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Tax in Developing Countries: Increasing Resources for Development

Written evidence submitted by Tearfund

Background

1. Tearfund welcomes this opportunity to contribute to the International Development Committee’s inquiry into Tax in Developing Countries: Increasing Resources for Development. Tearfund is a Christian relief and development agency working directly in response to disasters and in partnership with local organisations in around 50 countries, often working alongside or through networks of local churches.

2. A wide range of interventions are needed to ensure that countries can fully harness their domestic resources and manage them in a fair and transparent way. These interventions include well-targeted aid, strengthening government institutions, increased civil society participation in governance as well as increased transparency in the collection and use of government revenues.

3. Tearfund’s current campaign, Unearth the Truth, focuses on transparency in the extractives sector and we have been working through the Publish What You Pay coalition and through UK and European church networks to call for mandatory disclosure of payments (including tax payments) that oil, gas and mining companies make to governments. The rationale for this is developed further in our evidence which focuses on international efforts to promote tax disclosure and transparency.

4. Tearfund is also supporting a number of key partners who are engaged in national conversations about the use of natural resources. In Zambia, Tearfund works with the Evangelical Fellowship of Zambia (EFZ), who are particularly involved in discussions around accountability in the forestry sector and who are also involved in implementation of the EITI and on the steering group of the PWYP national campaign [1] . In Tanzania, the Tanzanian Council of Churches is on the steering group of the Extractive Industries Transparency Initiative (EITI). Work is also on-going in Sierra Leone and in Colombia and Tearfund’s recent report, ‘Unearth the Truth: making extractive industries work for all [2] ’, draws on the experience of citizens in these countries.

5. Our submission therefore focuses mainly on two of the issues that the International Development Committee identified for the enquiry: the need for tax disclosure and transparency; and the need for better revenue collection.

The Need for Disclosure and Transparency

6. It is estimated [3] that $148bn is lost every year from Africa due to corruption and this can only flourish in an atmosphere of secrecy. This works out at approximately £3,000 per second, which would be enough to ensure that every person around the world has access to clean water and sanitation. [4] Collusion between governments, multinational companies, banks and tax havens can result in poor deals for developing countries and capital flight.

7. Tearfund’s work has focused specifically on the extractives sector where there is such enormous potential for the generation of revenue that will benefit local communities and where questions of environmental sustainability are also acute. When compared to international aid flows, the amount that the extractive industries already contribute to domestic economies is substantial. In 2008 it was estimated that the revenues from oil, gas and mining in Africa were worth nine times [5] the amount that the continent received in aid. In 2009 – the latest available figures – in the context of a global financial crisis, revenues were still around six times [6] ODA.

8. The contract conditions under which multinational companies gain access to natural resources seem disproportionately generous in many countries, indicating that in some countries there is even greater potential for these resources to bring benefits to the local communities. In DRC, one of the world’s most resource-rich countries, untapped mineral wealth is estimated to be worth 24 trillion dollars and the country holds 80% of the world’s coltan reserves [7] . Even now, DRC is estimated to export $1bn in minerals every year and yet in 2006, the Treasury received just $86,000 from mineral rights.

9. In Sierra Leone, a country which is involved in the EITI, work carried out by the Budget Advocacy Network and involving the National Advocacy Coalition on Extractives indicates that substantially more finance could be raised from minerals. The report uses figures from the First EITI report in 2010 to show that estimated total mining revenue stood at $7.2m in 2006 and $10.18m in 2007. Calculated as a percentage of the total value of mineral exports, this works out as just 3.56% and 4.16% [8] . In many other comparable countries the figure is nearer 10-15% and the report concludes that in Sierra Leone the problem lies in weak administrative capacity and alleged tax evasion by some mining firms; and tax exemptions and patronage politics.

10. In Zambia, the issue of overly-generous contracts which have resulted in low tax take from mining companies, was a key issue in the 2011 Presidential election with newly elect President Sata proposing a doubling of mining royalties from 3-6%. A briefing paper from 2010 written by the Centre for Trade Policy and Development (CTPD) exploring options for raising additional revenue from mining highlighted a number of other options for Zambia, including reintroduction of a windfall tax, implementation of a mineral revenue sharing mechanism, and greater transparency and accountability for revenues. [9] Since then, the high profile case of Glencore and allegations of tax avoidance involving one of its subsidiaries (Mopani Copper Mines), has thrown a spotlight on the ways in which multinational companies are able to shift money around in order to lower their tax bills.

The demand from civil society for disclosure

11. A lack of transparency means that civil society groups do not always know how much revenue is received by local and national governments by way of tax, royalties, licenses and other payments. As a result they do not know how much money could potentially be available for investment in basic services and meeting the Millennium Development Goals (MDGs), many of which remain off-track, especially in sub-Saharan Africa.

12. A wide range of civil society groups as well as government officials and businesses are asking for such information so that they can hold their governments to account and better contribute to policy-making at both local and national level. As Aminata Kelly-Amin from the Network Movement for Justice and Development in Sierra Leone, told Tearfund: "We do not know what the government is receiving. We want to know how much is collected, so that we can monitor how it is spent and how much companies are actually fulfilling their obligations." [10] Similarly, Senator Jorge Robledo, Member of Colombian National Parliament, Polo Democrático Alternativo, told us: "I have spent years telling people we have a problem auditing and controlling our extractives sector. This legislation is very important. We can’t win the argument or even begin to fix any of the problems if we don’t have the minimum information for the debate." [11]

Ensuring international transparency efforts are effective

13. For international efforts to be effective, it is clear that there needs to be action on many fronts. In this section Tearfund has chosen to focus on transparency of data, reflecting on recent legislation in the United States (Section 1504 of the Dodd-Frank Act) and on legislative proposals currently being considered by the European Union in the form of the Transparency and Accounting Directives.

14. Tearfund welcomes the move towards legislation. Announcing the US decision to bring forward the 1504 provision in the Dodd-frank Act, President Obama said at the MDG Summit in 2010, "We know that countries are more likely to prosper when governments are accountable to their people.  So we are leading a global effort to combat corruption-which in many places is the single greatest barrier to prosperity, and which is a profound violation of human rights. That’s why we now require oil, gas and mining companies that raise capital in the United States to disclose all payments they make to foreign governments.  And it’s why I urged the G-20 to put corruption on its agenda and make it harder for corrupt officials to steal from their people and stifle their development."

15. The G20 Anti-Corruption Group, in their 2011 report, cited this legislative approach as an example of progress made, and Tearfund has welcomed the UK Government’s decision to embrace a similar approach requiring country level and project level report, as David Cameron set out last year in his Lagos speech.

16. For both the US and EU legislation to be effective and remain true to its original purpose, there needs to be a commitment to secure user-friendly, comparable data from companies that can be used by civil society organisations. It is for this reason that Tearfund has been advocating for project-level as well as national-level reporting. Our research in Colombia and Sierra Leone has shown that groups are motivated by information that they can relate to and that is immediately relevant to their daily lives. Local communities are often much more likely to galvanise around debates about the use of natural resources and the impact on their local areas, whereas the scrutiny of national-level data is likely to be the preserve of national-level organisations. Both these levels of engagement are important for participatory policy-making that will promote good development practices and meet the needs of diverse groups within a country

.

17. In some countries such as Colombia, it has even been the case that specific laws have been passed which hypothecate national expenditure to particular regions which are responsible for generating revenues as a result of their natural resources. Currently, 80% of all mining royalties return to producing regions with the remaining 20% going into a National Royalties Fund. This will reduce to 15% by 2015 but the principle remains in place. [12]

18. In many countries, the responsibility for licence agreements and / or tax collection is devolved to state or local authorities. Reporting on national level payments can therefore be useful in providing a general overview, but it only provides information of limited use for increased transparency and accountability at state and local levels. In the case of Nigeria, reporting through the EITI at a national level has had limited impact in the fight against corruption as it has not included information on transfers from federal to state and local governments and has not enabled state and local level civil society to participate effectively in decisions about resources in their localities. [13]

19. For these reasons, the inclusion of project-level data within any new transparency laws is essential, with a clear definition of ‘project’ as the contract, lease, licence, concession or other legal agreement which gives rise to a company’s tax and revenue liabilities in each country where it operates. This is the unit that ensures comparability across companies and which will also allow provisions to be extended to other sectors in the future. It also maintains the clear link between a company, local community and level of government to which it makes payments.

20. In addition, we believe that there should be a fairly low threshold of ‘materiality’ and that all project level payments above €10-15,000 should be published. Whilst this may sound like a small figure for a company like BHP Billiton, which published a profit of $21.7 billion in 2011, for a community in Zambia, this amount of money is significant and could lead to enormous development gains as it will provide information that is meaningful at a local level. It is also a feasible figure and is compatible with the level to which companies listed on the Alternative Investment Market (AIM) of the London Stock Exchange currently report.

21. There should be no exemptions allowable within the legislation, as has been argued by some companies. Any exemptions could allow unscrupulous governments to enact legislation that would prevent companies operating in their country from publishing the relevant information, thus undermining the EU rules and promoting a culture of secrecy.

22. Finally, Tearfund would also stress that information, in order for it to be verifiable and comparable across companies, should be fully audited and published in company annual reports.

23. Whilst the goal should ultimately be a global standard of transparency of company reporting, efforts that are already being made by some G20 countries are laudable and by focusing on listed companies, there is already significant coverage of Chinese and Russian companies such as Petrochina (listed on the SEC) and Gazprom (listed on the LSE).

24. Taken together with the EITI, the enactment of transparency legislation in the United States and now in the EU, which meets the criteria set out above, could go a long way to increase transparency, ensure that even more revenue is generated from tax for national economies and increase the likelihood of monies being spent on poverty alleviation.

The case of forestry in Zambia

The forestry sector is also significant for Zambia and as our partner EFZ has pointed out in its report, ‘Forests: Our Heritage Under Threat’, "Effective utilisation of the forestry products can greatly contribute towards government revenue and increasing job opportunities". (Foreword, p. iii)

The EFZ report identifies inadequate institutional capacity in the forestry sector and that under-staffing, poor funding, political interference and a de-motivated workforce have resulted in poor management especially at a district level. This has impacted on the collection of revenues.

According to the report, "There is no logistical support in the form of offices, office equipment and transport to district forest offices. According to forest officers talked to, the situation has deteriorated to levels where in order to bank government revenue collected, one has to use personal resources which never get recovered. This situation has led to demotivation of the workforce and transformation of field officers into desk officers and also has the potential to trigger corruption and illegal dealings in the forest resources."

The Timber Export Policy: Rules and Regulations (1997) allows for The Ministry of Tourism, Environment and Natural Resources (MTENR) was empowered to establish a Regeneration Fund into which 6% of proceeds from timber and wood products exports shall be deposited. However, this Fund is not functioning. According to EFZ, "If implemented, this could be a good and reliable funding to support sustainable forest resource utilization and management."

To improve forest management, domestic resource collection and local community benefits from forestry, EFZ recommends (p35):

· All district offices should be stocked with the necessary administrative equipment that will enable staff to fulfil their roles, including local revenue collection.

· The Regeneration Fund should be established immediately to ensure that revenue gained from the forests is reinvested to support the sustainable use of forests by local communities, which will not only protect the forests but provide a more sustainable tax base for the future.

Improving revenue collection and ensuring that there are mechanisms in place for financial resources to return to the communities from where natural resources have been extracted can play a complementary role to increased transparency in supporting development.

Recommendations: how can DFID best support developing countries to use the revenue base responsibly

25. The current proposals to amend the EU Transparency and Accounting Directives provide a significant opportunity in increasing transparency in the oil, gas, mining and forestry sectors, helping to combat corruption and potentially releasing valuable resource for development. It is important that the UK government takes a strong and united lead in supporting effective legislation that is true to its original purpose. Although the Department for Business, Innovation and Skills is the lead UK department and is working closely with the Treasury, DFID has an important role to play in providing public support.

26. Transparency alone will not lead to good governance and greater resources for development so it is important that legislation is also matched by investment supporting civil society access and use of this data, and in improving governance more generally.

27. DFID’s decision to invest up to 5% of its spending in civil society, in those countries where they are using general budget support, is a positive step in increasing accountability and transparency. This should continue and be focused on a wide range of civil society organisations at both national and local level.

28. DFID should include in its budget support the strengthening of the capacity of local as well as national government institutions in their revenue collection and look for innovative ways of doing this with civil society participation that keeps some link between the revenues collected and the benefits to the local communities, such as the Regeneration Fund in the case of Zambia.

29. As an increasing proportion of DFID’s budget, including through its bilateral programmes, is now being channelled through multilateral organisations, we would encourage DFID to use its leverage to ensure that these funders also appreciate the importance of long-term capacity building, civil society strengthening and good governance.

30. As the UK is currently chairing the G20 Anti Corruption Working Group, it would be important that the need for a global standard on disclosure of company payments should form an ongoing part of this group’s discussions in 2012.

February 2012


[1] http://www.pwypzambia.org/

[2] http://tilz.tearfund.org/webdocs/Tilz/Research/Unearth_the_truth_web.pdf

[3] Smith, Pieth and Jorge (2007) The Recovery of Stolen Assets: A Fundamental Principle of the UN Convention Against Corruption, briefing paper

[4] http://www.financingwaterforall.org/fileadmin/Financing_water_for_all/Reports/FullTextCover_ M DG.pdf

[5] WTO, International Trade Statistics, 2009, http://www.wto.org/english/res_e/statis_e/its2009_e/its09_merch_trade_product_e.pdf , p42.

[6] WTO, International Trade Statistics, 20 10 , http://www.wto.org/english/res_e/statis_e/its2009_e/its09_merch_trade_product_e.pdf , p44.

[7] Source: PWYP, http://www.publishwhatyoupay.org/resources/spotlight-drc

[8] Building a Fair, Transparent and Inclusive Tax System in Sierra Leone , Budget Advocacy Network, 2011, p.44

[9] A Fool’s Paradise? Zambia’s Mining Tax Regime , Centre for Trade Policy & Development, 2010

[10] Unearth the Truth: Making Extractive Industries Work for All (Tearfund, 2011), p.43

[11] ibid

[12] ibid , p.19

[13] Nigeria’s Extractive Industries Transparency Initiative: Just a Glorious Audit? , Nicholas Shaxson, November 2009 http://www.chathamhouse.org/sites/default/files/public/Research/Africa/1109neiti.pdf

Prepared 1st March 2012