Abstract
The extractive industries sector is one of the world’s most profit-generating business sectors. Yet, many of the world’s resource-rich countries are developing countries. They depend on their natural resource wealth but systematically fail to translate it into economic stability and growth and an enjoyment of basic human rights—such as access to health, education, and sanitation—for their citizens. Widely cited as the “resource curse” or the “paradox of the plenty”, it is increasingly recognized that this problem may partially be caused by ineffective tax collection systems. If the developing countries involved would find ways to increase their domestic extractive industries revenues by boosting the capacity to collect the taxes owed to them, they could achieve their full economic potential and obtain the public budgets needed to fund the advancement of human rights. In line with the UN Guiding Principles on Business and Human Rights framework, both state actors and companies have a role to play in considering the adverse impact of tax avoidance on human rights. Next to the obligations of state actors, this chapter focuses on the crucial role of multinational companies in the extractive industries sector, because if these companies decided to refrain from tax avoidance, they could prevent developing countries from being deprived of revenues that can have significant positive human rights impacts. The purpose of this chapter is threefold: (1) to examine the emerging link between taxation and human rights; (2) to highlight the human rights law responsibilities of state actors when tax avoidance in the extractive industries sector poses a threat to the enjoyment of basic human rights in developing countries; and (3) to demonstrate how increased tax strategy transparency has the potential to be a positive incentive for companies, both in and outside the extractive industries sector, to reduce tax avoidance and propel the advancement of human rights.
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Notes
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It is difficult to define exactly the “extractive industries sector” because interpretations vary. An UNCTAD report defines the extractive industry broadly as “processes that involve different activities that lead to the extraction of raw materials from the earth (such as oil, metals, mineral and aggregates), processing and utilization by consumers”, see Sigam C and Garcia L, Extractive industries: Optimizing value retention in host countries. UN Conference on Trade and Development, http://unctadxiii.org/en/SessionDocument/suc2012d1_en.pdf (last accessed 1 October 2018), p. 3.
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Sigam C and Garcia L, Extractive industries: Optimizing value retention in host countries. UN Conference on Trade and Development, http://unctadxiii.org/en/SessionDocument/suc2012d1_en.pdf (last accessed 23 May 2018), p. 1, arguing that six out of the ten largest companies in terms of revenues were from the energy and mining sectors in 2010 and enjoyed record profits over the past few years; Stevens et al. (2013), p. 5; Halland et al. (2015), p. 3, mentioning that the extractive industry is characterized by “exceptional profits”.
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Revenue Watch Institute, The 2013 Resource Governance Index: A measure of transparency and accountability in the oil, gas, and mining sector, http://www.resourcegovernance.org/sites/default/files/rgi_2013_Eng.pdf (last accessed 1 October 2018), p. 3.
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UN Development Programme, Extractive industries for sustainable development. April 2014, http://www.undp.org/content/dam/undp/library/Poverty%20Reduction/Extractive%20Industries/Extractive-Industries-Brochure.pdf (last accessed 1 October 2018). See also, Ross M, Extractive sectors and the poor. Oxfam America, 2001, https://www.oxfamamerica.org/static/media/files/extractive-sectors-and-the-poor.pdf (last accessed 23 May 2018), p. 5, “States that depend on mineral exports are among the most troubled states in the world today. They suffer from exceptionally slow rates of economic growth; their governments tend to be weak and undemocratic; and they more frequently suffer from civil wars than resource poor states”.
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The Economist, The paradox of plenty. 20 December 2005, http://www.economist.com/node/5323394 (last accessed 1 October 2018).
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Land (2009); Stürmer (2010); Le Billon (2011), arguing that much of the public revenues from extractive sectors in resource-rich developing countries is lost, partially due to tax evasion; Sigam C and Garcia L, Extractive industries: Optimizing value retention in host countries. UN Conference on Trade and Development, http://unctadxiii.org/en/SessionDocument/suc2012d1_en.pdf (last accessed 1 October 2018), pp. 10–11, mentioning the need for clear tax rules to avoid the negative impacts of dependence of governments’ revenues on the extractive industry; Halland et al. (2015), pp. 12, 74–78, mentioning the need for an effective resource tax system to realize the large public revenue potential of the extractive industry.
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Open Society Institute of South Africa et al., Breaking the curse: How transparent taxation and fair taxes can turn Africa’s mineral wealth into development. March 2009, http://documents.twnafrica.org/breaking-the-curse-march2009.pdf (last accessed 1 October 2018), a report by African and international civil society organisations arguing for transparent and balanced mining tax regimes in African states in order to fund social and economic development and break the “resource curse”.
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World Bank, Extractive industries – Overview, http://www.worldbank.org/en/topic/extractiveindustries/overview#1 (last accessed 1 October 2018).
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Leibfritz (2015), p. 182.
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African Union and UNECA Conference of Ministers of Finance, Planning and Economic Development, Illicit financial flows: Report of the High Level Panel on illicit financial flows from Africa, http://www.uneca.org/publications/illicit-financial-flows (last accessed 1 October 2018). It is difficult to come up with hard numbers because reliable data is lacking, given the secretive nature of tax avoidance. Despite this limitation there is a wide range of studies describing the negative impact of tax avoidance and tax incentives provided to foreign companies in African countries, see e.g., Ndikumana (2015), p. 94, mentioning that, in 2011, Zambia may have lost tax revenue that was nearly equal to its total GDP in 2008, as a result of profit shifting and transfer pricing mechanisms by companies involved in international copper trade; Curtis M, Extracting minerals, extracting wealth. War on Want, October 2015, https://waronwant.org/sites/default/files/WarOnWant_ZambiaTaxReport_web.pdf (last accessed 1 October 2018), arguing that Zambia is losing USD 3 billion a year from corporate tax dodging; Otusanya (2011), describing how multinational companies in the oil, gas, and manufacturing sectors have used various tax schemes, ranging from off-shore intermediary companies to claiming recharges, royalties or technical fees and under-reporting of profit, to avoid paying tax in Nigeria. For a criticism of the “inflated” estimates of corporate tax abuse calculated by NGOs, see Forstater M (2015) Can stopping “tax dodging” by multinational enterprises close the gap in development finance? Center for Global Development CGD Policy Paper 069. October 2015, http://www.cgdev.org/content/publications/can-stopping-tax-dodging-multinational-enterprises-close-gap-development-finance (last accessed 1 October 2018). In any case, one notable exception to the bleak picture in Africa seems to be Botswana; a resource-rich country—exporter of diamonds, copper, and nickel—which has largely avoided the “resource curse” and undergone a transformation, due to mineral-led economic growth, from one of the poorest countries in the world at the time of independence in 1966 to an upper-middle income country, currently enjoying relatively low levels of corruption and environmental damage with open and transparent taxation, strong public finances and minimal debts, see Jefferis (2009).
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Sharples N and Jones T and Martin C, Honest accounts? The true story of Africa’s billion dollar losses. Poverty Health Action et al., July 2014, http://curtisresearch.org/wp-content/uploads/Honest-Accounts-report-v4-web.pdf (last accessed 1 October 2018); Baker R, Financing for development: Enabling developing countries to tackle illicit flows. Global Finance Integrity, 8 February 2016, http://www.gfintegrity.org/press-release/financing-for-development-enabling-developing-countries-to-tackle-illicit-flows/ (last accessed 1 October 2018), a panel discussion speech by Global Financial Integrity President Raymond Baker at the 4th OECD Forum on Tax and Crime in Amsterdam, the Netherlands.
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These, and other, research findings are available at African Network of Centers for Investigative Reporting, Panama Papers: How the elite hide their wealth, https://panamapapers.investigativecenters.org/ (last accessed 1 October 2018).
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Jenkins (2005), p. 535.
- 16.
Developed countries in Europe play a large role in this regard, see Eurodad, Hidden profits: The EU’s role in supporting an unjust global tax system. November 2014, http://www.eurodad.org/files/pdf/1546298-hidden-profits-the-eu-s-role-in-supporting-an-unjust-global-tax-system-2014-.pdf (last accessed 1 October 2018). Bilateral double taxation treaties based on the OECD model significantly constrain developing countries’ rights to earn tax revenues on foreign business operations in their territories, see International Monetary Fund, Spillovers in international corporate taxation. 9 May 2014, https://www.imf.org/external/np/pp/eng/2014/050914.pdf (last accessed 1 October 2018). In general, many discussions about tax administration systems in Africa focus on dysfunctional and corrupted institutions in the continent’s developing countries. Much less attention has been paid to the fact that developed countries exploit and perpetuate these weaknesses for their own capitalist benefit. To come to grips with how corruption in developing countries and Western capitalism are intertwined, we need more research that unravels how these two occurrences are linked.
- 17.
Open Society Institute of South Africa et al., Breaking the curse: How transparent taxation and fair taxes can turn Africa’s mineral wealth into development. March 2009, http://documents.twnafrica.org/breaking-the-curse-march2009.pdf (last accessed 1 October 2018).
- 18.
Africa Progress Panel, Africa progress report 2013 – Equity in extractives: Stewarding Africa’s natural resources for all. May 2013, http://www.africaprogresspanel.org/publications/policy-papers/africa-progress-report-2013/ (last accessed 1 October 2018), p. 7.
- 19.
Deutsche Gesellschaft für Internationale Zusammenarbeit (2010), p. 6.
- 20.
Solheim (2012), p. ix, mentioning the example of Nigeria that made an attempt in the early 2000s to recover the funds that illegally fled the country but was confronted with out-dated rules and poorly trained staff in the domestic environment as well as bank secrecy, opaque corporate and trust vehicles, and time consuming procedures precluding cooperation overseas; Murphy (2012), pp. 287–288, mentioning that “the extractive industries are almost entirely immune to legislative changes affecting the way in which their tax liabilities are computed for periods of up to 30 years after signing mineral development agreements”; Calder (2014); Elbadawi and Mohammed (2015), pp. 249–250; UN Conference on Trade and Development (2015).
- 21.
Open Society Institute of South Africa et al., Breaking the curse: How transparent taxation and fair taxes can turn Africa’s mineral wealth into development. March 2009, http://documents.twnafrica.org/breaking-the-curse-march2009.pdf (last accessed 1 October 2018), p. 15, “[t]here is a consensus among UNCTAD, UNECA and the IMF that the paramount development benefit of mining in Africa is the potential to generate public revenue through a transparent tax and budget system.”; De Paepe and Dickinson (2014).
- 22.
International Bar Association’s Human Rights Institute Task Force on Illicit Financial Flows, Poverty and Human Rights, Tax abuses, poverty and human rights. October 2013, https://www.ibanet.org/Article/NewDetail.aspx?ArticleUid=4A0CF930-A0D1-4784-8D09-F588DCDDFEA4 (last accessed 1 October 2018); Van Os R and McGauran K and Römgens I, Private gain – Public loss: Mailbox companies, tax avoidance, and human rights. SOMO, July 2013, https://www.somo.nl/wp-content/uploads/2013/07/Private-Gain-Public-loss.pdf (last accessed 1 October 2018), p. 8, arguing that “Dutch fiscal policy that facilitates tax avoidance by large multinationals has a negative impact on human rights in countries where extractive industry operations take place”; UN Human Rights Council, Illicit financial flows, human rights, and the post-2015 development agenda, UN Doc. A/HRC/28/60, 10 February 2015, para. 33.
- 23.
See e.g., G20, G20 targeted approaches to addressing corruption in the extractives sector. November 2015, http://g20.org.tr/wp-content/uploads/2015/11/Targeted-Approaches-to-Corruption-in-the-Extractives-Sector.pdf (last accessed 1 October 2018), mentioning the role of tax authorities to ensure maximum compliance and to minimise corruption risk in the collection of taxes on the extractives sector; Ploumen L, Why developing countries need to toughen up on taxes. The Guardian, 7 July 2015, an article by the former Dutch Minister for Foreign Trade and Development Cooperation who argues that the full potential of developing countries can be achieved by their governments through domestic resource mobilisation starting with higher rates of tax revenue collection; Ploumen identifies three main areas of action: (a) ensuring fair taxation; (b) strengthening tax inspectors; and (c) broadening the tax base; The Report of the High-Level Panel of Eminent Persons on the Post-2015 Development Agenda, A new global partnership: Eradicate poverty and transform economies through sustainable development. 30 May 2013, http://www.un.org/sg/management/pdf/HLP_P2015_Report.pdf (last accessed 1 October 2018), p. 5: “Developed countries have a great responsibility to keep the promises they have made to help the less fortunate. The billions of dollars of aid that they give each year are vital to many low-income countries. But it is not enough: they can also co-operate more effectively to stem aggressive tax avoidance and evasion, and illicit capital flows. Governments can work with business to create a more coherent, transparent and equitable system for collecting corporate tax in a globalised world.”
- 24.
African Union and UNECA Conference of Ministers of Finance, Planning and Economic Development, Illicit financial flows: Report of the High Level Panel on illicit financial flows from Africa. http://www.uneca.org/publications/illicit-financial-flows (last accessed 1 October 2018), p. 3. See also UN Office of the High Commissioner of Human Rights, Natural resources sector: UN expert calls for binding human rights treaty for corporations. 18 June 2015, http://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=16097&LangID=E (last accessed 1 October 2018), UN Special Rapporteur on the Rights to Freedom of Peaceful Assembly and of Association, Maina Kiai, called upon States to enact a legally binding treaty that obliges businesses to respect fundamental human rights, arguing before the UN Human Rights Council that “corporations play an outsized role in the decision-making processes about exploitation of natural resources. But they are not subject to legally binding human rights obligations (…) It is time to address this issue more robustly; corporations must not escape responsibility to safeguard human rights”.
- 25.
Developing countries are not the only ones to be affected. In the aftermath of the financial crisis, civil society organisations have expressed their concerns about the negative impact of tax avoidance among extractive sector companies on developed economies such as the UK, see e.g., Platform, Making a killing: Oil companies, tax avoidance and subsidies. February 2013, http://platformlondon.org/wp-content/uploads/2013/02/MakingAKilling-LOWRES.pdf (last accessed 1 October 2018), arguing that UK-based oil companies like BP and Shell receive major government support and pay very small amounts of UK tax in comparison to their global mega-profits at a time of massive public spending cuts.
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See e.g., the Lima Declaration on Tax Justice and Human Rights, http://www.cesr.org/downloads/Lima_Declaration_Tax_Justice_Human_Rights.pdf (last accessed 1 October 2018), “Taxation (…) plays a fundamental role in redistributing resources in ways that can prevent and redress gender, economic and other inequalities and reduce the disparities in human rights enjoyment that flow from them.”.
- 30.
For a discussion of the second aspect, the question how to spend public resources and make effective budget decisions for successful domestic resource mobilisation and the realisation of human rights, see e.g. Nolan et al. (2013).
- 31.
International Covenant on Economic, Social and Cultural Rights (ICESCR), Art. 2(1).
- 32.
Maastricht Guidelines on Violations of Economic, Social, and Cultural Rights, para. 15(e).
- 33.
UN Human Rights Council, Report of the Special Rapporteur on Extreme Poverty and Human Rights, Ms. Magdalena Sepúlveda Carmona, on taxation and human rights, UN Doc. A/HRC/26/28, 22 May 2014, para. 5.
- 34.
International Covenant on Economic, Social and Cultural Rights (ICESCR), Art. 2(1).
- 35.
Maastricht Principles on Extraterritorial Obligations of States in the Area of Economic, Social and Cultural Rights, para. 21. Designed as a practical tool for public policymakers, the UN Guiding Principles on Extreme Poverty and Human Rights affirm that “states should take into account their international human rights obligations when designing and implementing all policies, including international trade, taxation, fiscal, monetary, environmental and investment policies” and “states must take deliberate, specific and targeted steps, individually and jointly, to create an international enabling environment conducive to poverty reduction, including in matters relating to bilateral and multilateral trade, investment, taxation, finance, environmental protection and development cooperation. This includes cooperating to mobilize the maximum of available resources for the universal fulfilment of human rights.”, see UN Human Rights Council, UN Guiding Principles on Extreme Poverty and Human Rights, A/HRC/21/39, 18 July 2012, paras. 61 and 96.
- 36.
Balakrishnan and Heintz (2014), p. 164. For an interesting hypothetical inter-state communications complaint under Article 10(1) of the Optional Protocol to the ICESCR by Zambia against Switzerland for its conduct related to tax evasion and the adverse consequences for Covenant rights in Zambia, see Lusiani (2014).
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Russia, for example, was over-eager to attract investment in 1994, when it signed a contract with a consortium led by Royal Dutch Shell to develop oil and gas reserves off its Pacific coast. The Russian government agreed to forgo its share of the revenues until the foreign investors had recouped their costs. What Russia did not foresee was that the project would encounter major delays and that it would take a long time for the government to receive any tax payments. See The Economist, Barking louder, biting less. 8 March 2007, http://www.economist.com/node/8815008 (last accessed 30 July 2017).
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The term “treaty shopping” generally refers to the practice of an investor forming a legal business entity in a country that has a favorable tax treaty with the “source” country, i.e. the country where the investment is made and the income in question is earned, often motivated by the goal to minimise tax payments.
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In practice, this argument is not completely valid. Not developing countries’ as Russia’s or Venezuela’s, but rather Britain’s fiscal policy is unpredictable as it “is constantly tinkering with its tax rates” according to energy consultant Saad Rahim, see Barking louder, biting less, 8 March 2007, http://www.economist.com/node/8815008 (last accessed 1 October 2018). See also Mansour M and Nakhle C, Fiscal stabilization in oil and gas contracts: Evidence and implications. The Oxford Institute for Energy Studies: SP 37, January 2016, https://www.oxfordenergy.org/wpcms/wp-content/uploads/2016/02/Fiscal-Stabilization-in-Oil-and-Gas-Contracts-SP-37.pdf (last accessed 1 October 2018), p. 9: “The UK has long been a textbook example of fiscal instability.”
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Blackaby and Richard (2015).
- 58.
Pak (2012), describing how over USD 110 billion have “disappeared” through large scale mispricing of crude oil in the US and EU between 2000 and 2010 leading to a reduction of tax payments and profits moving from source countries’ governments to extractive industry companies.
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In a similar sense, see Avi-Yonah (2014).
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Gravelle (2009); Mo (2003), p. 3. On June 1, 1937, President Franklin D. Roosevelt gave a speech to the US Congress on tax evasion in which he mentioned: “Methods of escape or intended escape from tax liability are many. Some are instances of avoidance which appear to have the color of legality; others are on the borderline of legality; others are plainly contrary even to the letter of the law. All are alike in that they are definitely contrary to the spirit of the law. All are alike in that they represent a determined effort on the part of those who use them to dodge the payment of taxes which Congress based on ability to pay. All are alike in that failure to pay results in shifting the tax load to the shoulders of others less able to pay, and in mulcting the Treasury of the Government’s just due.” See Roosevelt FD, Message to Congress on tax evasion prevention. 1 June 1937, The American Presidency Project, online by G. Peters and J.T. Woolley, http://www.presidency.ucsb.edu/ws/?pid=15413 (last accessed 1 October 2018).
- 65.
Sikka (2014), p. 135. With subjectivity abound and the complication involved in trying to find a clear-cut definition, some argue that tax avoidance, like hardcore pornography, is definable only ostensively, referring to US Supreme Court Justice Potter Stewart’s famous line “I know it when I see it” in the obscenity case Jacobellis v. Ohio, 378 U.S. 184 (1964), see Hern A, Why tax avoidance is like porn, 16 November 2012, New Statesman, http://www.newstatesman.com/economics/2012/11/why-tax-avoidance-porn (last accessed 1 October 2018); Maugham J, Is tax avoidance like hardcore pornography?. Financial Times Alphaville, 10 June 2016, https://ftalphaville.ft.com/2016/06/10/2165878/is-tax-avoidance-like-hardcore-pornography/ (last accessed 1 October 2018).
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Aaronson and Higham (2013).
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See Wouters and Chané (2015).
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See also, European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, A renewed EU strategy 2011-14 for Corporate Social Responsibility, COM (2011) 681, p. 7, mentioning transparency as one of three principles that constitute good tax governance, the other two principles being “exchange of information” and “fair tax competition between state actors”.
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- 86.
See also Blank (2009), discussing why the “shaming” sanction may not work and is rather counter-productive.
- 87.
For an analysis of five different corporate legal strategies (1. avoidance; 2. compliance; 3. prevention; 4. value; 5. transformation) with insights from business practice, see Bird and Orozco (2014).
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This term has been coined by the American political economist Robert Reich to identify the preoccupation of companies to increase shareholder value in the short term through paperwork on matters such as tax loopholes rather than in the long term through technological innovations and the development of new and better products. See Reich (1983). Another example of paper entrepreneurialism is the recent increase in share buybacks by directors of major listed companies, such as Apple, which leads to profits without prosperity. By reducing the number of outstanding shares, their value rises. This rise predominantly serves directors’ own interests as their compensation is often heavily based on stock. The increase in corporate profits is distributed to shareholders instead of making reinvestments in the corporation—e.g. development of new products, creating new jobs, giving employees higher incomes—that would benefit the economy. See Lazonick (2014).
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International Covenant on Economic, Social and Cultural Rights (ICESCR), Art. 2(1); Maastricht Guidelines on Violations of Economic, Social, and Cultural Rights, para. 15(e).
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Maastricht Principles on Extraterritorial Obligations of States in the area of Economic, Social and Cultural Rights, para. 21.
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UN General Assembly, Permanent Sovereignty over Natural Resources, Res. 1803 (XVII), 14 December 1962, Art. 1, paras. 1, 6; UN General Assembly, Charter of Economic Rights and Duties of States, Res. 3281 (XXIX), 12 December 1974, Art. 2, paras. 1-2(2)(b).
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Acknowledgements
I am grateful to the conference organisers for the opportunity to address the topic of business, taxation, and human rights in the extractive industries sectors at the young scholars’ workshop, where I received valuable feedback. I thank Prof. Markus Krajewski for his constructive comments and suggestions in a written review of this chapter’s initial draft.
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Khan, W. (2019). Improving Tax Strategy Transparency in the Extractive Industries Sector for the Advancement of Human Rights. In: Feichtner, I., Krajewski, M., Roesch, R. (eds) Human Rights in the Extractive Industries. Interdisciplinary Studies in Human Rights, vol 3. Springer, Cham. https://doi.org/10.1007/978-3-030-11382-7_7
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