Tax in Developing Countries: Increasing Resources for Development

Written evidence submitted by Rio Tinto

Introduction

Rio Tinto is a leading international mining group, combining Rio Tinto plc, a London listed public company headquartered in the UK, and Rio Tinto Limited, which is listed on the Australian Stock Exchange, with executive offices in Melbourne. The two companies are joined in a dual listed companies (DLC) structure as a single economic entity, called the Rio Tinto Group.

To deliver superior returns to shareholders over time, Rio Tinto takes a long term and responsible approach to the Group's business. This means concentrating on the development of first class ore bodies into large, long life and efficient operations, capable of sustaining competitive advantage through business cycles. We are a world leader in finding, mining and processing the Earth's mineral resources. Our products help fulfil vital consumer needs and improve living standards. We operate, and eventually close, our operations safely, responsibly and sustainably.

Rio Tinto's interests are diverse both in geography and product. We work in some of the world's most difficult terrains and climates. Most of our assets are in Australia and North America, but we also operate in Europe, South America, Asia and Africa. Our businesses include open pit and underground mines, mills, refineries and smelters as well as a number of research and service facilities.

Rio Tinto is a founding member of the International Council on Mining and Metals (ICMM) established in 2001 to improve sustainable development performance in the mining and metals industry and today has 21 mining and metals companies as members as well as 31 national and regional mining associations and global commodity associations. ICMM’s current work programmes include socio economic development, the Resource Endowment Initiative, which has now morphed into the Mining: Partnerships for Development, all of which recognise the important contribution that sustainable mining can make to economic development.

ICMM began the Resource Endowment Initiative in collaboration with UNCTAD and the World Bank Group. It has developed a substantial body of research on why some countries have avoided the "resource curse" and practical recommendations for companies, government and civil society. It was overseen by an independent international advisory group including the Head of the UN Global Compact and a former Prime Minister of Senegal. The Resource Endowment Initiative showed that the "resource curse" is not inevitable. Mining investments can drive economic growth and reduce poverty nationally and locally. However, companies alone cannot unlock the development benefits from mining – governance is key and multi-stakeholder partnerships can help fill capacity gaps. [1] The ICMM has also worked closely with the African Union, and has been involved in the development of the African Mining Vision which sets out how mining can be used to drive continental development.

Rio Tinto is currently undertaking exploration activity in Zambia but does not have any producing operations in Zambia. However, many of our experiences of operating a mine in other developing countries will be of potential relevance to Zambia.

My name is Janine Juggins BA ACA CTA AMCT and I have 23 years of international tax experience gained working for UK and US multinational companies, including the last 10 years at Rio Tinto where I am currently the Global Head of Tax. I have presented at various Tax and Development conferences organised by the IMF and ITIC [2] to share the practical perspective of a multinational mining company in the areas of tax and development and the design of natural resource taxation regimes.

Initial comments on the terms of reference of the enquiry

We agree that the link between taxation and development is fundamental, and that improving the capacity of developing county revenue authorities to administer revenue laws and collect tax revenues is a key building block for sustainable economic development.

However, we question the inclusion in the terms of reference of an estimate of $160 billion of revenues lost by developing countries due to the alleged tax avoidance by multinational companies as this figure cannot be supported by any reasonable analytical method [3] .It also risks diverting attention away from the real prize, which lies in identifying those simple but effective practical steps that can be taken to improve the overall efficiency of developing country tax administrations.

We also question the premise that multinational companies in the extractive industries sector are of ‘particular concern’. We recognise that our contribution to taxes in developing countries is often very significant, but ask the Committee to recognise that significant improvements to promote transparency have been made by the extractive industries sector in the last decade. Many major multinationals, including Rio Tinto, are signatory to the Extractive Industries Transparency Initiative (EITI) which was established in 2003 and have provided voluntary reporting of tax and wider economic contributions for a number of years. We believe that the EITI process, under which an independent party reconciles the payments made by the extractive industry to the amount of revenue received by the Government, remains the best way to promote transparency around payments to Governments and thereby assist in the fight against corruption, and enhancing the scope for populations to hold their governments to account as to whether they spend those revenues in support of poverty reduction.

As a complement to its support for EITI, Rio Tinto is committed to providing transparency about payments made to all governments, as part of our corporate commitment to sustainable development and good corporate governance. We have provided voluntary reporting of tax and wider economic contributions for a number of years. In 2010 we committed to increase the level of our detailed reporting on tax payments to governments. As a result the Rio Tinto Taxes Paid in 2010 Report, which covers the year ended 31 December 2010, presents key data on tax payments, revenues and earnings showing our economic contribution to public finances by country and by form of tax, was recognised through the PwC Building Public Trust Award for the best tax reporting by a FTSE 100 company. We have chosen to report this information voluntarily and intend to issue such reporting annually hereafter. [4]

Revenue Collection

An effective and efficient tax administration can be an important catalyst in creating a virtuous cycle of governance improvements. Creating a culture of taxation reinforces respect for the rule of law. The resulting increase in the share of revenue collection as a % of GDP will provide the Government with the means to make investments that support economic development. If the Government does this well, trust in the system is built encouraging others to participate in the formal economy. IMF staff estimates that if the

quality of institutions in sub-Saharan Africa were raised to the level of developing Asia, a

near doubling of Africa’s per capita GDP might be possible. [5]

DFID can support building capacity in developing country tax administrations by devoting a % of the DFID budget specifically to this objective. HMRC should be enlisted to support this work as they have the best practical experience of tax administration. Multinationals such as Rio Tinto are also well placed to contribute through their own practical experiences of being a taxpayer in many different developed and developing countries. For example, Rio Tinto recently organised tax training for a number of employees of the Mongolian Ministry of Finance and Tax Office in partnership with the World Bank, IMF, US Internal Revenue Service, Ernst & Young and Rio Tinto tax professionals.

Whilst academic principles provide the foundation, good tax policy design must be adapted to the practical challenges of tax collection and administration. These challenges will be different for each developing country based on its relative position, and they will change over time as progress is made. The starting point is to understand and target the main drivers of the economy.

The ICMM’s Mining: Partnerships for Development Toolkit identifies a partnership for enhanced revenue management as one of the six priority partnership themes for mining companies to work with government and other stakeholders to enhance the positive and minimise the negatives from mining. This Toolkit is available publicly and provides a tested methodology for governments, companies, donor agencies and local civil society and NGOs to collaborate on these issues. It has most recently been applied in Laos and Tanzania and a project is currently underway in Brazil.

The IMF paper on Revenue Mobilization in Developing Countries [6] provides a good analysis of the types of measures that have delivered real improvements for low income countries in increasing total tax revenues as a percentage of GDP. An important enabler for these measures is sustained political commitment so that reforms become systematised and enduring.

Typical practical improvements include:

· Clear rules that are transparently administered

In developing countries tax legislation can be poorly drafted causing confusion. Also, there can often be a lack of guidance on how to interpret and comply with tax laws, which can be compounded by poor communication within the tax authority leading to the tax law being administered inconsistently. Such inconsistencies and lack of guidance provide opportunities for fraudulent administration.

A strong centralised tax administration with suitably qualified senior employees is the most effective way to deliver improvements in this area. There should be a zero tolerance policy on corruption.

The creation of a centralised specialist unit to deal with large corporate and high net worth taxpayers ensures that technical expertise is brought to bear in those cases where it potentially matters the most.

The compensation of tax inspectors should not be linked to the amount of tax revenue assessed, as this encourages the issue of frivolous tax assessments. Instead the performance element of any compensation should be linked to meeting process-based key performance indicators such as responding to a taxpayer query within a certain time limit, or issuing a tax assessment within a certain period after the tax return is filed.

· Simplicity

Developing countries that lack strong tax administrations are not well placed to administer complex taxes. In this environment there should be as few different types of taxes and exemptions as possible.

The taxable income base on which the corporate income tax is levied should have minimal differences to the accounting profit computed under the local accounting GAAP or IFRS. Maintaining a broad tax base and a relatively competitive corporate income tax rate should strike the right balance.

Obtaining information on related party transactions should be part of the tax return completed by the taxpayer in the same way that this is the case in many developed countries. At a minimum the taxpayer could provide for each related party a description of the transaction, the amount incurred by type of transaction in the tax year, and the transfer pricing method used. This would provide the information for the tax authorities to assess tax compliance risk and to prioritise the use of expert tax audit resources.

In terms of administrative simplicity, taxes that are withheld at source and self-assessed by the taxpayer can be an efficient way to raise tax revenues.

· VAT

The IMF paper on revenue Mobilisation in Developing Countries found that in lower income countries, implementing a broad based VAT (with a fairly high turnover threshold at which registration becomes compulsory, thus carving out small businesses), the resulting broadening of the tax base and improved compliance may increase total revenue collection as a percentage of GDP by 2%.

· Self-assessment

An effective revenue administration can facilitate a move towards taxpayers self-assessing their tax liability. Revenue administrations need to be in a position to adequately police such self-assessments through use of withholding tax and other third party information, through taxpayer audits and through a penalty regime to encourage compliance.

· Electronic payments of tax

Provided that there is adequate IT infrastructure, electronic payments of tax can be efficient but also importantly remove a potential opportunity for fraudulent administration in terms of taxpayer dealing directly in person with a tax officicial.

Responsible use of the revenue base

In May 2011 the International Monetary Fund (IMF) launched =the Topical Trust Fund on Managing Natural Resource Wealth [7] which will provide about US$25 million over five years to scale up technical assistance to low-income and lower-middle-income countries endowed with oil, gas, and minerals to help them deal with the associated economic policy challenges. The technical assistance will cover the extractive industries fiscal regime, extractive industries revenue administration, macro-fiscal policies and public financial management, asset and liability management, and statistics for natural resources. The first two categories, the design of the extractive industry tax regime, and its administration, support revenue collection. The last three categories support responsible management of the revenue base.

Countries that depend heavily on revenues from mineral or agricultural commodities have to contend with the great volatility that can occur either due to changes in prices or production levels. The large variations in revenues make planning infrastructure investments and economic development and diversification, particularly in the context of often shorter term electoral cycles. This requires the development of expertise in forecasting, including the modelling of different commodity price scenarios, and the government capacity to deal with decisions such as those facing developed countries, as to how much of the revenue to respectively consume, save, invest or use to pay down debts.

Building capacity in tax administrations will fail to achieve its maximum potential impact unless complemented in parallel by building capacity in the management of the revenue base. Multinationals such as Rio Tinto are also well placed to contribute through their own practical experience of having to manage multi-million and sometimes multi-billion dollar investments over a period often in the range of 30 years or more.

· Tax incentives

Tax incentives are one potential use of the revenue base. Wisely used, they can play a helpful role in encouraging economic development by reducing the hurdle for initial investment. However, a careful analysis needs to be made of the cost in terms of tax revenues foregone versus the benefits of the investment. The need for tax incentives is likely to be influenced by diverse factors such as historical experience of foreign investment (has there been an unstable taxation environment, have there been examples of forced asset sales or creeping expropriation?), the quality of governance, the amount of investor competition, requirement for infrastructure, ease of access to markets, and in the case of mining the estimated quality of the mineral resource and general geological prospectivity in the country. As they impact total tax revenues, tax incentives should be agreed and administered by the Ministry of Finance and not, for example, the Ministry of Mines.

Tax evasion and avoidance

HMRC is a source of expertise for insights into practical methods that are effective in identifying individuals and companies that engage in tax evasion, and in the identification of high risk areas to target in a routine tax audit. Exchange of information agreements are a useful source of data and should be encouraged.

Tax disclosure and transparency

We refer to our earlier comments and the voluntary reporting of tax payments to governments that Rio Tinto has undertaken for many years. We believe EITI remains the best way to promote transparency around payments to Governments and thereby assist in the fight against corruption, and enhancing the scope for populations to hold their governments to account as to whether they spend those revenues in support of poverty reduction.

However, we recognise that the debate has moved on in the EU and US to whether mandatory rules for disclosure of payments to governments are necessary. A truly global standard could have advantages in creating a level playing field for the extractive industries.  So where such rules are envisaged, we believe governments should work together to adopt a consistent and comparable global approach, which establishes disclosure requirements and thresholds that are proportionate.

Capital flight

We have no comments to make on this point.

February 2012