Tax in Developing Countries: Increasing Resources for Development

Written evidence submitted by Extractive Industries Transparency Initiative (EITI)

International Secretariat Oslo

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1 Summary

 

3.5 billion people -half the of the planet’s inhabitants/world’s population -- live in countries whose economies are dominated by natural resources. The governments of most of these countries do not raise significant tax revenues directly from their own citizens. Partly because of this, these countries tend to be more repressive, corrupt and badly-managed. Ensuring the transparency of government revenues from natural resources is the first step in addressing this "resource curse". The second step is creating a platform to monitor and discuss with citizens how the government manages the sector, including raising a debate about of the role, level and use of tax and other government incomes from mining, oil, gas and other extractive industries.

The EITI is a global standard that establishes transparency and accountability in resource-rich countries:

§ Transparency: through the reporting, verification and public disclosure of company payments and government receipts from oil, gas, mining and other natural resources;

§ Accountability: through a multi-stakeholder group of government, companies and civil society and vibrant public dialogue.

35 countries on five continents – from Afghanistan to Zambia - are implementing this standard

There is emerging anecdotal evidence that the EITI process increases income from the extractives sector. The data from EITI reports also create opportunities to compare tax levels and revenues for the sector across countries.

The UK government has pledged to "lead by example and contribute to advancing open government in other countries." (Open Government Partnership Declaration, 2011). The Department for International Development (DFID) is helping promote better governance of resource-rich economies while also supporting the EITI internationally and in many resource-rich countries. However, the biggest impact would come if the UK government were to join fellow oil majors such as the US and Norway in implementing the EITI, thereby keeping its pledge to "lead by example" while adding great weight to the EITI as a truly global standard for transparency and accountability of tax and revenue. Until that happens, the UK’s absence will remain conspicuous and inconsistent with its policy of open government.

2 Brief Introduction to the EITI

 

The EITI was launched by the UK government in 2002 to promote trust and to reduce corruption and poverty in resource-rich countries. It is a standard with two key elements:

1. EITI report - Governments disclose their revenues from oil, gas and mining. Meanwhile, oil, gas and mining companies disclose their payments to governments in bonuses, royalties, taxes and payments-in-kind. A third-party entity reconciles these two reporting streams, making efforts to clarify any discrepancies;

2. Multi-stakeholder group - oversees the process and builds a platform for the key stakeholders to discuss the information and management of the sector more widely. This group also ensures that the EITI is inclusive and collaborative in each country

35 countries across all continents are implementing the standard. These include Afghanistan, Democratic Republic of Congo, Indonesia, Iraq, Nigeria, Tanzania, and Zambia – which span the range of natural resource-rich countries and include some of the largest oil and mineral producing countries in the world. Twenty-one of the implementing countries are African. In September 2011, President Obama committed the US to implement the EITI.

The EITI global standard is overseen by an international board on which the UK government serve. Companies like BP, Shell, Rio Tinto, AngloAmerican, institutional investors such as F&C Asset Management and Standard Life Investments and civil society organizations including the Publish What You Pay coalition and Global Witness also serve or have served on the Board, chaired by the Rt Hon Clare Short. A number of other British companies and institutional investors support the EITI.

The G8 has promoted the EITI for years and re-affirmed its support/backing in the 2011 Deauville Declaration, which called on "all countries" (i.e. emerging and developed economies) to join or support the EITI. The EITI has been endorsed by the G20 and the UN General Assembly. In October 2011, The Economist described the EITI as an "ingenious scheme… giving citizens a chance to see how much of (oil, gas and mining) payments actually end up in public coffers"

In the UK, the EITI enjoys support across political parties, media groups, academics, faith groups, industry associations and NGOs. The UK government provides political, technical and financial support for EITI largely, but not exclusively, through DFID. The UK government is a founding member of the Open Government Partnership a multi-government initiative promoting " more transparent, effective and accountable governments -- with institutions that empower citizens and are responsive to their aspirations "

3 Evidence

 

Countries whose economies are dominated by resource extraction industries, tend to be more repressive, corrupt and badly-managed. This can be partly attributed to the replacement of tax from citizens with direct income from natural resource production. A multitude of academic studies and journalistic literature (eg. Collier, Sachs, Venables, etc.) confirms that transparency of revenues to government is the first step in addressing the "resource curse". Along with transparency must come accountability and a sound environment for debate about of the role, level and use of tax and other government incomes from the sector. As Clare Short said in a BBC World Debate filmed in Lusaka in August "All over the world there has been total secrecy about the contracts, about how much the production was, about how much they really pay to the government, how much the government receives. If there’s nothing to hide, let’s get all of this out in the open. Let the people know what it costs, how much is being produced, what proportion of profits are being paid in taxes." ( http://eiti.org/news-events/clare-short-bbc-world-debate-does-mining-benefit-africa).  

The EITI’s two pillars seek to satisfy this necessary, but not sufficient, first step. There is emerging anecdotal evidence that the EITI process increases income from the extractives sector by building the capacity of tax collecting authorities, improving systems, and reducing opacity between line ministries and tax collecting authorities. Some EITI countries have seen a higher level of tax collection. For example, Ghana's 2012 budget included increased corporate tax rates and changes to capital depreciation allowances, echoing recommendations in Ghana's 2009 EITI report, which criticized low corporate tax payments and a high capital depreciation allowance of 80 per cent for companies' first year of operations. In 2010, the Zambian Government agreed a mining windfall tax with local operating mining companies using the EITI as a major forum for negotiation. After the first Nigeria EITI report, the Nigerian President, Umaru Musa Yar’Adua, said that the Nigerian EITI had "conducted studies that swelled government’s coffers by over $1 billion". Its second report, showed financial discrepancies and outstanding payments totaling over US$5bn for revenues generated by the sector in 2005 which, if the discrepancies alone were recovered could result in a far higher investment in the developmental sectors than the aid to that country.

The data from EITI reports also create opportunities to compare tax levels for the sector across countries. So Nigerian citizens can question why their government receives less for its oil than Norway despite similar levels of production. The EITI publication Extracting Data brings together these cross-country comparisons: http://eiti.org/document/extracting-data.

Whilst the EITI does not directly address issues of tax evasion and avoidance in developing countries by private individuals and companies, it does reduce the space for opaque transactions. Nor does it directly tackle issues of capital flight, but it does create a more attractive investment climate as seen by correlations between EITI compliant countries and indices on corruption, doing business, and credit ratings. In 2010, Fitch upgraded Azerbaijan's long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BBB-' from 'BB+' following the declaration of Azerbaijan as EITI compliant. Liberia jumped Liberia 91 places on Transparency International’s Corruption Perceptions Index (CPI) two years after becoming EITI Compliant.

DFID is helping promote better governance of the extractive sector and is supporting the EITI internationally and in many developing countries. They are considering our recommendation that DFID support the establishment of a UN Panel of Experts or similar high-level body to increase the profile of better-managed natural resource sectors. At the country level, DFID’s technical assistance in countries like Nigeria and DRC have been critical TA for EITI implementation, and is support for implementation in Indonesia ensured that the EITI’s most populous country became an implementer in 2010. DFID’s work to support public financial management reforms across Africa and elsewhere, especially training tax and mining officials on reporting has been important in ensuring that EITI links well with wider governance reform processes.

However, there is more that can be done. It would amplify this policy if the UK were to implement the EITI itself. As well as serving domestic objectives for improving the management of UK public resources and revenues and building trust about the sector, this would help the UK promote extractive resources transparency as a global standard and allow developing countries an opportunity to compare and understand the UK tax regime in the extractive sector. Indeed, as the founder of the EITI and the Open Government Partnership, a major oil producer with many of the largest extractives companies listed on the FTSE, the UK government’s absence from the EITI is notable.

By implementing the EITI, the UK would help reinforce the EITI as the global standard for transparency in extractive industries. Countries like Angola, South Africa, Brazil, Sudan, Colombia, Uganda, Papua New Guinea, often question why they should implement the EITI if the UK is not willing to subscribe to the international standard that it launched itself. These are countries which do not respond to aid as a lever for better governance, yet are home to hundreds of millions of poor people and receive billions of pounds each year in resource revenues. They could benefit significantly from EITI implementation.

The US commitment to implement the EITI has highlighted the anomaly of the UK’s absence – with recent critical commentary in the Daily Telegraph and Africa Confidential. Canada and Australia are also under international and domestic pressure to implement the EITI.

Following the UK Government’s invitation for consultation on its open data initiative data.gov.uk, the EITI International Secretariat submitted a short paper urging the UK Government to follow the example of Norway, the United States and other countries, by committing to implement the EITI standard: http://eiti.org/news-events/international-secretariat-encourages-uk-implement-eiti-0.

The UK Government has committed "to being the most transparent government in the world". A useful next step to fulfilling that commitment would be to implement its own transparency initiative.

February 2012