Tax in Developing Countries: Increasing Resources for Development

Written evidence submitted by London Mining Network and

International Accountability Project

I. EXECUTIVE SUMMARY

London Mining Network is an alliance of 27 organizations concerned about the impacts of London-based and London-financed mining companies around the world. International Accountability Project (IAP) is a U.S.-based human rights organization with expertise on the human rights ramifications of development policies and projects.

This submission of evidence concerns a proposed mining project in northwest Bangladesh, the Phulbari Coal Project. The project has generated fierce controversy over the past six years. Project opponents cite a 6% royalty rate and a nine-year tax "holiday," both of which violate national mining rules, as serious concerns. Both would constrain development revenues in one of the world’s most economically poor countries while allowing a UK-based corporation, GCM Resources plc, to extract one of Bangladesh’s most valuable non-renewable resources. Contract terms also allow the export of 100% of the coal, which means that Bangladesh’s finite coal resources would not be used to meet the country’s own unmet energy needs.

In addition to a royalty rate and tax exemption that violate Bangladesh’s mining regulations and would sharply constrain revenues desperately needed for development, the project would inflict severe costs that include adverse impacts on the nation’s food supply, access to water, health and the environment, which would affect as many as 220,000 Bangladeshi citizens. In so doing, the project threatens to reverse Bangladesh’s progress toward meeting Millennium Development Goals (MDGs), and undermine DfiD’s spending and core work in support of the specific goals of reducing hunger and extreme poverty, increasing access to water, improving health, and building livelihoods.

It is our understanding, based on personal communications with a contact within DfiD in Dhaka, that DfiD is actively promoting open pit mining generally and GCM’s Phulbari Coal Project in particular. If correct, this is of grave concern, in light of the fact that the project would undermine DifD’s core development goals and work in Bangladesh.

II. BANGLADESH: DEVELOPMENT GAINS & CHALLENGES

Bangladesh deserves close scrutiny from the IDC’s inquiry on tax in developing countries. Like Zambia, selected by the Committee as a case study for this inquiry, Bangladesh faces major challenges in achieving development goals. Moreover, as noted in the IDC’s 2010 report on DfiD’s programme in Bangladesh, the UK has a long relationship with Bangladesh, the fourth highest recipient of UK bilateral assistance." [1]

It is important to note the progress that has been achieved. According to the IDC report, poverty levels in Bangladesh were reduced from 57% at the beginning of the 1990s to 40% in 2005. [2]

However, despite progress on the goal of reducing extreme poverty, "large numbers of people remain desperately poor" and Bangladesh continues to confront major development challenges: "It remains a low-income country with an average per capita income of $470, and about 64 million people who live on less than $1 a day. Of these, approximately 35 million are still extremely poor and 15 million live on the equivalent of 20 pence a day." [3]

III. GOVERNANCE, TRANSPARENCY & THE RISK OF TAX EVASION

Analyzing factors that impede Bangladesh’s progress toward meeting its development goals, the IDC’s report concluded that the country’s potential has been hampered by high levels of corruption and poor governance, including accountability mechanisms that do not function as they should. Bangladesh, the report notes, ranks 139th out of 180 countries on the 2009 Transparency International Corruption Perception Index. [4]

The ongoing problems of corruption and lack of transparency raise serious questions about the risk of tax evasion by corporations operating in Bangladesh. Moreover, as the IDC notes in its announcement for this inquiry, the problem of tax avoidance by multinational companies is of particular concern in the case of extractive industries, "where payments to governments are often not disclosed and may not contribute to development or poverty reduction." In Bangladesh, these concerns are exacerbated by the findings of the IDC report, which concluded that tax evasion is already a pressing concern in Bangladesh, largely as a result of weak governance.

A 2008 Action Aid report estimates that developing countries in the Global South lose $500 - $800 billion each year, as a result of corruption, tax evasion, and criminal activities. [5] In Bangladesh, the risk of capital flight is now greater than ever, as the country moves forward with plans to greatly increase its use of coal-fired power, while a UK-based company is pushing for open-pit extraction of the country’s domestic coal deposits.

IV. BANGLADESH’S COAL RESERVES & LACK OF A NATIONAL COAL POLICY

Bangladesh has an estimated 3 billion + tons of coal in five coal deposits, all of which are located in the country’s densely populated northwest. Bangladesh currently has only one coal-fired power plant, with a 250 MW capacity, located roughly ten miles from the proposed Phulbari mine project. However, the current administration has recently signed contracts with a local and Chinese joint venture firm to build three new coal-fired plants, and also floated tenders to build six additional coal-fired plants across the country. [6]

In a speech in January of 2012, Prime Minister Sheikh Hasina stated that the new coal-fired power plants would use imported coal, and Bangladesh would reserve its own coal for future generations and the development of new technologies that would allow energy to be generated without extracting the coal. All of the nation’s coal deposits, the Prime Minister pointed out, are located in densely populated areas and people have already been killed while protesting against the proposed mine in Phulbari.

However, shortly after Hasina’s speech, the chairman of Bangladesh's Power Development Board, Alamgir Kabir, commented that new coal-fired plants would initially use imported coals but "Local coal will be utilized once the country starts extracting local coal significantly." [7]

Efforts to formulate and approve a new national coal policy in Bangladesh have repeatedly been impeded by controversy over whether it will include a ban on open-pit coal mining. Proponents of a ban point out that the nation’s coal reserves are located in an extremely densely populated region, which means that open-pit mining would have an enormous human cost.

V. THE PHULBARI COAL PROJECT: AT WHAT COST?

This summary of project impacts is necessarily brief due to limits on the length of submissions to this inquiry. For a full discussion of project impacts please refer to the Phulbari Fact Sheet prepared by International Accountability Project that accompanies this submission.

The Phulbari Coal Project would excavate an immense open-pit coal mine in northwest Bangladesh, six miles from the Indian border. It would acquire 14,660 acres of land, 80% of which is fertile farmland, displacing tens of thousands of people in one of the world’s most densely populated countries.

The project would undermine efforts to improve food security in Bangladesh by destroying one of the country’s most important food producing regions in a nation in which nearly half of all people currently exist below the nutrition poverty line.

The project also threatens people’s UN-recognized right to water. The Final Report of an Expert Committee formed by the government of Bangladesh to assess the project concluded that 220,000 people would suffer reduced access to water as a result of dewatering operations associated with the mine. This would exacerbate an existing water crisis in the region: nearly half of all people in Phulbari do not currently have enough water to meet their needs. [8]

Bangladesh’s gains in reducing extreme poverty are also threatened. Although 80% of the households who would be displaced are farming and indigenous households with land-based livelihoods, project plans state that their cultivation lands will not be replaced and "most households will become landless." Project plans calling for cash compensation alone show an alarming disregard for the large body of research on the displacement of people with land-based livelihoods, which shows that reliance on cash compensation alone results in impoverishment of the displaced families.

The project would have devastating impacts on some of Bangladesh’s most vulnerable and marginalized groups. Bangladesh’s Indigenous Union (Jatiya Adivasi Parisad) estimates that the project would evict or impoverish 50,000 indigenous people from 23 villages.

The mine has an estimated lifespan of 36+ years. Total extractable coal is estimated at 572 million tons, with 16 million tons to be extracted annually at peak production. Plans to transport the coal though the Sundarbans Reserve Forest threaten a UNESCO-protected World Heritage Site, which is the largest remaining mangrove forest in the world and Bangladesh’s only buffer against the devastating impacts of tropical storms and cyclones, which are increasing in intensity and frequency as a result of climate change.

VI. WHO BENEFITS?

The Australian mining giant BHP (now BHP Billiton, listed on the London Stock Exchange) surveyed Phulbari’s coal deposits in the 1990s. Due to the depth of the deposits and their location within a flood-prone deltaic region with numerous rivers and heavy monsoon rainfall, BHP concluded that it would be unable to excavate coal in Phulbari in an environmentally responsible manner. [9] BHP subsequently signed an agreement to transfer its license to Asia Energy/Global Coal Management Resources plc, hereafter AE/GCM. [10]

AE/GCM is a London-based company, domiciled in England and Wales. It was incorporated as a Public Limited Company on 26 September 2003 and admitted to the London Stock Exchange Alternative Investment Market (AIM) on 19 April 2004. The company was formed as a single-purpose entity, solely to implement the Phulbari Coal Project. Although two members of the board and management have experience in coal mining, AE/GCM itself "possesses no pedigree, as a company, in operating mining projects of any kind, let alone on the scale of Phulbari." [11] In light of BHP’s conclusions regarding efforts to mine Phulbari’s coal deposits, AE/GCM’S absolute lack of mining experience as a company is of serious concern.

VII. TAX-AVOIDANCE & THE RACE TO THE BOTTOM

While demand from fast-growing economies such as China and India led to record prices for commodities during the first decade of the 21st century, this has not meant an economic bonanza for many of the resource-rich developing countries that own much of the iron ore, copper, nickel and platinum being extracted. "By measures both legal and illegal," a Christian Aid report observes, companies extracting the finite resources of developing countries "have too frequently shown themselves to have just one priority: taking as much wealth as possible from the countries where they operate, while putting as little back in as possible by paying as few taxes as they can." [12]

There are numerous ways for corporations extracting finite resources in developing countries to avoid tax. Among the legal options are:

· Taking advantage of tax-avoidance schemes;

· Demanding tax concessions, such as tax "holidays" and;

· Negotiating low royalty rates.

Even legal methods, Christian Aid’s report notes, "may not always be what they seem; mining and oil drilling concessions have been most closely associated with the payment of bribes to corrupt ministers and officials in order to secure unfair mineral contracts which are advantageous to mining companies but deprive economically poor countries of revenues that are critically needed for their own development, while also removing their non-renewable resources. [13]

As in the case of Bangladesh, competition among developing countries seeking to attract transnational investors means that many resource-rich countries have found themselves in a ‘race to the bottom’, offering financial inducements that include slashing taxes and royalty rates. In developing countries, a 2008 Action Aid Briefing Paper notes, tax competition often manifests itself in the form of tax ‘holidays’, tax-free or low tax economic zones. [14]

While tax holidays and exemptions and slashed taxes and royalty rates may prove successful in attracting capital investment, the consequences are so often grim that the term "resource curse" is now commonplace.

VIII. TAX AVOIDANCE: THE TERMS OF AE/GCM’S CONTRACT

AE/GCM estimates that the Phulbari Coal Project would "contribute 1% to Bangladesh's GDP each year and pay in the order of US$7 billion in taxes, royalties and service charges to the Government over the life of the Project ." [15] According to one of Bangladesh’s leading economists, AE/GCM may gain US $20 billion in profits from the coal alone over the lifespan of the mine. [16] If both estimates were correct, this would mean that the company is reaping over 65% of the profits from the coal alone.

The Expert Committee formed to assess the project compared AE/GCM’s calculations of its royalty payments against the value of crop losses. With the total value of lost crops estimated at $ US 783 million, the committee concluded, crop losses alone are equal to 63% of the total calculated royalty payments of $ US 1,240 million [17]

The committee’s Final Report (ECR) also challenges the legality of BHP’s contract, subsequently transferred to AE/GCM, on a number of grounds, four of which are directly relevant to the foregoing discussion of legal forms of tax avoidance and this inquiry:

1) Tax Holiday: the contract with BHP included a tax holiday of nine years from the beginning of commercial production. According to the ERC, there was no provision for granting such a concession under the Mines and Mineral Rules of 1968 and 1992, and current rules do not permit a holiday of more than six years.

2) Royalty Rate: the 1967 Mining Rules and subsequent amendments fixed a royalty rate of "20% of the coal value in pit’s mouth." Yet, Bangladesh’s Bureau of Mineral Development signed an agreement with a royalty rate of 6% which was, the ERC states, "completely contrary to the existing rules, and therefore, illegal and against national interest." [18]

3) Royalty Calculation: the ECR cites an AEC report that includes two tables with operating costs showing total royalties of $1,649 million. However, the same report shows reduced royalties of $1,240 million, after a deduction for delivery cost to the port. This deduction, the ECR states, "is not consistent with the existing rules." [19]

4) Failure to submit a Bank Guarantee: AE/GCM submitted a scheme of development on October 2, 2005, but failed to submit a deposit equal to 3% of the total project cost ($27.51 million) as required by Bangladesh’s Mining Rules 39. [20]

Further violations of national mining regulations identified in the ECR but not directly related to this inquiry pertain to limits the size of lands leased for open-pit mining, and the duration of the lease. [21]

IX. A PROJECT STALLED BY PROTEST

AE/GCM’s most recent Interim Results report, dated 1 st February 2012 [22] , notes:

Approval from the Government of Bangladesh is necessary to proceed with development of the mine. GCM continues to await approval.  […] While GCM continues to strive to advance the Project, the approval of the Scheme of Development is a political decision outside our control and accordingly we are unable to predict its timing. GCM is ready to move the Project forward upon approval.

In fact, the company’s efforts to move the project forward have not succeeded in overcoming fierce opposition that has stalled the project since its inception. Massive protests against the project began in August 2006, when paramilitary troops opened fire on some 70,000 people marching in Phulbari, killing three people and wounding as many as 200. Outraged citizens enforced a six-day strike, closing shops, offices, educational institutions, and roadways in the district and beyond.

Project opponents have suffered further violence, including savage public beatings by police, death threats, and arbitrary arrest and detention. Bangladesh’s notorious Rapid Action Battalion (RAB), denounced as a "death squad" by Human Rights Watch, [23] has been deployed to at least two demonstrations against the project in 2011. Nonetheless, lethal violence and repression have failed to suppress opposition and the grassroots struggle to stop the project has succeeded in blocking the mine for six years.

As this suggests, AE/GCM has no social license to operate in Phulbari. Local residents burned its project information office to the ground following the massacre in 2006 and the company’s personnel were forced to flee the country under police escort. A six-point agreement, which ended the protest strikes, calls for AE/GCM to be permanently evicted from Bangladesh and institutes a permanent ban on open-pit coal mining in Bangladesh.

X. CONCLUSION & RECOMMENDATIONS

We welcome the IDC’s inquiry on taxes in developing countries. The loss of revenues suffered when countries like Bangladesh slash royalty rates or offer exemptions such as the nine-year tax "holiday" claimed by AE/GCM in order to attract international investors engaged in "tax shopping" leaves developing countries with insufficient funds to achieve basic standards, such as freedom from extreme poverty and hunger, adequate shelter, access to clean water and sanitation, decent livelihoods, education, and good health including maternal health and, in the case of Bangladesh, the critical need for climate adaptation.

As evidence submitted here shows, Bangladesh’s efforts to achieve these basic standards are seriously threatened by AE/GCM’s Phulbari Coal Project. This being the case, possible support from DfiD for this project is of grave concern, and we respectfully request that the Committee include the reasons for concern, presented herein, in its report to the House of Commons.

Any support from DfiD for open-pit extraction of Bangladesh’s coal reserves also directly conflicts with the position of Prime Minister Sheik Hasina, who has publicly stated that Bangladesh will not move forward with open pit mining due to high population densities and the excessive number of people who would be forcibly evicted from their homes and lands. Bangladesh, Hasina says, will reserve its coal for future generations and the development of technologies that would allow energy to be generated without coal extraction. [24]

In light of Prime Minister Hasina’s position and the severity and magnitude of the threats that open-pit mining and the AE/GCM’s project pose to development efforts in Bangladesh, we also respectfully request that the Committee consider endeavouring to ensure that DfiD, the Foreign and Commonwealth Office (FCO), and the UK High Commission in Dhaka are fully informed of these risks and support the Prime Minister’s resolve to pursue Bangladesh’s development goals in a manner that will not displace and impoverish tens of thousands of Bangladeshi citizens.

4 February 2012