The practice of moving money around the world to cream off profits where there is minimum tax liability is attracting growing scrutiny

As the push to promote transparency and accountability in the extractive industries has gained momentum, there has been an explosion in the number of civil society groups focusing on the wider effort to better regulate public companies and stock exchanges.
 

Central to this is a global fight to enhance corporate tax disclosure through adoption of a uniform country-by-country reporting standard.
 

The effort aims to focus attention on tax haven obfuscation and practices such as “transfer pricing”. This easily abused pricing method of goods and services within multinational companies is estimated to deprive developing countries of hundreds of millions of dollars a year.
 

The movement’s biggest success to date is the Dodd-Frank Wall Street Reform and Consumer Protection Act, which includes a provision requiring oil, gas and mining companies registered with the US Securities and Exchange Commission to publish their payments to foreign countries and to the US government.
 

Project reporting
 

“It’s the first major piece of legislation of its kind,” says Matthew Genasci, a legal adviser at Revenue Watch International, “and it goes beyond country reporting to require companies to report on a project-by-project basis, potentially enabling authorities to obtain information and track transfer pricing irregularities”.
 

Transfer pricing – which can be used to move the location of the taxable profits – is a tactic allegedly employed by Glencore, a giant fuel, metals and cereals trader which owns a 73% stake in Zambia’s Mopani Copper Mines.
 

According to a leaked audit report obtained by charities group ActionAid, Mopani sold copper at artificially low prices to Glencore in Switzerland under a deal struck with the firm’s UK subsidiary in 2000. The metal was then sold on, allowing Glencore to take advantage of Switzerland’s ultra-low tax regime.
 

Chris Jordan, a campaign officer with ActionAid, says the company’s practices potentially deprived the Zambian government of £76m a year in corporation tax, an amount significantly more than the £59m the UK government gives Zambia each year in aid.
 

“Developing countries simply don’t have the skills, experience or capacity needed to track this kind of transfer pricing,” Jordan says.
 

The effort requires a huge amount of data and analysis. It took a year-long investigation of brewing giant SABMiller’s pricing transfer practices, carried out by ActionAid with the help of groups including Tax Justice Network, to reveal the avoidance of millions of pounds of annual taxes in Africa. In the wake of this work, in May 2011 five African countries launched an investigation into SABMiller’s tax payments and its transfer pricing strategies.
 

Activists in the NGO community say the Tax Justice Network – a group staffed with “insider” former accountants and legal professionals – is playing a key role in getting the issue on the agenda.
 

“Things are accelerating because it’s clear that there are failures in the international financial architecture,” says John Christensen, director of the international secretariat of the Tax Justice Network.
 

Efforts are under way to push country-by-country legislation through government bodies such as the European Union, Christenson says. The Organisation for Economic Co-operation and Development currently has a working group looking into country-by-country implementation, and both the G20 and International Monetary Fund have indicated support.
 

Broader consensus
 

Groups including Publish What You Pay are actively pushing the agenda, Christensen says, linking a broader campaign concerned with international accounting standards to transparency concerns in the extractives industry. The movement encompasses traditional development charities such as Christian Aid, War on Want and Oxfam whose on-the-ground expertise is proving fruitful.
 

“Many oil and mining companies argue: ‘We are not violating the law. We are not doing anything illegal,’” says Christopher Avery, director of the Business and Human Rights Resource Centre. “The response to that is, ‘if you are not paying a fair share of taxes in a developing country where that money is needed by the government to provide basic rights to the population then that does raise serious human rights questions.’”
 

According to the OECD, developing countries lose nearly $400bn a year to tax havens. That’s more than three times total 2010 aid donations.
 

ActionAid says: “The international tax rules must change to make it simpler for low-income countries to enforce them.”