In response to the shifting business climate, the need for economic and political stability has increased the calls for greater transparency and strengthening of accountability and good governance for both governments and businesses across all industries, including the extractive sector. This emphasis on transparency reflects in part a lack of public trust in corporate behaviour, worries over companies not paying their fair share of taxes, and a belief that current disclosure measures are too difficult for non-tax experts to understand.
Companies need to be actively involved in the conversation about the goals of tax transparency and what constitutes good tax reporting. There are a number of transparency initiatives currently in force or being proposed to help address these public concerns. Specifically related to the extractive industry, The Extractive Industries Transparency Initiative (EITI), originally established in 2003, is a globally developed standard that promotes revenue transparency at the local level.
The EITI is made up of a coalition of governments, companies and civil society groups, investors and international organizations. The framework aims to enhance governance through the verification and full publication of company payments and government revenues from oil, gas and mining companies.
The EITI established a disclosure framework for companies to publish what they pay and for governments to disclose what they receive. The structure aims to be a robust and flexible methodology that encourages a global standard is maintained through the different implementing countries.
The execution phase lies with the responsibility of individual countries. Reporting requirements are determined by each country through a multi-stakeholder consultation process. According to the EITI rules, each participating country is required to determine their own reporting template and define which revenue streams are included in company and government disclosures. Each country’s template must be agreed by a multistakeholder group in the country, which again includes the government, companies and civil society organizations.
The EITI framework states that all material payments upstream oil and gas, and mining companies pay to governments and all material revenues received by governments from oil, gas and mining companies should be published. The framework provides guidance on the types of payments that might be included, but it is up to the country to identify the material tax payments and the time period to be covered. Some examples of what revenue streams are included in the EITI framework include:
Companies don’t have to highlight publicly taxes levied on consumption, such as sales taxes and other personal income taxes. Payments directed towards infrastructure development are also excluded. Corporate social investments are not included in the framework, but are included in some local country EITI programs.
Currently, more than 60 of the world’s largest oil, gas and mining companies support and actively participate in the EITI process. With regards to countries implementing the EITI, there are now 14 fully compliant countries while 22 countries are ‘candidates’, which means their governments are committed to a process of moving towards full compliance. The EITI isn’t the only framework in place to help oil, gas and mining firms become more proactive about improving their accountability. In July 2010, President Obama introduced the Dodd-Frank Wall Street Reform Act, which includes provision for country-by-country reporting for companies in the extractive industries. Also, following announcements made by President Barrosos (President of the European Commission), the European Parliament requested the Commission to initiate proposals for mandatory disclosure requirements for the extractive industries.
There are also ongoing proposals made under the ‘Publish What you Pay’ banner and a number of non-government organizations also calling for more comprehensive country-by-country reporting for all multinational corporations.
While these initiatives will be costly to comply with, the mining companies could benefit from providing the additional disclosure. Those who argue in favour of higher taxes on mining companies likely base their position on the assumption that mining companies pay tax equal to the current tax expense disclosed in their financial statements. If mining companies were to disclose their total tax contribution, including those taxes that are included in operating costs, they could be in a better position to respond to those who lobby for higher taxes.
For more information on the EITI and other transparent initiatives within the extractive sector, please visit PwC’s mining site at:www.pwc.com/ca/mining