculations of what our anticipated tax would be. In terms of health with looking after a quarter of a million people per year, or educating 200,000 children, that is a perfectly acceptable cost to us, and not resentment at all. This is a desperately poor country and we are very happy to play our part. That is a question aside from taxation.

Q88 Chair: Mr Mackay, it is a different business, but I wonder whether you want to comment. Obviously you are quite used to having to pay things like customs and excise duties on your products.

Graham Mackay: Yes. In fact, it is not as different as one might suppose, because if you look at all the tax that we pay in Africa, about 84% of is in fact consumption taxes. It is not corporate income tax or tax on profits at all. That is not all that different from the rest of the world. It is not as though there is a special situation that pertains in Africa.

I would make a couple of points on that. First, consumption taxes have their place. They are simple; they have all the merits that you have mentioned. However, they are also, in a consumer industry, really regressive taxes. That gets a lot of commentary here, for instance, but that is a fact.

Secondly, because they are simple does not mean that everybody complies with them. In our industry there are local industries that we compete with-and other international industries, obviously, but we do not have to worry about them-and what we compete with in particular is informal alcohol. Somewhere between probably 50% and 70% of all the alcohol consumed on the African continent is informal-subsistence alcohol, untaxed, outside the net, and some of it very dangerous. It causes deaths, which are reported in the newspapers from time to time.

Simply raising past a natural limit the level of consumption taxes in our business has a similarly deleterious effect on investment, because we simply cannot make the numbers work. One of the things that Governments routinely do-again, this is not limited to Africa-is to underestimate the elasticity of demand for a product like beer, or any given product. They think, "People will buy it anyway, won’t they?" The answer is, "No, they will not. They will either do without, or buy something else." The level of consumption taxes in our industry is high, compared with corporate taxes. It has the merit of simplicity, but it is not a panacea for everything. The temptation is perhaps, without wishing to upstage my mining colleagues, to make those even more variable. Excise duties can be varied at the stroke of a pen, and very often are, year by year. The phenomenon of killing the golden goose-finding that actually total excise take has dropped precipitately because essentially you have strangled the industry-has happened many times over the last few years in Africa and in other parts of the world where we operate.

Q89 Mr McCann: Good morning, gentlemen. At our last evidence session, witnesses suggested that Government should endorse countrybycountry reporting of financial information, and also an automatic exchange of that information between tax authorities. Could I ask each one of you, perhaps starting with Mr Scott, what your views are on that idea?

Tim Scott: The countrybycountry reporting of financial information has pros and cons. The pros are the transparency. The cons or the disadvantages would be the cost to business of producing this information in a reliable and, I presume, audited format. The second potential disadvantage is that with this information it is not clear to me that anyone would be any the wiser on the level of taxation paid, or whether the right tax had been paid at all. That is simply because one has to look at financial reports in the context of the tax law, and of tax returns as well, before one has a very clear idea. I am not too sure that this is amazingly useful.

The second point, on automatic exchange of information between tax authorities-information which taxpayers had submitted to individual tax authorities-I think is a good idea, and something that we would have no problem with.

Q90 Mr McCann: Could I just press you on your response about the disadvantages? In terms of the cost of preparation, surely the information exists already? In these days, when we are not working with slates and we have the ability to use computers and transfer information electronically, that wouldn’t be such a huge burden.

On the second point, the whole idea is that we ensure that there is no suggestion that companies are trying to tailor their finances in order to avoid paying tax. Therefore, the ability to shine a light on these issues would ensure that campaigns run by organisations like ActionAid would not be able to make the argument that you are not paying your proper taxes.

Tim Scott: No, I hear what you say. They are valid points. It is an ongoing debate on many levels, and that is my view on it. I don’t particularly disagree with you, and we are happy to work with partners, NGOs and Government to take that one forward.

Q91 Mr McCann: Does anybody else have any views on it?

Graham Mackay: I think you could make a cost argument. To say that the information is there as it is is not quite true, because we do not produce statutory accounts country by country all over the world. We run a much more fragmented business than most mining companies. We have small businesses in a lot of countries. I would not suggest that cost per se is an insuperable barrier.

What I think is much more relevant is the question of how enlightened one would be from looking at this. Tax affairs are extremely complicated on an individual country basis, and they are even more complicated on a group basis. To unravel the picture from the enormous minutiae of detail and make a confident assertion about anything, really, on a global basis for a company like ours would be extremely difficult.

It is also a question of who you are doing this for. We are completely transparent in our tax affairs. We file tax returns for every Government who have an interest in taxing us, or who are able to tax us. The information is provided to Governments. It is provided to the users of the information. I am not sure what purpose would be served by producing countrybycountry accounts.

There is also the point that there is little consensus, if any, on exactly what those accounts should look like and how they should be presented. There is no accounting standard for them. In fact, there does not seem to be an emerging standard, either. My own view, and our view, is that we want to back off from the question and say, "What is the problem we are trying to solve, and is there another way of solving the problem?" That comes back to the debate about tax capacity in local countries.

On the question of sharing information between tax authorities, as long as taxpayer confidentiality is respected-that is confidentiality with respect to the outside world-we have no problem at all.

Christopher Lenon: In my previous role as Head of Tax at Rio, I led its development of countrybycountry reporting. In its submission you have had this document. This costs a reasonable amount of money to produce. You cannot just go to accounting systems to retrieve the information, because SAP, which most of us use as our accounting system, is not set up in that way. There is additional work involved in getting to that.

It is useful in showing how much tax companies pay, but as has been said, it does not tell you whether it is the right amount of tax. It can provide data that allow you to question whether, perhaps, too little tax is being paid, or why it is that a small amount of tax is being paid. The fundamental issue is that international tax, particularly in terms of income taxation, is fundamentally very complicated, and it is really only companies and properly resourced tax administrations who will be able to work out whether the right amount of tax is paid. Even if you put enormous amounts of data into the public arena, you still would not be able to work out whether the right amount of tax had been paid.

Countrybycountry, which I think is a good thing, we have supported on a voluntary basis. All it does is to show you how much tax has been paid. You can then look at the accounts and get some idea of whether that is within a range, but because tax depends on a series of fairly complicated calculations, like capital allowances and so on, you will not be able, year by year, to say, "That is right; that is wrong," and so on. It will give you a broad indication, but it will not tell you if the answer is right. The only way that you will do that is through a thorough examination of all the data provided to tax authorities.

To give you some idea, the returns that Rio produces in the US are that thick in terms of data. That is what is required under US law. You need that level of detail to work out the tax for those companies.

Q92 Mr McCann: One final point, Chair. Can I summarise your position by saying this: that you feel that no matter what you would do in relation to how much information you collated and how thick the books are in terms of the information publicly available, there would still be those and their communities who would level the accusation at you that you are not paying enough?

Graham Mackay: That is a supposition, but I would say yes, that is probably right.

Q93 Jeremy Lefroy: Good morning.

I have a couple of points, both of which are raised by things that Mr Mackay has said. First, there is the question of the informal sector that does not pay tax, which you referred to, and which I would imagine occurs in pretty much every industry. Would you not then see perhaps an opportunity within reporting to say, "This is the size of the informal sector. This is the amount of tax forgone by Government because of the existence of the informal sector. These are the health effects," and so on. This would put the positive case alongside what you are already doing.

That is one question-or proposal. The other side is that I am slightly mystified by the statement that individual countries are not producing statutory accounts. Presumably in every country in which you all operate your limited companies or PLCs, there is a legal requirement to file certain accounts. If that is not the case, should not we also, in addition to providing support to tax authorities, be saying to companies-six of the top 10 fastest growing economies in the world are in subSaharan Africa-"Let’s bring company law up to date." The UK provides an excellent example of company law, as I believe does South Africa. Let’s bring that up to date. Let’s use the most modern forms. If SAP is not providing the kind of software that enables this kind of thing to be done, I am sure it could, if it was encouraged to do so.

We also have things called international accounting standards. I am sure that you all report to those when it comes to the London Stock Exchange. Surely we should be encouraging all countries to move in this direction as they seek to encourage outside investment, which in turn will be far more confident in investing in countries that adopt these kinds of standards?

Emmanuel Mutati: May I pick up on that, on the issue of submission of statutory accounts? It is a legal requirement in Zambia for companies to submit their annual audited accounts to the Securities and Exchange Commission, and we have indicated that at item 5.1 in our document. At the same time, the accounts are lodged with the companies registry, and the public can access the accounts for the fee of $4. They are available.

As we all know, there has been the EITI, which has been sheltered in Zambia for the last two years. We have done two years-2008 and 2009-and we are now in the process of publishing what the mining industry pays to the Government, and what the Government receive from the mining industry. In 2008, the first year, there were some problems-about a 30% discrepancy; 2009 was much better, with an overall discrepancy of 1.5%. We are moving in the right direction.

Christopher Lenon: On the statutory accounts, the OECD has a taskforce on tax and development, on which I sit, and it has just done a project on statutory accounts. The conclusion from that is that there are a large number of countries where there is no requirement to file statutory accounts. A prime example would be the US, where there is no need. However, the pattern is varied around the world.

The dilemma you have is that if you require countries to introduce statutory accounts, you clearly require that for all businesses that are limited liability. There is a cost to that. What information will you get from those statutory accounts? The dilemma is that the information you get from accounts, rather like voluntary countrybycountry reporting, will give you some idea of roughly where you are, but it will not get you all the way to, "Is this the right answer or not?" because of the adjustments that are made between accounts and the final tax calculation. It appears to be a way forward, but I’m not sure, based on the report that has been produced, whether it takes you any further forward. It does not get you all the way: it gets you some of the way, and there is a cost to imposing it.

Q94 Jeremy Lefroy: May I just come back on that? I may be wrong on this-as a chartered accountant, I may well be wrong-but it is my belief that one of the reasons why London and the UK are trusted, particularly as a centre for probably the world’s largest financial services industry, is our high standards of reporting. Therefore, shouldn’t we as a country be encouraging this in every country in which our UKbased multinationals-and indeed others-operate? I do not hear from UKbased companies that their shareholders and analysts have a huge problem with the kind of information that is provided. They are able to look at the tax note and say, "Yes, that makes sense," or, "That doesn’t make sense."

I am not talking about small or medium businesses. We in Britain have exemptions for those anyway, so we recognise the burden of bureaucracy and the burden of reporting. However, shouldn’t we be encouraging other countries to move in the direction in which we have been moving since the Companies Acts of 1948 and 1986? We have had this progression and believe it is the right course to follow. Shouldn’t we be encouraging other countries to do that?

Christopher Lenon: It is the balance between the transparency and probity that you gain, and the cost that you impose-that is the dilemma. What do you actually gain from making that imposition that you cannot gain from having a better resourced tax authority working out the right tax? They are the tradeoffs that you have to look at.

Q95 Jeremy Lefroy: I am not sure that I see it as an either/or. We are not saying that we can get there tomorrow, but I see it as a both/and. As I say, six of the top 10 fastest growing economies in the world are in subSaharan Africa, and of course, looking further beyond, there is tremendous progress all around the world. We would be encouraging the local accountancy firms and local people to say, "This is an area in which we need to invest."

As we all know, one of the great problems that those of us, including me, who have worked for many years in developing countries have is finding sufficiently qualified finance professionals not just in the accountancy firms, but in business. We often have to bring expatriates in, because we don’t find enough there. Surely this would be one way of promoting a higher-powered accountancy profession in all the countries in which we operate, which is to all our advantage?

Graham Mackay: I am not a tax expert, but all I would plead in this particular line of argument is that if that is the course that Her Majesty’s Government would pursue, it should be via the sovereign states-

Mr McCann: Of course.

Graham Mackay: -and not by using UK registered companies as a stick to beat them with. This proposition would work only if it were adhered to completely on a local basis, not if the sole UK multinational in town were the only one that produced statutory accounts. That would not get you anywhere.

Can I just pick up two other points from this particular part of the debate? One is the suggestion that of course we should make these facts known to the local Governments, and persuade them to extend registration and formalise the local industry-of course we do that. We do it constantly in many countries, in fact with a great deal of success from time to time. It is not always successful, but it is a long debate, and unfortunately continuity within Governments and civil services cannot be assured, so you win one year and then you do a bit of backsliding the next.

The problem with doing that in public is that it embarrasses the Government, because you are laying on the table your private negotiations with the Government, or private discussion with the Government. We are not pleading for anything special for our company. We are simply trying to get them to create a level playing field in that country, but it is quite a politicised process. We cannot make it public, and I think it would be counter-productive if we did.

The other point that I would make is that the phrase "the right amount of tax" has been used several times. We pay the right amount of tax. We pay exactly what we owe, legally, to every jurisdiction we operate in. As far as that is concerned, that is right. If you want to judge what is the morally right amount of tax, or the right amount of tax for development or for the long term of the country, you cannot do that from one year’s accounts-first, because they are far too complex; and, secondly, because they do not give you a pattern. You cannot form a view as to where all this stuff came from and where it is going to.

Investment allowances are a very good case in point. The fact that you happen to have investment allowances in the country, which drives you into a tax loss position for a couple of years-is that bad? It happens here; it happens in the whole world. Africa should be allowed to do that, too. In essence, we don’t think that there is any way to get at this problem through simply enforcing some level of global transparency. We don’t think that that will work. We think that the suggestion of raising tax capacities and capabilities of a country is the way forward, plus all the work that is being done by the OECD and so on. This transparency drive to achieve a right outcome is, we believe, doomed, quite frankly.

Q96 Pauline Latham: Before I start, may I just draw attention to the Register of Members’ Interests in respect of SABMiller?

May I change the subject slightly on to transfer pricing laws? Do you all think that the current transfer pricing laws are appropriate, and do you think they are effectively enforced? Rio Tinto argues in its written evidence, which was referred to earlier, that companies should be required to provide information on relatedparty transactions on their annual tax returns. Would you all support that?

Tim Scott: Yes.

Q97 Pauline Latham: Is that yes to everything?

Tim Scott: Yes.

Pauline Latham: That is very clear, thank you. Does anybody else have any views?

Chair: Has anybody got a comment?

Pauline Latham: Does nobody else have any feelings about the transfer pricing laws and whether they are appropriate?

Q98 Chair: The point is that people who have given evidence-or complained about this-say that transfer pricing is a way of moving resources to the lowest tax denominator, I suppose. What we are saying is: to what extent do you feel that that can happen, or does the enforcement actually cover it?

Tim Scott: Can I add a bit more, in that case? Transfer pricing is a neutral term. A transferred price is what occurs when one member of a group sells or transacts with another member of the group. The concern of many people, including ourselves, is to make sure that that transaction is fair, that the price is the right price, and that it is ostensibly the price that would have occurred had the two parties not been related to each other.

When people talk about transfer pricing as some sort of dark art, I think it is slightly misconceived. What they should be talking about is "transfer mispricing" or the abuse of transfer pricing. Transfer pricing is not an avoidance technique at all. Generally around the world, including in the countries in which we operate, including Zambia, there are laws under tax legislation that enforce this principle of arm’s length, correct transfer pricing.

Q99 Chair: Do you refute the allegation that companies-I am not saying your company-use transfer pricing to transfer assets from a high-tax regime to a low-tax regime? In other words, people will say, "It is amazing how much copper is transacted in the states of Jersey or the Cayman Islands, which do not produce any of these things." That is the charge that is being levelled. In simple terms, do you believe that that fundamentally does not happen, or that the system can expose it, and that the allegations are therefore somewhat misplaced? Is that what you would say?

Tim Scott: I can only really speak for Glencore, obviously, because I see only what happens within the Glencore context. That is, of course, the case. Transfer pricing is ostensibly arm’s length-it is demonstrably, transparently arm’s length-and we would be willing to speak to tax authorities about this, as we do, all the time. More broadly, the question is whether other people abuse it. I somehow would doubt it, because I think that most tax authorities, including the Zambian ones, are perfectly capable of looking at a transaction. They have the right-and they do-to audit the books and raise these questions. On a consistent level, so that there were macro-economic effects of this practice, I don’t think that is likely.

Q100 Mr McCann: Can I put a direct question to Mr Mackay? You said in response to an earlier question, "We pay the right amount of tax." The direct allegation against companies like yours is that you manipulate your figures so that you can minimise the amount of money that you pay tax on. Therefore, I will put the direct point to you: has your company in any circumstances inflated figures, inflated transaction costs, or inflated service costs within your company in order to avoid or minimise tax that is paid?

Graham Mackay: Absolutely not. We operate within the OECD guidelines, so greater minds than mine have certainly concentrated longer than I have on these matters. The OECD guidelines are, we believe, fair. They have had a lot of thought put into them. The arm’s length pricing principle is a fundamental cornerstone of that. In fact, I should point out too that, in our particular industry, what could be called transfer pricing, which is essentially costs of services that cross borders, is very small, because our businesses produce, market and buy locally. It is not as though we are shipping a vast amount of commodities, or buying, processing and shipping them, as many companies do. We do not do that. Our production is all local.

In the case of Africa, for instance, we do have group buying, which is run for the Africa region out of a professionally established hub. The operating bosses of the business are at liberty to choose whether to buy locally or to buy from the hub. They are not incentivised on any profits made outside their own market at all. When they choose to buy from the central procurement agency, it is because it is a better deal for them. In fact, to come back to my initial point, the value of that stuff that goes on, compared with the size of the business as a whole, is minimal-it is very, very small indeed. I absolutely deny that allegation.

Q101 Richard Burden: I think I understand what you are saying: that you operate within the rules and that they are transparent. However, I am still not sure that you have answered the question: do any of your companies use transfer pricing to minimise or reduce tax liabilities? Even if it is transparent, do you do that?

Graham Mackay: We do not make charges or set up company structures for the purpose of minimising tax. That is not the purpose of doing so. We set up company structures to provide expertise and services to operating companies, which they would not be able to afford, or practically obtain, by any other means.

I should also point out that that is the way in which all multinational companies operate. It is simply not practical to imagine that one can buy a business, or start a business, in Ghana, Uganda or Zambia, or anywhere like that, and run it using local resources and expertise to modern standards, and bring it up to speed with the way we do that. It requires specialised knowledge and specialised skills. You cannot disperse those knowledge and skills because they are not available on that sort of scale, and it would be wildly inefficient to do so. It has to be centralised and specialised somewhere. If it is specialised somewhere outside Ghana, say, it is irrelevant to Ghana where it is specialised in. The fact is that the Ghanaian business pays and buys a service, and buys it for good value, according to the arm’s length pricing treaties. That is it.

Q102 Richard Burden: Would that be the case-

Tim Scott: For Glencore? Yes. Our business, in fact, is slightly simpler than Graham’s. What we do is that Glencore buys metal from Mopani, and buys it at the correct LME price.

Q103 Richard Burden: And, from the OECD’s point of view, no problem.

Christopher Lenon: The issue is that we live in a world where there are significant intangible assets. If you look at most companies, and you look at their tangible assets and their market capitalisation, there is a significant gap. That gap is their intangible assets: their intellectual property, their brand, their benefits of operating as a group, and their knowhow. All that has to be charged for under the principles, because the principles say that if you provide a service, you should charge an arm’s length price for that service.

The fact is that most of that knowhow is located in OECD countries. In fact, the UK Government’s policy is to encourage that, and to encourage high-value manufacturing and intellectual property. Under the principles, it is therefore correct to charge for those benefits. Valuing those benefits is sometimes very difficult, and the OECD has a project at the moment on intangibles, but what companies seek to do is to operate within the principles.

There will always be exceptions. I cannot say that every company that is a member of the BF organisations does everything in the right way. However, the vast majority of companies using the Big Four will prepare their returns based on the arm’s length principles, and they will provide the information in support of that to the tax authorities in which they operate. Some tax authorities may not like the answer that that produces, and a debate will then ensue, but it is to do with the proper pricing of intellectual property and intangibles, where I think most of the questions that have been raised by civil society come from. That is an issue we have because of the way in which the global economy operates.

Q104 Richard Burden: If you were advising civil society, would you say, "You are barking up the wrong tree here; there is not an issue," or, "There is an issue, but you are going about it in the wrong way?" If it is the latter, what is the right way they should go about it?

Christopher Lenon: The way you will see developing countries raise more tax is if they have more high-value activities occurring in-

Richard Burden: Yes, that is-

Christopher Lenon: No, hold on. Tax follows what actually happens in terms of your business model. Unless you have high-value activities occurring in your country, the likelihood is that you will be taxing lower-margin activities. If you are taxing lower-margin activities, you will raise less tax, so tax policy needs to follow on from economic policy, and economic policy should be seeking to encourage more higher-value activity to occur. That is facilitated by having an investment regime that is transparent, stable and based on the rule of law, and a tax system that follows on from that, which again is transparent, stable and well administered. My conclusion would be that you can tax only the activities that occur in your country. We have a world in which most of the higher-value activities occur in OECD countries.

Q105 Richard Burden: I absolutely understand. I tried to interrupt you before because I absolutely understand what you are saying about the kind of economic activity you want to incentivise in developing countries to maximise the tax benefits to local people, but that was not my question. My question was: in relation to transfer pricing, or mispricing, is there an issue that civil society needs to be getting at, and they are getting at it in the wrong way; or is there not an issue from the OECD’s point of view?

Christopher Lenon: My view is that they are probably getting at it in the wrong way, and the focus should be, as was said right at the beginning, on exchange of information to deal with tax avoidance and evasion in developing countries. This is a very important area that needs to be worked on. It is probably going too slowly in terms of developing that network. That is an important area.

Capacity building, which has been referred to on a number of occasions, is equally a very important area. Unless you have tax administrations that can devise tax policy, administer that tax policy, and collect the taxes that that tax policy intended to be collected, you will not have a fully functioning tax administration. Those are the two areas that are key to improving tax in developing countries.

Q106 Mr McCann: Can I just ask a followup question to that, Mr Lenon? Do you believe that companies are taking advantage of the lack of capacity?

Christopher Lenon: Having dealt with tax in developing countries since the late 1980s, I think there is a misunderstanding. I would rather deal with a wellresourced, wellfunctioning tax administration than one that is completely arbitrary-and I have dealt with both. The trouble with arbitrary ones is that they can make mistakes both in your favour and significantly against you. I would think that most business would see capacity building as the important area that we should focus on.

Q107 Mr McCann: But is that capacity building only up to a certain point that allows them to behave in a way that gives them more profit, and are they taking advantage of that? I am not asking the question of whether you would want to deal with someone who is unprofessional or who is professional. I am asking: is there capacity up to a certain point, and are companies enjoying an additional benefit because that is not moved to an optimum level?

Christopher Lenon: I think we should aspire to capacity building where tax authorities in the developing countries are of the same standard and quality as they are in OECD countries.

Q108 Jeremy Lefroy: I should also draw attention to my entry in the Register of Interests, similarly to Mrs Latham, about a visit that we paid to Nile Breweries last year, which was extremely instructive, and showed the involvement of the brewery with smallholder farmers, which I think we appreciated, as well as in the local health system.

May I ask a followup question on the previous one? Rio Tinto has argued in its evidence that companies should be required to provide information on relatedparty transactions as part of their annual tax returns. I wondered whether you would all agree with that?

Tim Scott: No problem. Absolutely right.

Q109 Jeremy Lefroy: So that is something that we should recommend.

Tim Scott: Yes. Yes.

Christopher Lenon: If you look at the US, Canada or Australia, there is a requirement in all those tax returns to provide a full schedule of your transfer pricing transactions. I think what Rio is proposing is that some form of standardised schedule should be adopted as best practice so that the information is available but, because it is standardised, it is much easier for businesses to set up their systems to provide that information in a consistent way.

Q110 Jeremy Lefroy: Thank you very much. I would like to move on to a question about minimising tax liabilities. Would it be safe to assume that all the companies represented here would use legal means that are available to them to minimise their tax liabilities?

Tim Scott: No, I don’t think that is a fair way of putting it. We obviously do not pay more tax than we have to under law, but we do not pay these socalled clever lawyers and accountants to find loopholes through the law that, although they legally work, result in us paying less tax than we should be paying. There is a moral element to this as well, which we are aware of. We pay what is the right amount of tax-the tax that the Government would be expecting to receive-according to the spirit of the law, and not necessarily the letter that we have managed to find a way around.

Graham Mackay: Yes, I agree with that completely. You do not pay more tax than you have to, but there is such a thing as aggressive tax planning and nonaggressive tax planning. We are not aggressive tax planners. We do not do things purely for tax reasons, and we certainly do not set up company structures such as we are talking about here for tax reasons. They are for sound commercial reasons. Tax is a huge cost. It costs us more than anything else, including raw materials. It is obviously something that you pay a lot of attention to, and that you minimise within certain parameters, but those parameters are clearly understood.

Q111 Jeremy Lefroy: Clearly, one of the major ways in which tax liabilities are minimised is through capital investment, because with capital allowances of often 100%, that reduces tax paid. Do you think there is sufficient understanding of the fact that the reduction in the tax liabilities, or at least the deferral of tax liabilities, is a consequence of the investment that everybody is seeking?

Graham Mackay: As a matter of fact, for our corporate income tax in our African subsidiaries, our effective rate is higher than the statutory rate, as a result of running out of capital allowances. So they are perfectly legitimate, and the net result is that they do run out. They encourage investment. The regimes differ dramatically from country to country, as I am sure you know-not just within Africa, but in the rest of the world as well. It is a matter of record that our own corporate tax rate is in the upper quartile of the FTSE 100. It is not aggressively managed at all.

Christopher Lenon: In terms of capital allowances and any form of tax incentive, what tax administrations need to do is to ensure that they are doing the right cost-benefit analysis of the tax forgone. That would apply to any Government, be it OECD or developing country. Obviously, it is true that in situations where there is significant investment, it is likely to wipe out the corporate tax liability for a period of time. However, people don’t invest to get capital allowances; they invest to make money. The tax follows the investment, but the key is that Governments have the capability to make the right policy choices in terms of the tax incentives that they provide in their codes. That, again, comes back to capacity.

Q112 Richard Burden: My question is specifically to SABMiller. You will know that we have had written evidence from ActionAid in which it refers to a report that it has written that mentions your company specifically. I don’t intend to go through the allegations in that report, other than to say that my understanding is that it is not accusing SABMiller of tax evasion-in other words anything illegal-but I guess it does draw a similar distinction to the one that you drew about issues of morality. It talks about some actions and policies that SAB pursues as being, I think, ethically questionable. You have referred to there perhaps being a problem in some companies with aggressive tax planning. I guess you were getting at the same sort of territory there. Specifically on what ActionAid said about SABMiller, could you give SABMiller’s position on those allegations?

Graham Mackay: We think-actually we don’t just think; we state-that ActionAid’s allegations and inferences are squarely wrong. It accuses us of transferring profits out of Africa into tax havens, in essence, in legal but morally dubious ways. That is not what we do. We have a number of service providing centres, which charge at arm’s length rates for the services they provide. Any effect on our overall tax rate of any of these activities is absolutely de minimis; it is not even a rounding error. We derive no tax benefits from any of those activities whatsoever. They are simply commercially efficient service charging mechanisms-that is that.

Q113 Mr McCann: Did ActionAid contact SABMiller directly before the campaign started to allow you to answer any of those allegations?

Graham Mackay: It did, and it ignored our replies.

Q114 Mr McCann: How detailed was the reply that you sent in relation to the individual allegations that it made?

Graham Mackay: We gave detailed written replies.

Q115 Mr McCann: So, in terms of the points that were made about intracompany transactions, royalty payments for the use of trademarks, management and service fees, procurement payments and interest on loans from sister companies, which is estimated at a value of £100 million-I must get my currency right-you answered every one of those detailed points before the campaign started?

Graham Mackay: Yes. We met it on three separate occasions to discuss its allegations in detail, and wrote it a letter.

Q116 Pauline Latham: This is to Glencore. Obviously, most people in the room will be aware of the leaked report and the allegations made in the Grant Thornton report. Will you set out Glencore’s position on those?

Emmanuel Mutati: Yes, please. The advisors to the Zambia Revenue Authority, together with the Revenue Authority, carried out an audit at Mopani. They had indicated to Mopani that a draft report would be discussed with Mopani before closing it out. Unfortunately the report leaked in the paper. The Zambia Revenue Authority described that as a "confidential, preliminary and incomplete draft" of the report, as we have indicated in our paper in item 5.3. We have been in discussion with the Zambia Revenue Authority, and we are about to close the issues that we have at hand with the Zambia Revenue Authority.

Q117 Pauline Latham: The Centre for Trade Policy and Development, which is a Zambian organisation, told the Committee that it had filed a complaint with a Swiss national contact point regarding the case, but Glencore had refused to co-operate. Is that true?

Tim Scott: No, that is completely untrue. In fact it did-a Swiss Economic Ministry agency called SECO. We went to speak to SECO for some time and went through these allegations specifically with it. SECO is completely content with our answers. We have no case to answer as far as it is concerned. What SECO then did was to ask whether we would speak directly with the NGO, with SECO acting as a mediator. We said, "Yes, we would be perfectly happy." As far as I understand, that process is ongoing. I would add that anyone can come to Glencore and talk to us.

Q118 Pauline Latham: What do you think the motivation is behind all these accusations against the companies that you represent here?

Tim Scott: I do not want to speculate about people’s motivations, because I completely respect concerns about desperately poor countries and the living standards of people in them. We are trying to do our bit to build the economies of those countries. I have no argument with people’s motivations. The situation that we have got into at the moment is primarily, or indeed uniquely, because of the leaking of this draft, incomplete report to the press. This in no way was a final conclusion on any aspect of our business in Zambia, but it has been taken as such, and people think there is a case to answer, which obviously there is at this point. We have answered it to you in our written submission, and we are speaking directly, of course, to the Zambia Revenue Authority. Any NGO that wants to speak to us as well is perfectly welcome.

Q119 Mr McCann: I fully take on board the points you make about it being a draft report that was leaked, and the various issues in it. One of the things that had been said was that MCM resisted the pilot audit at every stage. I wondered what the interactions had been between the company and the auditors. Were there discussions between them as the report was being put together, and an ability for misunderstandings to be resolved? What was the agreement on the draft report? Was that to be shared with both sides-an opportunity to, again, sort out any misunderstandings before a final report would be concluded?

Emmanuel Mutati: The audit was undertaken by the Zambia Revenue Authority, and they were the ones present on site. We were not aware of who the advisors were who were working with the Zambia Revenue Authority. We co-operated as much as we could. In fact, initially the proposal was that they would do the audit offsite-in the capital city, 400 km away-and we suggested that they come on site and do the audit, because we have the resources on site, and that would assist them in their audit. They agreed to come on site. We provided all the information and answers they wanted. In fact, it is on record that the Zambia Revenue Authority wrote to Mopani to commend it for the co-operation with the audit. We were surprised to hear comments that we were not co-operating; it is on record that we co-operated fully with the authorities.

Mr McCann: Thank you.

Tim Scott: I will add, if I can, that I don’t believe we ever saw a draft of this report by Grant Thornton, or had any ability to respond to it before it was leaked to the press. That is correct, yes?

Emmanuel Mutati: Yes.

Jeremy Lefroy: I realise we are running out of time. I wanted to ask a rather technical question about hedging, but maybe we do not have time for that.

Q120 Chair: There is just one final question, and I hope you appreciate that these are allegations that have been made, and it is a really good opportunity to have them answered and addressed. The final one, relating to local taxes for the Mopani mine, is that those of us who visited the mine also afterwards met the mayor and some of the local council, and they stated that they were angry, but also disappointed that in their view, Mopani should have been paying to the local authority ZMK9.4 billion per year, whereas Mopani the mine said that ZMK2.4 billion was all that they were prepared to pay. I gather there is a court action ongoing about it. As you will appreciate, we got a very bald statement: "They owe us ZMK9.4 billion; they haven’t paid it. What’s going on?" I wondered if you could tell us precisely what the basis of the dispute is.

Emmanuel Mutati: As we have stated in our document, we pay our dues in line with the Act-in line with the law. The Mufulira Council, we believe, has acted outside the law, in the sense that it has included two plants-specifically the smelter and the refinery-in the evaluation, which the Act does not provide for. Those are classified under the Factory Act. They are not supposed to be included, and that is where the dispute is. We have met with them once, and we are due to meet them in the next week or so to resolve the issue. We believe that we will resolve this. We had a similar situation with a council in Kitwe, and we have resolved that. We believe that they will now see our side of the story, and we will be resolving the issue in the next week or so.

Q121 Chair: You would accept that it is not a particularly happy situation for a major employer such as yourself that is operating in a community to be in dispute for whatever reason with that local community. The mayor was a reasonable man, I thought. He simply defended the line. The district commissioner, who was also at the meeting, said that the company was engaging, and when there were accusations, he said, "It is not true that they are not talking to us." He did acknowledge that. Nevertheless, it seemed to me that this had created an atmosphere in the community, and that it was in neither side’s interest to see it prolonged.

Emmanuel Mutati: Yes, indeed. This is somewhat unfortunate. As I said, we act under the law, and if the council includes assets that are not covered by the applicable law, we have to discuss with them and say, "We can pay according to what the Act says." Unless the Act is amended, we cannot do otherwise, and this is what we have said. We said that once we agree what is supposed to be paid under the Act, we will pay, including the outstanding dues to date. We have continued to pay them, but on the old rates. We are saying, "Once we resolve, we will pay you whatever the balance ought to be."

Q122 Chair: Yes, because you provide hospital facilities and school facilities, albeit at a fee, within the community. There is no connection between that degree of goodwill and, if you like, corporate social responsibility, and this very specific dispute about the revenue you pay to the local authority?

Emmanuel Mutati: We do assist them a lot. In fact, there was recently an outbreak of typhoid in a council area, and we were the major player in that regard. We provided a new pump, a new generator, medicines, access to a laboratory and access to hospitals. We support them in many ways that I think they may have disclosed to yourselves.

Q123 Jeremy Lefroy: This is just a general question, and refers to a comment of Mr McKay’s at the beginning, which is the perception and perhaps the reality that large companies are targeted by revenue authorities because they are seen as effectively milk cows for tax revenue. Certainly, with my experience in one or two countries, I would concur with this. One thing I have often advocated, but which perhaps not surprisingly has not been taken up, is the disclosure of the total amounts paid by all major businesses within a country, whether multinational or nationally owned. Would you see that as a step forward? It might identify not only the amounts that were being paid, but also the amounts that were not being paid by some fairly major businesses, which are perhaps not multinational, which is a perception that I have often had.

Tim Scott: I do not think that that necessarily will assist in any debate. To take ourselves, for example, we are in a startup phase where a massive, $2 billion-worth of capital expenditure means that capital allowances are essentially deferring our cash payments of income tax well into the future.

Q124 Jeremy Lefroy: May I interrupt you? You have already declared, understandably, the amount of taxes that you are paying. We saw advertisements in a Zambian magazine when we were there. You should have nothing to fear from this.

Tim Scott: No, but people will compare these two reported profit figures and ask what the difference is.

Q125 Jeremy Lefroy: I am talking about total taxes-not just profit taxes, but the total tax.

Tim Scott: The total tax? Correct.

Chair: I think we saw First Quantum, wasn’t it, with an advert in one of the inflight magazines we saw in Zambia, saying, "This is our turnover, this is the tax we have paid, this is the number of people we employ, this is the PAYE, and other social benefits we pay." To be honest, it made a very positive story. I take your point that if you have $2 billion-worth of investment, your profits contribution may not look so good, but even so, if you state all of that, and show what the offsets are, doesn’t it actually help?

Q126 Jeremy Lefroy: The reason I ask this is that a company I was involved in was awarded a certificate for being the second largest taxpayer in a particular region, which we were very proud to be. The fact was that we were very surprised to hear that we were the second biggest taxpayer, given that we felt we were a fairly small company. Were more information of that sort put into the public domain, it might encourage people to find out who was not paying their taxes. I am sure that none of those represented here would be at all afraid of that.

Graham McKay: I am not sure it would have much effect, to be perfectly honest. These things are broadly known. We recently received a "Taxpayer of the Year" award in Mozambique. It’s the same sort of thing. We pay far more tax than anyone else.

Q127 Jeremy Lefroy: Is that implying that the tax authorities are, should we say, not looking sufficiently hard at many major businesses within their jurisdiction?

Graham Mackay: It is politically more difficult, and it is much more work.

Q128 Mr McCann: Can I just follow up on the question you asked, Chair, of Mr Mutati? Just to be clear, there is no connection between the local tax dispute and any of the additional services that the company provides to the local community.

Emmanuel Mutati: No, there is no connection.

Graham Mackay: Chair, could I just record a correction for the record? I stated earlier that we had met ActionAid three times. In fact, I have just been told that the situation is that we met it once, and we answered three sets of questions formally.

Chair: Thank you for putting that correction on the record.

Can I say to all four of you: thank you very much for coming along and giving us evidence? Obviously, we have had a lot of written evidence from you and your critics, but an oral hearing like this gives us an opportunity to press those points, and you-I hope you agree-the opportunity to explain your perspective. The Committee is looking for evidence. We are not interested in allegations that aren’t substantiated. We want to make sure that we get the facts.

The ultimate objective-I think this is your point, Mr Lenon-is to see a situation where developing countries genuinely develop, and where in the process of developing their capacity to raise revenue from all sources improves to the point where they become less dependent on aid and more able to fund their own services. That is what we as a Committee are interested in. Obviously, major investors like yourselves have a significant contribution, but as you have all said, you are not the only players, and you shouldn’t be treated as the only players. There are others as well. Thank you very much indeed. We really appreciate the fact that you have come and given us evidence.

Examination of Witnesses

Witnesses: Eddie Rich, Deputy Head and Regional Director (Southern and Eastern Africa and the Middle East), Extractive Industries Transparency Initiative, Dr OddHelge Fjeldstad, Research Director, International Centre for Tax and Development, and John Christiensen, Director, Tax Justice Network, gave evidence.

Q129 Chair: Thank you, gentlemen. I think I can just say good morning. Thank you for coming in to give evidence. I think you have heard the evidence we have just had, but again, for the record, I wondered if you could introduce yourselves, perhaps starting with you, Mr Rich.

Eddie Rich: Thank you, good morning. My name is Eddie Rich. I am the Deputy Head of the EITI International Secretariat, and I also have regional responsibility for various countries, including Zambia.

John Christiensen: Good morning. My name is John Christiensen. I am the Director of the Tax Justice Network’s International Secretariat. I am a member of the OECD’s Taskforce on Tax and Development, and a member of the Global Taskforce on Financial Integrity.

Dr Fjeldstad: Good morning. My name is Odd Fjeldstad. I am Research Director of the International Centre for Tax and Development.

Q130 Chair: Thank you very much indeed. You have obviously seen the written evidence and heard the exchanges we have just had with representatives of the business community. Perhaps first of all I might just ask you whether there are any particular comments you would make on the basis of what you have heard. Are there any particular things that strike you, perhaps starting with you, Mr Rich?

Eddie Rich: I pass that on to colleagues.

Chair: You defer to Mr Christiensen.

John Christiensen: I am happy to make a couple of comments. First, I welcome the broadly positive response to the issue of information exchange. I did not hear any negative reactions to that, and certainly the Tax Justice Network’s point of view is that improved information exchange is a crucial part of deepening transparency.

Secondly, on the issue of countrybycountry reporting, I think that the talk about cost to companies is very often overstated. The figures that have been put to the OECD’s Task Force on Tax and Development relating to the additional cost of the accounting provision and of the audits that go with it were frankly very modest indeed. It is not that huge a cost. I would make the point that when they talk about the use of SAP for accounting systems, if these accounting systems were modified to accommodate countrybycountry reporting, it would significantly reduce the costs, so I don’t think that cost is really that large a barrier to implementation of countrybycountry reporting.

I would say, however, from my point of view, that while voluntary approaches are always good news in some areas, in areas where there are clearly some companies that want to abide by good practice on tax, and some companies that do not, a voluntary approach is not adequate. A mandatory approach, or rather an international accounting standard adopted globally, is the appropriate approach to countrybycountry reporting. It is, after all, the bad players who we are trying to tackle, not the good payers. For that reason, good practice needs to be encouraged, and not undermined by making this a voluntary approach.

Finally, I would like to comment about the arm’s length principle that was referred to. Most of the experts within my network would say that the arm’s length principle is deficient in many, many key areas. Its application particularly to intangibles, as Chris Lenon acknowledged, has always been a problem, and is an increasing problem. The arm’s length principle, which is the principle at the heart of the OECD guidelines on transfer pricing, is one approach amongst others, but I think in the long term we need to think about very different ways of taxing multinational companies.

Q131 Chair: Just on that point, I thought Mr Lenon explained it really quite well. They are intangibles; therefore they are difficult to quantity. What kind of international standard could you apply? These things are highly subjective.

John Christiensen: Absolutely.

Chair: They can obviously be abused, but at the same time, people say, "This intellectual property, this technique, or this process is hugely valuable, and we are pricing it at that real value."

John Christiensen: That is quite correct and I obviously have experience within the industry of trying to apply the arm’s length principle to intangibles: management services, copyrights, licences and so on. From an economist’s point of view it is immensely difficult. It is highly problematic and therefore open to abuse. In the long run, my own view is that we should be moving towards taxing companies globally on a unitary basis, using a formula of reapportionment as the basis for taxation, which is the general trend that the European Union is trying to push through its own initiative.

Q132 Chair: Dr Fjeldstad?

Dr Fjeldstad: There was a question related to whether companies took advantage of lack of capacity in the Government or tax administration in poor countries, and the impression I got from the companies here was that, no, they stick to the law. I found that response a bit vague, because we know that tax planning takes place everywhere-in the UK, in Norway, where I am from, and so on. Of course, if companies have the opportunity to take advantage of weak tax legislation and administration, we would expect that they use it. We see a number of examples of that. For instance, if you look into the tourism sector and hotels, etc., every five or six years they change names to another company, because of the fiveyear tax holiday. This is an exploitation of the system.

That is one thing. Another thing that was referred to, and with which I agree to some extent, is that there is a need to build tax administrative capacity. However, the major constraint in countries such as Zambia, Tanzania, Mozambique and other countries in Africa is weak tax legislation. Tax policy is the major constraint, which is reflected in these extensive tax exemption/tax incentive regimes, which imply huge losses of revenue. In Tanzania, for instance, one estimate suggests that the total tax exemptions represent 6% of GDP. That is a huge revenue loss.

Q133 Chair: That is helpful. Perhaps I will come back to you, Mr Rich, on this issue. The EITI was set up initially by the UK, but it is now genuinely international. Its aspirations obviously are something that we would all support. What do you think are its real benefits? To what extent can it deliver what it says on the tin-transparency?

Eddie Rich: I think EITI probably needs to be placed in the context of the wider development debate at the moment about what replaces the Millennium Development Goals. Hillary Clinton, speaking at the Open Government Summit last week in Brasilia, talked about it, characterising the development debate as having moved on from north and south, to open and closed countries.

EITI is really one of many mechanisms out there that are being developed to help Governments, companies and civil societies, and to help the debate to move towards more open processes. In terms of answering the question, "What benefits does it have?", we need to understand the context in which each country will come to sign up to and implement it. There will be different reasons in different countries, because their reasons for wanting an open process will be different.

The EITI itself, as you say, Chair, was established by the British Government in an announcement at Johannesburg in 2002. At that point it was just an initiative, and then it went through many, many internal discussions with people coming to the table, and developed into a standard. I don’t think that development of an international standard occurred until 2006, when there was established a board and a secretariat as well. Since then, 35 countries are implementing the process. That is 900 million people now with access-in many cases for the first time-to reports with reliable figures of how much money is coming into that sector. This year there will be around 50 of those reports from around the world.

It has evolved very fast. There is a lot of information on the table. What does that amount to? That is the issue that we need to move on to. We have been challenged to do that, to some extent. We had an evaluation last year that said, "EITI has been very successful in developing a process and in spreading information, but it doesn’t answer some key questions. It answers how much money is coming into the sector in these countries, but it doesn’t ask how much money should be coming in, whether the right amounts are being paid, how the money is being spent, and so on." These are the challenges for the future. At the moment there is an ongoing strategic process to look at how the EITI can perhaps develop from being a standard to being a process that allows each country to develop the framework in their own useful way.

I would identify quite a few areas, though, where from country to country you see strong, anecdotal and in some cases quantitative information on the benefits: an improved investment climate, increased tax revenue, better tax collection systems, greater stability and trust between the various actors around the table-we heard the discussions from Zambia-and civil society voice and protection. However, those are very variable across the 35 implementing countries. In some cases we can see that really making a societal change and improvement in Government policy; in some cases, frankly, the process has to be more rigorous to expect to see some of those enhancements.

Q134 Mr McCann: There have been some suggestions that EITI could be improved and strengthened, and for example that participating countries should be required to compare their tax receipts with GDP figures, or with profit figures for the extractive industries, and the question of whether participating countries should be required to compare tax receipts from the extractives sector with the quantity of resources extracted. Perhaps I will put it to the Tax Justice Network first: do you think these are good ways of strengthening EITI, or are there other ideas or views that could help us in this area?

John Christiensen: I should preface by saying that my own involvement with EITI and Publish What You Pay generally has been around the issue of countrybycountry reporting. Certainly, I think that greater transparency over not only what the tax receipts are, but what contractual deals are being done behind the scenes, and above all a clearer understanding of the costs of tax exemptions-what are the tax expenditures involved in these deals?-needs to be developed. This point was made by one of the previous panellists: building capacity to undertake cost-benefit analysis on tax exemptions and tax expenditures generally would be a very, very important way forward. I would like to see more emphasis on that area as well. I have just heard quite a stunning figure: 6% of Tanzania’s GDP is absorbed in tax exemptions. That is an extraordinary figure. I don’t know whether there is sufficient capacity at a political level to understand the implications of granting these kinds of exemptions. As far as I am concerned, the Tax Justice Network’s engagement with EITI has largely been through developing countrybycountry reporting as an appropriate standard for disclosure.

Dr Fjeldstad: Certainly transparency is important, and EITI has initiated a very important process, but also, as Eddie Rich here says, what EITI reports is what is coming in, or what the Government have received. The challenge is, of course, what should have come in. One key area to strengthen the revenue side from extractive industries is to build up more physical measurement systems, where Government can hire people to measure physically what the resource base is, the purity of resources and how much resource has been extracted from individual mines. This physical measurement system was a key component when Norway developed its petroleum tax regime.

This is also something that Tanzania has now developed in the mining sector: Tanzania Minerals Audit Agency. It is quite unique. They have people-geologists, accountants, etc.-in all the mines. They started this process a few years back. Now they are developing capacity. That is essential if you want to move towards a regime that says not only how much is reported or received, but how much should have been received.

Q135 Pauline Latham: Could you tell me exactly how much EITI receives from DFID?

Eddie Rich: I don’t have the exact figures, but it is receiving in the order of $250,000 per year.

Q136 Pauline Latham: Can you tell me why you think the UK has so far been reluctant to implement the EITI, considering it brought the idea to fruition in the first place?

Eddie Rich: That’s a very good question. I am not sure I can. To some extent, the question that we have heard back is that they say to us, "We need to be convinced that it is of domestic value." I was interested to hear what the CBI said to you last week when it was talking about the EITI. It said, "Any way in which the EITI could be extended would be very beneficial. (In that regard, we would note that the United States has just agreed to join the EITI, and we believe that EU Member States could also set a positive example by signing up.)" If the CBI is supporting implementation in this country, I think there is a strong domestic reason.

I also think that it echoes very strongly what President Obama said when launching the EITI process in the US. He is ensuring "that taxpayers receive every dollar they are due from the extraction of natural resources." Now the size of the sector is not maybe so large in the UK. It may be dwindling to a large extent, but those arguments seem to me to be very powerful here, just as they are in Norway, just as they are in any of the other 35 countries. It is a good example of where, as I was saying at the beginning, we are moving with these development processes from this north and south to open and closed countries. There is no longer a clear distinction that can be written between domestic policy, and foreign and development policy. There needs to be a signal that a global standard is not just a standard for countries that are poor or stricken by the resource curse. It has to be, "We are all in it together. If this is a good standard, then we are in it."

Chair: The list looks a bit odd, doesn’t it?

Q137 Pauline Latham: If the UK were to implement EITI, would it also be logical for the Government to make its development assistance conditional on the recipient country’s EITI compliance?

Eddie Rich: EITI compliance is just one milestone in a journey, I suppose. Even where we have not seen compliance, just implementation, there has been a very useful conversation. I would say that that conversation would have to be taken one step back. It is more about whether or not they start implementing the process and whether they start doing the reporting, even if the reporting is not yet good enough to be EITI compliant. Conditionality of aid on that is not something that EITI is advocating. It is something we would like to see the UK and DFID encouraging in those countries where there is a significant part of their economy related to natural resources.

Q138 Chair: It is strange that the United States is considering signing up and the UK, as yet, does not. You mention Norway. Every time you look at the list, you immediately think, "Where is Uganda?", for example-they have just discovered oil. If we are not setting an example as developed countries, it looks like a thing that was set up for poor countries with resources, rather than a more aspirational standard that says, "What we are trying to do is set up global standards of transparency to which rich and poor countries should all sign up."

Eddie Rich: I think the UK is looking a little left behind now on this. Australia is piloting the process. Last week, Colombia and Ukraine committed to implement it, and people are asking us-in Uganda, in South Africa, in Brazil-"Where is the UK on this?" It becomes difficult for us to make the case that these other countries should be doing it when the first question they have back is, "You started it; where is your implementation?"

Q139 Jeremy Lefroy: When we visited Burundi last year, we discovered that the UK, through DFID, was assisting Burundi-the Office Burundais des Recettes-with technical advice and immediately they had seen a substantial increase of 25%, I think, in tax collection. Clearly that was extremely beneficial to the Burundian Government and showed the advantage that such advice can bring. Perhaps I could ask Dr Fjeldstad first: could you perhaps give us a summary of how you see that technical assistance to revenue authorities can benefit those countries? You have already referred to weak tax legislation, but are there other ways in which assistance to revenue authorities can help those countries?

Dr Fjeldstad: I will start by saying that several bilateral and multilateral agencies have already contributed substantial support to build capacity in revenue administrations in a number of African countries. DFID has certainly been very instrumental in a number of countries, including Uganda, Zambia and Tanzania. They are also involved in the common basket in Mozambique, etc. That has been very important to build up the basics-the essentials of running a revenue authority. I could also add the Rwanda Revenue Authority. In some of these countries-I will say most of the countries I mentioned-the revenue authorities are probably among the best functioning public institutions in the country, relatively speaking. That does not mean that there is no need for further development.

What is now required is, first, to build more specialised expertise into the more complex tax issues related to multinational companies, certainly including extractive industries, to build specialised tax audit capacity within the revenue authorities. This is not only with extractive industries, however, but also the financial sectors, complex sectors, the tourism sector, telecoms, and so on. There is demand for this. I returned just a few days back from Zambia after having had intense workshops with the Zambian, Tanzanian, Mozambican and South African revenue services, and this is a demand that is crosscutting.

Secondly, there is a need to build research and policy analysis capacity within the revenue authorities. Most have research and policy departments. They are very good at collecting data, but very weak at analysing and using the data. Finance ministries have, to some extent, been left out of the equation. There has been a lot of focus on building administrative capacity in the revenue authorities, which is very good-there is more need, as I mentioned. However, tax legislation and tax policy are a major challenge, and the policy analysis divisions of the finance ministries really need to be lifted up.

Q140 Jeremy Lefroy: Perhaps you could comment specifically on the case of Zambia, since we are looking at that. Is there anything, apart from those general points, that you would like to raise specifically with regard to Zambia?

Dr Fjeldstad: When it comes to extractive industries, certainly. The mining sector is potentially a major revenue source in the country. It is not one yet. There is a challenge with access to information from mining companies. That is a crosscutting issue that I have discussed both with the Ministry of Finance in Zambia and the Zambia Revenue Authority. They have problems gaining access to information from the mining companies. A problem with the legislation in Zambia is that third party information cannot be used, by law. It is not like in our countries, or at least in Norway, where the revenue authorities can go to the banks and get information on individual clients and companies, etc. That is not allowed by the banking sector or financial sector in a country like Zambia. The same is the case in Tanzania and Mozambique, and many other countries. Access to third party information is a major problem. This can be done through legislation.

Q141 Chair: Mr Christiensen, you were nodding. You wanted to comment?

John Christiensen: Yes, if I may. I strongly support building up a commitment to technical capacity building, but I think it needs to go beyond the tax revenue authorities. One of the things that strikes me, when I have travelled in many countries through electoral cycles, is how little public discussion happens around the issue of tax. Coming from a country like Britain, where tax feeds a huge amount of discussion come election time, and right the way through, it seems to be pretty well absent in many cases.

This is because there is a lack of civil society engagement on this. One of Tax Justice Network’s commitments is not just to working with the tax authorities on technical capacity building, although I think that is an important part, but to building public awareness around tax. When you look at tax compliance and the tax culture in many countries, it is very weak, and in some cases this is a heritage of the history of tax and the way it was imposed in earlier periods. There remains quite a strong resistance, and a feeling that, "We pay the taxes and it disappears, and we don’t get anything back from it." This needs also to be put into a state building prism, where building democracy also involves building public awareness around taxes and getting the appropriate mix of tax policies. That is not just a technical issue for the tax authorities.

If you look, for example, in Britain, where you have organisations like the institute of fiscal affairs, they are very important in terms of critiquing tax policies and developing new ideas. Very often institutions like that are absent from the civil society dialogue, and that is another area where we need to build, expanding a tax policy dialogue and providing independent research. I am also very much in favour of creating an organisation called "Tax Inspectors Sans Frontières". The idea behind this would be to take some of the superb technical expertise that is available to tackle transfer pricing abuse, for example, and to provide capacity for tax authorities in Zambia and elsewhere with that longterm support. When you investigate a transfer pricing abuse case, it is not a case of flying someone in for three months. You have to put people in there who might well spend five years working on that case and taking it all the way through the judiciary. There is a very strong case for having that kind of longterm commitment to building capacity in that area.

The final thing I keep on flagging up is that in many developing countries-and elsewhere; let’s not just focus on developing countries-there is a lack of what I would regard as the base information that is needed to tax effectively. This particularly applies to property taxation. Travelling through Latin America and talking to the tax policy people there, they all say, "Our cadastres are wildly out of date, and the end result is we cannot tax property." This is not accidental. I regard property taxation as an important part of any tax mix, but there is a case for building up the cadastres, modernising them and bringing them up to spec so that you can actually implement a modern tax system.

Q142 Jeremy Lefroy: A quick followup question. My perception is that local businessmen and women who, let’s say, are perhaps not so keen on paying tax and do not necessarily get caught in the tax net are often quite generous-they make large donations in civil society. It goes back to what Dr Fjeldstad was saying. One of the problems in a lot of tax legislation is that there is no provision for any-and this is perhaps particularly relevant in this country at this time-tax deductions for charitable giving. In effect, the expectations on giving large donations, whether it is for a local hospital or some other local charitable purpose, are there in a society, but there is no incentive whatsoever for that to be part of their normal declaration of income and getting some kind of tax benefit for that. I wondered whether you felt that if the two could be brought together-if tax regimes in those countries were to be more friendly towards charitable giving, which is a major part of people’s lives there-it would have an effect on tax compliance, because people would say, "By giving this money, I am allowed to offset against tax, therefore it is not such a problem that I am paying tax, or I am declaring my income for tax."

Dr Fjeldstad: In principle, I agree with you. We have those mechanisms in our society. In practice, I would be a bit cautious about introducing such a system, because it will complicate the work of the tax administration, and it can also be abused. There were many good intentions behind the giving exemptions to specific sectors. For instance, religious organisations are very often exempted. Donors are also exempted in many countries for projects where they import goods, etc, but we see there is a lot of abuse. These projects or procurement, equipment, etc. are not used for the purposes they are exempted for.

I think here one must be a bit cautious about developing exceptions in the tax regime, which can be abused. The main challenge in a country like Zambia, for instance, is to have a tax system that is transparent, predictable, and has as few exemptions as possible for taxpayers. That would also reduce the compliance costs for taxpayers. It will also reduce the administrative costs for tax administration.

Q143 Pauline Latham: When we were in Zambia, we were told about an extra import duty that applies only to informal traders, the aim being to incentivise them to join the formal economy. Do you think that that sort of model has potential, and should it be scaled up?

Dr Fjeldstad: I think that is a tax that discourages the development of the small trader. It is called the advanced income tax. It is a tax that is perceived to be unfair by the small traders. It also confuses them, when it comes to why they have to pay this in advance, and it squeezes the market. This is a tax that I think really needs to be reconsidered. There is also turnover tax of 3% on businesses in Zambia. A 3% turnover tax is quite high if you are operating on the margin. It can be substantial, and it can be a tax that makes the company, entrepreneur or business person decide, "We have to just move out of our business. We will not survive otherwise."

What is the alternative here? There is a discussion, which is not formal but internal to the Zambia Revenue Authority for the time being, but also in dialogue with small business associations, about whether the turnover tax could be turned into a single business permit or licence, which would be the single type of tax they pay, to one office. It would be the responsibility of the municipal or local government to collect.

Q144 Pauline Latham: Do they feel that might be more acceptable to them?

Dr Fjeldstad: Yes. The ZRA research department is in the process of setting up a study on that, based on a baseline that was supported by the German GIZ draft paper from last October or November.

Q145 Pauline Latham: Do you think the tax authorities would be happy with that as well?

Dr Fjeldstad: That is interesting. For the time being it is in the research department at the ZRA, and there are people there who think that this turnover tax is very discouraging for developing the small scale. It is a disincentive. However, they have not decided on what is possible and whether to abolish the turnover and give the single business permit licence to the municipalities. There will be pros and cons here, but a number of people also in the small business sector, whom I interviewed in October and November last year, see this as a much more viable option for them than the current regime.

Q146 Mr McCann: This is a question for Dr Fjeldstad and Mr Christiensen. In our last session, we asked whether revenuebased taxes might be preferable to profitbased taxes, on the basis that revenue figures are more difficult to manipulate than profit figures. What would your view be on that? In terms of revenuebased taxation, are mineral royalties preferable to windfall taxes? What is your view on that?

Dr Fjeldstad: I need a clarification, if I may. What do you mean by revenuebased tax?

Q147 Chair: Obviously royalties is one.

Dr Fjeldstad: Oh, royalties.

Chair: And, I suppose, a turnover tax is as well.

Dr Fjeldstad: Yes. In most mineralrich countries, royalties are part of the tax regime. In Zambia it has been increased to 6% recovered, which is high-maybe too high. This is a royalty that mining companies have to pay independent of what they have earned, so it is quite high. The normal rate is 3% to 4%, and maybe up to 5%. Royalties, however, are in place in most countries. It is not an either/or between royalties and corporate income taxes. Corporate income tax or profit tax is something that should be in place when they start earning money. The windfall tax has been a big issue, particularly in Zambia; it was introduced in 2008, and abolished a year later. That does not mean that the windfall tax necessarily is a bad tax, but it might have been the case that it was poorly implemented. One problem in Zambia was that the windfall tax was not deductible from the profit tax. It was not deducted as a cost for the companies. Together with the resource tax, the windfall tax plus corporate tax and resource tax meant that the marginal effective tax rate was more than 100% for some companies, so of course it led to an outcry from them. However, if properly designed and implemented, a windfall tax can work, but it must be based on a system where we have very high prices on metals. It is not something that can start when the price of the minerals are at average levels. It must be when we have very, very high prices. Don’t ask me what that would be with respect to copper, but there is historical data that we can look at.

John Christiensen: I concur with what Dr Fjeldstad has said about windfall tax. I think it is a matter of design and timing. If the design is right and the timing is right, these are perfectly appropriate in certain circumstances. Generally I think that turnover taxes can dampen growth and be harmful. I prefer to see profitbased taxes, because I grew up thinking that "turnover is vanity and profit is sanity", and we must encourage enterprise. Certainly when I hear figures of 3% on turnover, I find that quite a surprisingly high tax rate, which I think would dampen activity, or push activity into the informal sector, which is harmful. Generally speaking, I think a profitbased approach-

Q148 Mr McCann: Profitbased taxes, therefore, with safeguards in place to ensure that there is no manipulation of the figures.

John Christiensen: Absolutely. This is the big problem that we have is that the current regime for taxing multinational companies, I would argue, is not fit for purpose. The current guidelines certainly need to be radically changed, in my opinion, particularly around the taxation of intangibles. This is, in my view, one of the key fault lines in the globalised economy.

Q149 Chair: In the context of Zambia, my understanding is that there is a windfall tax. We have had the same issue in the UK sector in the North sea with oil and gas. The companies protest, because it is a very blunt instrument. It doesn’t take account of the variable costs. You look at the price and say, "Oh, you are $106 for oil," and whatever it is for copper, but you might happen to have a very difficult mine or particularly difficult oil field. If that is not taken into account, it is a very blunt instrument. It has the exact effect of saying to investors, "I will avoid a country that is likely to do that to me, if there are others where I find a more stable regime." It is risky, isn’t it?

Dr Fjeldstad: It is risky.

Q150 Chair: For countries to use windfall tax, it creates a very uncertain atmosphere.

Dr Fjeldstad: Yes. It is risky, so it should be used very cautiously and only when prices are very, very high. That was not the case in Zambia, and they also had a resource tax. The implementation was a major problem and led to outcry.

Q151 Richard Burden: I love the idea of "Tax Experts Sans Frontières". That might well find a place. I suppose my question is mainly to you, Mr Christiensen. Throughout all the evidence that you have given, in written form and so on, the question of automatic exchange of information took centre stage. Some of the evidence we have had, certainly in the previous evidence session, has suggested that if you have the right degree of transparency and you build up the right capacity in developing countries, you might not need automatic exchange of information in the way that you suggest. What would be your response to that?

John Christiensen: I am intrigued by that. Certainly the demands for automatic information exchange, as the global standard for information exchange, has increased significantly over the last few years. We now have very major countries like India saying that they see automatic information exchange as the appropriate global standard to aspire to. From an operational point of view, I think the automatic information exchange process has attributes that place it significantly ahead of the alternative, with the major alternative being the "on request" model for information exchange, which I describe in my submission.

From a policymaking point of view, I have always felt it is far better to deter rather than detect crime. The advantage of automatic information exchange is, as everyone agrees, that it deters tax evasion, because there is a clear knowledge that your information will automatically be exchanged between tax authorities from one country to the other. In that case only the really hardline nutcases are likely to go ahead on the assumption that the tax authority in the country of residence will not have access to that information. In that respect I think automatic information exchange is clearly head and shoulders above the alternative model.

I will not say that the alternative model doesn’t have a place, because it does have a place. You need to have both. You need to have the bilateral tax information exchange agreements in order to get the information exchange required to take a case to court, if it goes that far. The advantage of automatic information exchange lies in its deterrence effect. In that case, we are now seeing a very wide trend, not just within the European Union but also in the United States and countries in the south saying, "Automatic information exchange is the appropriate standard to apply to."

I would argue that it is better, when you are trying to adopt the global standard, to avoid ending up with a standard that is subpar. I always refer to the battle between VHS and Betamax. Betamax was by far the better standard, but VHS won out commercially. In this case, it is important that we adopt a standard that is effective in terms of allowing for information exchange and also deterring crossborder tax crime. Automatic information exchange achieves that objective.

Q152 Richard Burden: A last question from me. Again, with the previous panel, there was quite a lot of discussion around transfer pricing. I think in all of your evidence you have suggested that there needs to be a little more probing on things like how you account for and translate issues of intangibles and so on. The impression that was given by the previous panel-admittedly, the companies there could only speak for themselves-was that they would clearly say that they do not evade tax, but they were also very clear that as far as tax avoidance and their companies was concerned, they did not aggressively tax plan. I don’t expect you to comment on individual companies, but would that be your view? Would that be the general picture you would have of the approach of large multinationals in the developing world, or would you say that aggressive tax planning is perhaps rather more of an issue than we heard from the last panel?

John Christiensen: Yes. If we interpret "aggressive tax planning" as being to put a transaction into any part of the process that is primarily driven by seeking a tax advantage, my view is that the vast majority of multinational companies are engaged in aggressive tax planning. They are using tax haven jurisdictions-substituting tax haven jurisdictions extensively, primarily for that purpose. This is the norm rather than an exception. I have experience from both sides of the fence, having been an advisor to Government on these issues, and also having worked in the private sector on precisely this. My experience is that this is the norm rather than the exception.

Q153 Richard Burden: I will break my own rules, because having said that that was my last question, I have one further one around the evidence on that. I suppose this may come back to questions of transparency. It seems that these discussions get into questions of, on the one hand, allegations that perhaps may go over the top, or may be not easily substantiable, versus a view that because the allegations are not substantiable, there is not as much of a problem as is being said. How do we break that logjam?

John Christiensen: This is a systemic issue. I find that while case studies are fascinating and always help to spice up stories, we need to recognise that the current global system is not fit for purpose. Pointing fingers at a bunch of companies and saying, "You are badmash characters," does not necessarily help. What we need to do is to have a global debate about what is the appropriate way of taxing multinational companies, and what is the appropriate level of transparency around the taxation of multinational companies. My view is that the current system is not fit for purpose. We should be moving, as I said earlier, towards a very different regime for taxing multinational companies.

First of all, the arm’s length principle, which lies at the heart of the OECD’s guidelines, is intellectually flawed, and there is no way of overcoming those intellectual flaws from an economist’s point of view. Secondly, the issue of intangibles is becoming increasingly the area around which there is contention. There is no way through that particular thicket, and therefore moving towards a system of taxing multinational companies that looks more at the issues of economic substance-in other words, where they are making their profits, rather than what legal structures they are putting into place to shift their profits from one subsidiary to another-is the logical way forward.

Q154 Chair: This leads to a final question to all of you on the role of donors in co-ordinating these kinds of measures. We see division of labour: for example, Norway is often brought in to advise on oil and gas taxation in countries that have discovered oil, because the donor community has said, "That is the way we do it." Taking up precisely that point, what are donors doing, and what should donors be doing to co-ordinate more effectively, establishing practices and transparency systems that will enable this to happen?

On your last point, Mr Christiensen, I suppose if you are sitting in Zambia and you are dealing with a copper company, you will say, "This company is basically trading in copper. Why on Earth should I be providing tax breaks for some intellectual property stuff, which after all only exists for them to get the maximum amount of profit from the copper that lies under the soil of, for example, Zambia?

John Christiensen: Would you like me to come back on that?

Q155 Chair: This is a last comment, really, on the role of the donors and trying to raise the game on this.

John Christiensen: I would like to make a point about that. It has been very heartening to see the extent to which donor countries have looked to build tax capacity and the tax system generally as a logical step to moving beyond aid and into what in the jargon is called "domestic resource mobilisation" as a longterm sustainable thing. I have spent most of my career hoping to see this step, and it is very laudable. I think there is a danger that we all tend to move in tandem on this, and there are so many angles one could come at. I would like to see DFID, which I still see as one of the leading lights in this area, to take on some of the harder targets, including building public compliance, and to see tax as a way of strengthening democracy and state building. That is quite a soft thing to achieve-to build public awareness around these things and to build dialogue around what the appropriate tax mix is for a particular country. My argument with the IMF, for example, for the past 20 years, is that it has tended to take a one-size-fits-all approach to tax policy, which is not appropriate. Where we can add value is by helping to build the institutional capacity, not only within the state, but also more broadly within civil society-such as involving university departments, research institutes, think tanks and sponsoring PhDs-with the long term goal of trying to build a clearer awareness of how the tax might help a particular country to move towards greater selfreliance.

Q156 Chair: Dr Fjeldstad?

Dr Fjeldstad: There has been a lot of focus on extractive industries during this discussion, and that also reflects the discussion we experienced in Zambia, for instance. There is a lot of focus on extractive industries, which is natural. Civil society in Zambia has also done a tremendous job there of shedding light on that issue. It is a big political issue. The danger is that one ignores the development of the broader tax system. We know from our own countries that revenues from natural resources and the extractive industry will never be able to finance all their development initiatives-infrastructure, public services, etc. In Norway, oil revenues may be 44% of the total revenues. If the country wants to develop and to have a sustainable, reliable revenue source, one has to develop the ordinary tax system, corporate income taxes, personal taxes and so on.

One of the challenges now in a country like Zambia, and also many other developing countries, is to move the debate a bit further-not forgetting the extractive industry, but taking a broader perspective to issues of taxation. That will then lay the foundation for building a broader citizen engagement around taxation. Taxation, we know, is essential for state building. Taxes create citizens.

Q157 Chair: We did have that discussion with the Ministry of Finance in Zambia. The final one to you, Mr Rich.

Eddie Rich: Thank you. Building on that, and building on the Zambia example, and Uganda, Tanzania and Mozambique, all around that east Africa region, where there are such discoveries of oil and gas resources at the moment, we probably have one more electoral cycle in which development assistance and aid will be the largest inflow into the economy. After that it becomes these forms of tax, which may not be broadbased at first. This will lead to a very fraught discussion, as we can already see reflected in the discussion going on in each of the countries.

One of the strengths of the EITI is helping that discussion to be had incountry. I would say it is an advantage over some of these mandatory disclosure reporting requirements and so on. It is not an either/or; we see them as complementary, but we need to have Governments, companies and civil society sitting around the table together in countries. What can DFID and other donors do to support that? We have already heard a lot about capacity building on cadastres, and building up civil society, on improving the diversity of the tax base. We have heard about research and development in the sector. I would also encourage DFID to do more of what it is doing in supporting technical assistance of the EITI processes in the countries that are implementing it.

Lastly, I would also say that there is an opportunity for DFID to lift this debate a little bit higher in the public consciousness, and to bring the international debate much more on to the UN table. Is there an opportunity for a UN panel of experts to look at tax and development, particularly the challenges raised by increasing extractive revenue resources in developing countries and others, and to have that discussion across all development partners, not just DFID?

Chair: Thank you all very much. It has been extremely helpful. Two things emerge. One is that, having spawned EITI, the UK had better decide what it wants to do with it. We accept entirely that while our focus is on the extractive industries, that is not the title of our inquiry-it is the whole issue of expanding the whole tax base. Of course the industries themselves say, "We don’t just pay corporation tax, but we employ people who pay high salaries and should pay PAYE and so on." It has really been very helpful to us, and we thank you very much for your written submissions and for coming to give us evidence. Thank you.