Politics of Poverty

Dollars in the details: Improving oil and mining tax collection

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Main pit at Prestea mine owned by Bogoso Gold Mines, a subsidiary of Golden Star Resources. Despite being Africa's second largest producer of gold and generating millions in revenues, Ghana is not using its gold production to benefit the citizens living near mines. Photo: Neil Brander / Oxfam America.

New IMF handbook guides governments to manage fiscal systems so that oil and mining companies can’t walk through an open door.

The IMF may be known for sitting on a pile of gold, but it is unusual for the organization to publish a map on how to find unclaimed riches. That’s essentially what it’s done, though, with a new IMF handbook on “Administering Fiscal Regimes for Extractive Industries.” The handbook lays out steps that governments must take to make sure that they are maximizing fiscal benefits, and to make sure what is paid by oil, gas and mining companies is what is actually owed.

As the guide notes, “Natural resource wealth is an opportunity for many developing economies that may never be repeated, but too often they fail to take advantage of it.” Accounting for extractive industries taxes “should be straightforward but governments often do everything possible to make it difficult” and throw up big barriers to transparency.

So how do several of the problems identified in the guide play out in Ghana’s oil and gold mining sectors?  A few concrete examples stand out for me:

  • Cooperation between tax administrators and natural resource regulatory agencies remains poor – For example, keeping natural resource agreements secret causes many problems and as the guide states, “this secrecy can also be a barrier to effective tax administration because arrangements are sometimes kept secret even from the tax department.” I saw this play out in Ghana where I had a leaked copy of the main oil contract for the Jubilee field even before the Ghana Revenue Authority. (Thankfully, most of Ghana’s oil agreements are publicly available but this should be made a statutory requirement in the pending Exploration and Production bill.)
  • Failure to audit – The guide notes that many countries simply fail to watchdog the accuracy of payments companies make for resource rights. “Countries may fail to apply a self-assessment regime backed up with comprehensive taxpayer services; selective, risk-based audits; and rigorous enforcement.” While some countries, such as Angola, have paid international auditing firms to make sure that international oil companies are paying what they should pay, countries fail to audit companies, including audits of production costs that are charged to projects and that reduce government revenues.
  • Weak audits – Even when governments do audit, they often lack the expertise to conduct thorough audits of companies. The guide notes “…if an ineffective audit leaves an open door, some companies will walk through it, and serious tax loss can result.” For big companies, the guide notes, “the main compliance risk is that the tax they declare does not accord with the law…These risks are likely to be more concentrated in underreporting, for example through the use of transfer pricing operations, transactions with tax havens, and thin capitalization.
  • Failure to measure – Amazingly, the guide notes that some governments fail to measure production, oversee company measurement processes, or do physical audits of production. In Ghana, civil society watch dogs have said the government still does not have a way to independently verify production from the Jubilee Field and the World Bank has noted Ghana’s Large Taxpayers Unit does not have the “capacity to verify the weight and quality of gold independently.”
  • Giving state oil and mining companies a pass – State-owned natural resource companies (NRCs) such as Angola’s Sonangol, Nigeria’s NNPC, or the Ghana National Petroleum Corporation often receive little scrutiny. While “NRCs should be audited by tax departments in the same way as other companies, NRC audits are often poor in practice…NRCs may be powerful organizations under limited ministerial control, with poor accounting standards, and it can be difficult to enforce tax obligations on them.” Ghana’s GNPC has not been independently audited recently or at least those audits have not been disclosed. You’ll get a “file not found” error if you look for the company’s annual reports.
  • Tax manipulation Even with the best-designed regimes there can be different interpretations and unacceptable tax manipulation at the margin – and with natural resources even marginal errors can involve very large amounts of money.”

The prose of the handbook may be dense and boring – espresso highly recommended – but fixing the major problems outlined in the guide could generate billions of dollars for resource-rich countries that could be channeled into health, education and agriculture. It’s not a stretch to say that lives depend on better tax collection – and, of course, accountable expenditures – from extractive industries.

Not surprisingly, this guide is not a political economy of why these problems are all too common, but it does admit that “what is desirable in theory may not be achievable in practice. Powerful political considerations often dictate the way things are done.”

Getting the guide into the right hands

The IMF guide was launched in July at the IMF with a panel discussion, including my colleague Isabel Munilla. But I’m afraid the good work by Jack Calder, supported by Katherine Baer, Philip Daniel and other colleagues at the IMF and World Bank, may fall into a black hole unless these issues get more attention – and the IMF guide is made freely available. Given all the attention on extractive industries revenues and governance issues in the last decade or more, it’s amazing that this guide is one of the first of its kind.

It will be up to citizens, members of parliaments, civil society groups and other watchdogs to help change the political calculus and take on vested interests that benefit from corruption in natural resource revenue administration. While global action is needed to address problems such as tax havens and profit shifting – and to finish the job on extractives company payment disclosure requirements (looking at you, SEC) a lot of action can be taken now in resource-rich countries to address weak tax administration.

For emerging oil and gas producers, such as those in East and Southern Africa, whether the tax regime is designed and administered properly could be a question of billions – not millions – of dollars left on the table.

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