African Extractives on the Frontline of Global Struggle for Tax and Commodities

Guest post by: Edward Harris, Head of Communications, Africa Progress Panel

Smart politicians talk about reform but they understand the value of promise without delivery, one academic told participants at a conference in Oxford last week. Organised by Oxfam and Oxford University, the one-day conference discussed how extractive industries can work for African people.

Reinforcing the conclusions in this year’s Africa Progress Report, the conference also highlighted the wider, global struggles for control of commodities and tax revenue.

Both struggles are better understood by examination of Africa’s oil, gas, and mining sectors, where tax avoidance is a major issue. One participant noted that extractive industries account for some 60 percent of illicit financial flows from Africa.

In the struggle for commodities, the big question is – and always has been – how government and business divide the mineral revenues. The private sector must focus on profit, of course, but multinationals have often negotiated grossly unfair deals with African governments, who are more confident now than ever before. Contract renegotiations by African governments have become a major threat to multinational profit.

Keen to head off this major risk, business displays both increased transparency and good intentions – “talking the talk”, at least. But have their incentives really changed? It’s still about the profit.

The struggle for tax payments is more nuanced. Tax justice has become a hot issue, and future regulation will likely require the multinationals to pay fair amounts of tax. The struggle is for control of those future tax revenues.

Assuming they are eventually restricted from using tax havens and offshore shell companies, should multinationals pay tax based on their headquarter location, for example?  Or based on the location of the minerals that they extract? It’s revealing that rich world clubs – the G20 and OECD – are setting the agenda for global tax reform. This can only work to their advantage.

The UK received a major PR boost with this year’s G8 agenda on tax and transparency, but a British official raised doubts in Oxford when he said that implementation of these promises could take a decade.

Business and government may be making the right noises, but actions speak louder than words.

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Chaired by Kofi Annan, former Secretary-General of the United Nations, the ten-member Africa Progress Panel advocates at the highest levels for equitable and sustainable development in Africa. The Panel releases its flagship publication, the Africa Progress Report, every year in May. 

Tackle tax and transparency issues to give Africa a fair chance

Guest post by: Caroline Kende Robb, Executive Director, Africa Progress Panel.

With the commodity supercycle still rumbling on, Africa’s natural resources should be transforming the lives of millions across the continent. After all, Africa has an estimated 30 percent of global mineral reserves and less than 15 percent of its population.

But jobless growth, corruption, and rising inequality are still robbing African citizens of the benefits of their natural resources, as we showed in this year’s Africa Progress Report, Equity in Extractives – Stewarding Africa’s natural resources for all.

Tax and transparency issues merit special attention. And we, the global community, must tackle these issues if Africa is to have a fair chance of profiting from its natural resources.

Transparency can be a deceptively complex concept, referring variously in this context to beneficial ownership of companies and trusts, contracts between governments and multinationals, or even the use of public revenues.

But we all understand the basic principle that transparency prevents corruption and improves accountability.

Our report details five shadowy mineral deals which cost the Democratic Republic of the Congo good opportunities for a fair price on mineral concessions. As a result, one of the poorest countries in the world effectively lost$1.4bn, roughly twice its combined annual budgets of health and education.

The good news is that the transparency train has left the station. More and more African governments are publishing contracts online, the Extractive Industries Transparency Initiative is rolling out tougher standards, and western governments are implementing tough new legislation.

The journey will not be without its delays, of course. China has not yet implemented such legislation, state-owned enterprises often remain out of reach, and the American Petroleum Institute continues to fight against the tide of history.

Ultimately, however, the transparency train can only go in one direction, driven on by the increasing accessibility of data and growing demands for fairness in Africa and across the world.

The same is true for tax justice. But why tax? And why is it such an issue for the extractives industries?

Answers can be found in the combination of weak capacity in many African tax administrations, the nature of the extractives industries, and a global tax system that has failed to keep pace with the realities of globalisation.

The practical complexities of extracting oil, gas, and minerals in hard-to-reach locations produces high barriers to market entry and strong economic advantages for companies that are vertically integrated and present in several different countries.

With a focus on profit, these companies use a variety of practices to shift their profit and revenues to low tax jurisdictions. The scale of these practices has led our Panel Chair, former UN Secretary-General Kofi Annan, to describe them repeatedly as “legal but morally unacceptable”.

By misrepresenting the values of their imports and exports, for example, a practice known as trade mispricing, companies can lower their tax obligations considerably. This practice alone costs the continent an estimated $38.4bn every year, more than it receives in either international aid or foreign direct investment.

This year’s G8 Summit gave hope that the international community can tackle these issues effectively. Indeed, African governments, the international community, and many multinational corporations all seem to be aligning around the need for fair and transparent relationships.

After all, transparent corporate governance builds reputations, reduces political risk, and may ultimately win more extractive contracts too. And we all benefit from an Africa that is prosperous, stable, and fair.

Original source: This is Africa

Chaired by Kofi Annan, the former Secretary-General of the United Nations, the Africa Progress Panel (the Panel) includes distinguished individuals from the private and public sectors, who advocate on global issues of importance to Africa and the world.

Africa risks losing out on natural resource boom, Kofi Annan warns

Africa and its partners could lose out on the enormous opportunities that natural resources offer. This was said by Mr. Kofi Annan in his speech delivered at the Graduate Institute of International and Development Studies (IHEID) on September 26, 2013 to mark the opening of the 2013-2014 academic year in Geneva. “Africa and its partners will miss the opportunity to transform the lives of future as well as present generations, however, if they carry on with business as usual”, Mr. Annan warned.

Kofi Annan recounted the challenges that confront Africa’s extractive sector. He stressed that though natural resource wealth rightly belongs to the continent’s citizens, the “citizens are being robbed of its benefits by revenue diversion, corruption, jobless growth, and rising inequality.”

Africa’s impressive economic growth in the past decade has largely been driven by natural resource boom. However, this growth has done little to reduce poverty and improve the living standards of the people particularly those in resource-rich countries.

Mr. Annan urged governments in Africa to adopt transformational measures that will harness the potentials of the natural resource sector. He advised that natural resources should be processed to bring extra value before export. He again charged African leaders to adopt effective transparency and accountability measures. “African governments must put transparency and accountability at the heart of their natural resource policies. They must manage their citizens’ natural resources efficiently and share the revenues fairly”.

Some African countries have made strides in ensuring transparency by publishing oil, gas and mining contracts online. These include Ghana, Guinea and Liberia. More to this, several resource-rich countries have subscribed to the Extractive Industries Transparency Initiative (EITI). “Some 12 African countries are now compliant with the Extractive Industries Transparency Initiative, which recently announced more rigorous standards”, said Mr. Annan.

Mr. Annan indicated that multinationals have a role to play. Though there is growing commitments to transparency, he charged multinationals to “improve their behaviour” adding that “they also play a critical social role and that doing good is ultimately good for business”. He further advised multinationals that “transparent corporate governance builds reputations, reduces political risk, and may ultimately win more extractive contracts, too.”

Multinational companies into oil and gas and mining extraction in Africa have often been cited to engage in illicit practices including tax evasion and trade mispricing. The cost of these illicit practices is staggering. The Global Financial Integrity indicates that developing countries lost an estimated $98 billion to $106 billion annually to corporate tax dodging during the years 2002 through 2006. Africa is hard hit in these practices. Mr. Annan also added that “trade mispricing, a technique to lower tax payments, costs Africa an estimated US$38 billion per year, more than the US$33 billion in foreign direct investment or US$30 billion in official development assistance”.

He called for equitable tax justice system that will “bring benefits for Africa and for the international community more generally.”

BY: Stephen Yeboah, Geneva.

Read full speech of Mr. Kofi Annan here: http://bit.ly/18LS8VA

Africa’s governments must manage natural resource rents wisely – Kofi Annan

Mr. Kofi Annan, former UN Secretary General and Chair of the Africa Progress Panel, has challenged governments in Africa to wisely manage revenues that come from the continent’s natural resources. In managing these resource rents, he urged African “leaders to invest more upfront to relieve the pressing human needs that constrain Africa’s development.”

Mr. Annan was speaking at the Graduate Institute of International and Development Studies (IHEID) on September 26, 2013 to mark the opening of the 2013-2014 academic year in Geneva. The lecture was as well to celebrate the move of the Graduate Institute to its new campus, ‘Maison de la Paix’. Speaking on the theme “Is Africa’s mining boom helping or harming its people?” Kofi Annan bemoaned the increasing paradox that has taken over the continent’s extractive sector. He stressed that though natural resource wealth rightly belongs to the continent’s citizens, the “citizens are being robbed of its benefits by revenue diversion, corruption, jobless growth, and rising inequality.”

Africa is endowed with vast natural resource deposits like gold, diamond, cobalt, oil and gas, and bauxite. However, there is evidence of the ‘resource curse’ syndrome where natural resource wealth has been found to be negatively correlated with living standards. Countries like Nigeria, Democratic Republic of Congo, Equatorial Guinea, Gabon, Liberia, and Sierra Leone have often been cited to have suffered from the resource curse.

Mr. Annan called for a transformation of extractive sector. “Africa and its partners will miss the opportunity to transform the lives of future as well as present generations if they carry on with business as usual”.

Africa has recorded impressive economic growth over the decade driven by natural resource wealth but this growth has not translated into improved standard of living of the people. Though GDP per capita in Equatorial Guinea is higher than in Poland, “yet three-quarters of the population still live in poverty, and child death rates are among the highest in the world”, Mr. Annan said.

He put forward strategies that could help governments harness the potentials of their natural resource wealth. He indicated that “African governments should adopt national strategies that set the terms on which their natural resources will be developed, and link these strategies to plans for poverty reduction and inclusive growth”. He again urged governments to build on the Africa Mining Vision by adopting “legislation that requires companies bidding for concessions and licences to disclose fully their beneficial ownership”, adding that “tender and concession granting processes must be open and transparent”.

Mr. Annan challenged leaders to make transparency and accountability a high priority in the natural resource sector. “African governments must put transparency and accountability at the heart of their natural resource policies. They must manage their citizens’ natural resources efficiently and share the revenues fairly”.

The Africa Progress Panel, chaired Mr. Kofi Annan, released a report “Equity in Extractives: stewarding Africa’s natural resources for all” this year revealing the plunder in Africa’s extractive sector through practices like tax evasion and transfer mispricing by multinational companies. The report has, inter alia, called for improvement in taxation system and the need for transparency reforms in all deals in Africa.

STORY BY: Stephen Yeboah, Geneva [profstephenyeboah@gmail.com]

Breaking the affinity with secrecy in Africa’s extractive sector: G20 Summit and expectant reforms

“The G20 cannot afford to miss another opportunity to end illicit practices like tax evasion, transfer mispricing and capital flights that multinational companies engage in. These practices are stifling the ability of developing countries especially in Africa to finance development that trickles down to the poor.”

The subject on transparency in the extractive industry has extensively been discussed. The campaign drive for transparency in the past decade to make contracts and revenue flows in the oil, gas and mining industry open has been intense. Global transparency campaign has succeeded in prompting and facilitating historic reforms that seek to fade out secret deals especially in the extractive industry. The G8 in its recent meeting joined the fight but with not too impressive outcome. The G8 put forward measures to clamp down on tax evasion and illegal capital flights which thrive in ‘darkness’. David Cameron indicated in June that the time had come to insist on greater transparency from resource-extracting companies, in order to “lift the veil of secrecy that too often lets corrupt corporations and officials in some countries run rings around the law”.

But the results have still been modest. That there are still billions of dollars being lost through tax avoidance and evasion must be the concern now. On September 5 and 6, leaders of the G20 are expected to agree on, inter alia, a reform to fight evasion by multinational companies. Of course, there could be no right time than this particular moment. The issue at hand is staggering. This is no politics. It is about denying both developed and developing countries the opportunity to finance development. In this discussion, developing countries and those in Africa in particular receive the most attention. Why? The Global Financial Integrity indicates that developing countries between lose an estimated $100 billion to $160 billion annually to corporate tax dodging.

Africa is known to suffer the most from tax evasion and transfer mispricing. Africa is hard hit. The Africa Progress Panel, chaired by Mr. Kofi Annan, in its report “Equity in Extractives: stewarding Africa’s natural resources for all” this year gives worrying details. Africa between 2008 and 2010 lost US$38.4 billion through transfer mispricing and illegal capital flights. This together with corruption and mismanagement makes the situation grievous. Governments are increasingly worried. There is growing public discontent regarding these illicit practices that deny people from deserved benefits of development. The G20 Summit in St. Petersburg, Russia ought to deal with the challenge. And there are economic reasons for this.

The extractive industry in Africa is mired in very disturbing paradox. Extensively rich in all kinds of natural resources, Africa still struggles to improve the lives of people. Livelihoods of people have even worsened in these resource-rich countries. Even scandalous is that the right amount of revenues from oil, gas and mining do not reach these governments. Tax evasion, transfer mispricing and other illicit financial practices by multinational extractive companies to evade taxes are to blame.

Transparency, to begin with, must precede all reforms aimed at stopping tax evasion and transfer mispricing commonplace in the oil, gas and mining sectors. These illicit practices by multinational companies only survive in opaque environments. In this sense, there is no denying that global reforms to leverage transparency have been groundbreaking. What are these reforms? In the United States, there is the 2010 Dodd-Frank Act. Though this act is being challenged in court by the American Petroleum Institute (API), the largest U.S trade association for the oil and natural gas industry, the Dodd-Frank Act has succeeded in driving other reforms elsewhere. The European parliament this year passed a legislation compelling oil, gas and mining companies to publish payments they make to governments. The parliament issued new transparency rules in the EU Transparency and Accounting Directives. Under this directive, European companies are mandated to publish payments of more than €100,000 made to the government in the country in which they operate, including taxes, royalty payments, and licence fees.

In Switzerland, the Federal Councilor announced in June this year transparency draft law for the entire Swiss commodities sector. Berne Declaration, a Swiss-based NGO, indicates that the extractive activities of all major Swiss commodity companies will most likely be covered by EU and/or U.S. regulations. Aside from these, the Extractive Industry Transparency Initiative (EITI) has encouraged countries especially in Africa to sign up to standards in reporting revenues from oil, gas and mining industries. These reforms have direct bearing on practices in Africa’s extractive industry.

But more needs to be done. Here leaders of the G20 have to take the challenge. Reforms that have happened so far need to be built upon. It is in this transparent environment that broad tax reforms can be instituted. Further reforms to stop tax havens that support activities of companies are needed. The automatic exchange of information set out by the G20 must take into account the conditions in Africa. Critical today is bringing together large partners that will undertake a standardised model that tracks activities of multinational companies. Of course, isolated reform will achieve modest results. This underscore why Africa, which hosts major operations of these companies, must be brought in.  

For far too long, transparent and efficient global tax system has not been given the needed attention it deserves. The G20 cannot afford to miss another painstaking opportunity to end illicit practices like tax evasion, transfer mispricing and capital flights that multinational companies engage in. These practices are stifling the ability of developing countries especially in Africa to finance development that trickles down to the poor. Developed countries as well are affected. Little or no reform to combat tax evasion and transfer mispricing will not only be disappointing but akin to the G20 condoning these practices that exploit developing countries. Stricter reforms with broad implementation strategies must be envisioned.

These reforms promote the good governance that Africa needs. But it must be acknowledged that transparency and tax reforms cannot provide the quick-fix to the menace in extractive industry in Africa. Governments must take the huge responsibility. The Revenue Watch Institute’s 2013 Global Governance Index which measures transparency and accountability in oil, gas and mining sector of 58 countries worldwide reveals that vast majority of countries surveyed fail to meet satisfactory standards in how natural resources are governed. Of the countries categorised as ‘failing’, majority (8 out of 15) is from Africa. They include among others, DR Congo, Mozambique, Cameroon, Libya, and Equatorial Guinea. These standards are exactly what promote good governance of the extractive industry. Governments must strive to improve these governance structures.

Thus internal governance and institutional structures must be given the boost. Taxing systems in Africa must understand the way international tax jurisdictions operate. The capacity of tax authorities must be enhanced for better appreciation of the global tax system. An extractive industry that contributes to equitable and sustainable development and that fights poverty for both today and future generations is what is ideal for Africa. For their part, leaders of the G20 must break this affinity with secrecy that emboldens multinational companies to avoid their simple obligation of paying the right taxes to governments. Essentially, all stakeholders must be held into account.

BY: Stephen Yeboah. He is an academic researcher with experience in agriculture and natural resource governance in Africa. He currently studies at the Graduate Institute of International and Development Studies in Geneva. [Email: profstephenyeboah@gmail.com]