Taxation for Development
A preview of Mining in DRC- a new Christian Aid
report
1
Taxation as a development issue
•
•
•
•
•
•
•
•
•
Taxation in the most obvious form of domestic resource mobilisation
Traditionally a neglected area- the domain of tax specialists- technical issue
‘tax in its practical application is controlled by professional bodies, be they accounting or law. It
may suit the professions to keep tax safely within its technical box; a convenient lie to keep
prying eyes from closely examining the hidden power plays at work’- Boden 2010
Financial crisis brought focus onto financial flows, illicit flow, and taxation
G20 London 2009- Gordon Brown, crack down on tax havens- important
OECD tasked with exploring the issue further- ongoing
Picked up again at Seoul, 2010: as part of its multi year action plan on
development. Included- ‘Support the development of more effective taxation
systems’
Commission Communiqué June 2010, legislative proposals of October 2011
Bettancourt(L’Oreal heiress) in France, Warren Buffet in states, Uncut in UK
etc all have had impact of bringing tax more mainstream, and shaped the
discussion into one of tax fairness
2
All very positive
•
•
•
•
•
•
•
•
Potential to move states away from aid to something more
sustainable.
Aid flows are volatile, vulnerable to political factors
Taxation shifts accountability from donors to population- social
contract between state and citizen – ‘he who pays the piper,
calls the tune’
Incentive for government to promote economic activity
Higher governance indicators where taxation systems are
strong (Moss et al)
Potential for addressing inequality through redistribution of
wealth
Increases revenue take-Christian Aid estimate that two forms
of dodging alone deprive countries of $160 bn/yr,
OECD- more lost to tax dodging than received in aid
3
•
‘When a country makes reforms in taxation, transparency, and
fighting corruption, it ignites a virtuous cycle. Taxpayers see
what they’re getting for their money and they can no longer rely
on the old excuses for not paying their share. Higher revenues
means that the government can provide better services and pay
decent wages to public employees. And so these reforms, in
turn, create a more attractive climate for foreign investors and
they strengthen the case we can make to our own citizens for
continuing to support development programs. So if we partner
with developing countries to break the vicious cycle and instead
catalyze the virtuous cycle, we can not only help them provide
more for their own people, but actually get on the path to selfsufficiency’ – Hillary Clinton, @ OECD, May 26th, 2011
4
Obstacles to tax collection
•
•
•
•
•
•
•
•
•
•
•
But yet, LIC in Africa collect about 11-15% of GDP in income tax, compared to about 35%
in OECD countries
Why?
Informal sector is large (est. 26% in Ghana, 40% Brazil)
Perception that tax burden carried by poor- rich can avoid
Legacy of colonialism- political realities change faster than long held prejudices
Tax compliancy seen as onerous-often seen as complex to tax payers. Esp. in countries
with low literacy levels, educational disadvantages, or different languages within country
Low capacity of revenue authorities and oversight bodies in country
Corruption between tax payers (citizens and foreign companies) and revenue authorities
Global financial regulation system does not do enough to curb to tax avoidance
The lack of transparency in the global financial regulation system, including the disclosure
and reporting requirements of MNCs, as well as the extensive use of tax havens makes it
easy for some unscrupulous MNCs to pay little or no tax in developing countries.
Use of tax havens- African Union estimate %150 billion from African-80% to havens
5
Greater transparency required
•
•
Inter jurisdictionally: greater exchange
of information on an automatic basis
Intra-company: greater transparency
in the reporting of multinational
companies, including the profits made
and taxes paid, in each of the
jurisdictions in which they operate
6
Mining in DRC
•
•
•
•
•
•
•
•
2 high profile cases involving international companies took place in
2010.
Involved disputes over millions of dollars of DRC mineral resources
Interesting things was that they took place not in DRC, not in London,
or Toronto, where these companies or listed- but in tax havens!
1. FG Hemisphere’s vulture fund case against Groupement de Terrill
de Lubumbashi(GTL) took place in Jersey
2. Canadian firm First Quantum and ENRC took place in British Virgin
Islands
Not unusual!
Lundin in Sweden, Freeport McMoran(US) through Bermuda
ENRC various companies in the BVI
The company extracting from Terrill de Lubumbashi slagheap in
registered in Jersey
Glencore’s investment in Kamoto Copper Company appears to be
routed through various jurisdictions incl. Bermuda, Guernsey,
Switzerland, BVI, and IoM
7
Mining companies presence in
DRC and havens
- Attraction of tax haven- strong financial sectors,
greater certainty for investments
- but also financial secrecy, and possibility of profit
shifting within a group of companies, so that costs
are allocated to high tax jurisdictions
Impact of company structures such as this is that it
is hard to assess how much profit group in making
from particular project
- looking at available data on how much profit is
being paid in industrial mining sector- remarkably
low, suggesting profits are being shifted offshore on
a large scale. Well established method for doing this
if companies wish to engage in this.
8
Congo
•
•
•
•
•
•
•
DRC- diamonds, coltan, tin, oil, natural
34% of world’s cobalt, 10% of worlds copper reserves
WB- tax revenues as share of GDP are among the lowest in
the world
Weak governance, democracy in its infancy
Most of the mining investment comes if form of joint venturesoverseas investors and one of DRC’s state mining companies
(Gecamines or Sodimico) with minority holding.
By such structures, and by keeping profits low, or shifting them
offshore, companies can avoid paying profit tax, but also avoid
paying the (typically) 20%-25% profit dividends, it is entitled to
as minority shareholder.
The lack of transparency makes it impossible to conclusively
determine whether profit shifting is taking place.
9
Profit tax paid?
However, one indicator on whether this may be happening is how
much profit tax is being paid in DRC.
Through EITI and figures published by Congo’s Ministry of Finance,
we can now get a clearer idea of this
2008, raw material containing 336,554 tonnes of copper shipped from
Katanga province- 42,461 tonnes of cobalt
Based on average metal prices over 2008, could have contained over
$2.3 billion worth of copper, and over $3.4 billion cobalt
2008- total of less than $18 million profit tax
2009 (albeit during financial crisis) measly $1million!
Weak mining contracts, weak/absent legislation, poor compliance,
corruption all at play
But low profit figures, together with widespread use of tax havens
suggest strongly that off shoring of profits is occurring in DRC
10
One mechanism:mispricing of
international trade
The OECD arms length price principle
should govern intra-group sales
But companies can over price or under price
exports to shift money in and out of a
country
By looking at EU customs data we can see
how imports from DRC are priced e.g. cobalt
imports from EU over last 10 years
11
160
140
120
Congo-D
Malaysi
S.Africa
Australi
Congo
Tanzani
Canada
USA
Russia
Brazil
Zambia
Morocco
Norway
Netherla
UK
Japan
Germany
Uganda
Belgium
China
France
Finland
Thousands
2000-2010 DRC is the largest supplying country of
cobalt to EU countries.
Cobalt Export to EU 2000- 2010
Weight (ton)
100
80
60
40
20
0
12
Average Unit Value by Exporting Country
Cobalt Mattes Export to EU 2000-2010
€45
€35
Cobalt Export to EU 2000- 2010
Average unit value
€30
€25
€20
€15
€10
€5
€0
Congo-D
Malaysi
S.Africa
Australi
Congo
Tanzani
Canada
USA
Russia
Brazil
Zambia
Morocco
Norway
Netherla
UK
Japan
Germany
Uganda
Belgium
China
France
Finland
EUR 1,000
per ton
€40
13
DRC's Export Price of Cobalt Mattes to
Finland
14
What’s required?
CBCR in accounts of large multinationals
Curtailment of trade mispricing, but not
limited to abusive transfer pricing
Enhanced automatic information exchange
between states. Secrecy is the enemy of
democracy and good governance
Confirmation of beneficial ownership in all
banking and securities accounts
15
WB 2008- mining sector in DRC could
contribute 20-25% of GDP, and one third of
total tax receipts
Greater political will- damaging effects of tax
havens are well documented, but little to say
about their positive effects. When has
financial secrecy contributed to enhanced
democracy?
Aid remains the easier option compared to
tackling capital flow from Africa- but it has
potential to be a lot more important
16
Thank- you for listening!
[email protected]
17