En Français »

The commodity downturn represents an opportunity to invest in good practices that will help countries break from a legacy of inadequate governance and legal structures, weak enforcement of tax legislation and imprudent revenue management. Making improvements in establishing and enforcing strong governance and fiscal frameworks now to capture resource rents will also pay off when mineral prices rise again.

A critical area of reform is to counter aggressive tax planning and tax evasion. Tax planning, or tax avoidance, is the use of legal methods to minimize the amount of income tax owed by multinational enterprises (MNEs). In the absence of rigorous controls, some MNEs also employ illegal methods to reduce their taxable income by knowingly and illegally misrepresenting their transactions. This is called tax evasion.

The Africa Progress Panel has identified crossborder transactions between related parties as a major threat to the tax base of African countries. One of the principal vectors of losses in these transactions is transfer pricing, which occurs when one company sells a good or service to another related company. Because these transactions are internal, they are not subject to ordinary market pricing and can be used by MNEs to shift profits to low-tax jurisdictions.

Many African countries have begun to put legal rules on the taxation of cross-border transactions in place. Most of these rules require taxpayers to price transactions between related parties as if they were taking place between unrelated parties. This “arm’s length principle” is at the core of most global standards on controlling transfer pricing, led by the Organisation for Economic Co-operation and Development (OECD). However, compliance with the letter and the spirit of these rules depends on the administrative capacity of countries to actively enforce legislation. Preliminary results from research by the Institute for Mining for Development Centre suggest that out of 26 countries surveyed in Africa, most do not have the requisite capacity to implement effective transfer pricing rules.

This study assesses the development and implementation of rules to monitor transfer pricing in the mining sector in countries with varied experiences.

NRGI has also published case studies on transfer pricing in Ghana, Guinea, Sierra Leone, Tanzania and Zambia. Preventing Tax Base Erosion in Africa: A Regional Study of Transfer Pricing is available in French here. 

Listen to a podcast relating to this research:

This paper provides civil society organizations with different strategies to obtain and analyze detailed information on direct social expenditures (DSE) by companies. It also provides civil society with useful lessons on advancing the transparency agenda in this area.

The World Bank defines corporate social responsibility (CSR) as “companies’ commitment to contribute to sustainable economic development by working with employees, their families, the local community and society at large to improve their quality of life in a way that is beneficial for business and also for development.” Extractive industries engage in CSR because their activities are considered among the most environmentally and socially disruptive and it is critically important for them to secure their “social licenses to operate.”

As part of their CSR extractive companies invest significant amounts of resources to undertake social development programs; in 2001, oil, gas and mining companies disbursed more than $500 million in community development programs. These expenditures can have a large impact on small local economies. When poorly conceived and implemented, they can lead to corruption and undermine government authorities and institutions. In addition, these resources are obtained on the basis of concessions of oil, gas and minerals that belong to citizens. Companies receive fiscal concessions or incentives from the social activities undertaken in the countries where they operate. All these reasons make it imperative that civil society organizations monitor DSE to ensure they are spent effectively.

Companies can employ different mechanisms to disburse DSE. These could be a function of program objectives and other contextual factors. A company might implement different mechanisms in different countries. It could use public or private disbursement channels, or a combination of both. CSOs need to understand these mechanisms and their pros and cons in order to monitor them. The paper studies the experience of two CSOs—Grupo Propuesta Ciudadana (GPC) in Peru and Instituto Brasileiro de Análises Sociais e Econômicas (IBASE) in Brazil—that successfully made extractive companies disclose information on their expenditures and have since monitored and evaluated the impact of these expenditures. Both CSOs created transparency indices and performed social audits to rigorously assess and rank company performance and undertake evidence-based policy advocacy. GPC successfully obtained information from more than 30 companies on $900 billion worth of social expenditures, and IBASE convinced over 300 private companies to disclose their social audits. The paper also explores experiences of countries that have negotiated including direct social expenditures in the disclosure requirements of the Extractive Industries Transparency Initiative (EITI).

Despite progress in companies disclosing relevant data in recent years, transparency of direct social expenditures is more the exception than the norm. Companies should improve their reporting by providing detailed information about the types of projects funded, the objective of such projects, the amounts disbursed, and the persons responsible for allocating these resources. Contracts that include social expenditure obligations should be available for public consumption.

Disclosing contracts and licenses is one of the most important steps that EITI implementing countries can take to promote more effective management of their extractive resources. Contract transparency promotes constructive relationships between citizens, companies and governments, which can reduce conflict and promote stability in the sector. It helps set realistic expectations about the terms of and timelines for extraction, which facilitates accurate government revenue collection and forecasting. The disclosure of contracts also provides enhanced opportunities for stakeholders to monitor adherence to obligations, which encourages all parties to act responsibly in project implementation.

Contract/license disclosure also enhances the utility of other EITI disclosures by providing context that facilitates the analysis and understanding of revenue flows and other data. For example, Section 4.1(e) of the EITI Standard requires the disclosure and, where possible, reconciliation of material social expenditures that are mandated by law or contract. Without contract disclosure, it is difficult to determine whether contractual social payment obligations even exist, let alone accurately collect and reconcile information on them.

The note begins by looking at how an MSG can start discussing contract and license disclosure, followed by how countries can approach defining the scope of disclosure. Next, we cover mechanisms for assembling and verifying documents and establishing public access to this information. Finally, the note outlines options for maximizing public education and outreach. Throughout the note, we base the discussion on lessons learned from the experiences of the growing number of countries that publish their extractive industry contracts and licenses.

Ce guide s’adresse principalement aux Organisations de la Société Civile guinéenne: son but est de renforcer leurs capacités en mettant à leur disposition les informations nécessaires à la compréhension et au contrôle du secteur minier.

L’objectif de ce guide est de soutenir les efforts des journalistes qui cherchent à faire la lumière sur le secteur minier guinéen. Le journaliste guinéen trouvera dans ce guide les orientations et informations nécessaires pour bien couvrir le secteur.

A practical guide for journalists aiming to create better coverage of the mining sector in Guinea, this French-language guide presents important tips for better reporting on a key industry.