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The "Pay Your Taxes" Debate: Perspectives on Corporate Taxation and Social Responsibility in the Chilean Mining Industry
Over the past two decades, an increasing number of transnational corporations (TNCs) have adopted a variety of policies and practices associated with corporate citizenship or corporate social responsibility (CSR). CSR is often defined as greater responsiveness on the part of TNCs and other companies to the social, environmental and human rights concerns of multiple stakeholders in both host and home countries, and as going beyond the minimum standards set out in law. The CSR agenda has evolved considerably in terms of both the number of companies, civil society organizations, governments and international agencies supporting it, and the range of issues addressed. An earlier focus on selected environmental issues, working conditions, community relations and philanthropy has broadened to include such aspects as labour and other human rights, the social responsibilities of suppliers, and the role of TNCs in dealing with specific societal problems such as violent conflict and HIV/AIDS. An issue that has received less attention is that of corporate taxation. This omission is curious not only because of the key role of taxation in social development, but also because of the fact that responsibilities associated with taxation have always been a central element of citizenship and should, presumably, apply as well to corporate citizenship.
The lack of attention to the question of taxation has played into the hands of critics of TNCs who dismiss CSR as window-dressing and point to the double standards that exist when companies promote CSR initiatives and simultaneously engage in legal forms of tax avoidance or illegal tax evasion to minimize their fiscal contributions, as well as other practices that can have perverse developmental impacts.
Growing awareness of these problems, and evidence that they are increasing in the context of globalization and economic liberalization, has prompted some civil society organizations, governments and intergovernmental organizations to take action to curb such practices. Internationally, we see, for example, the formation of the Tax Justice Network and the Publish What You Pay Campaign, the efforts of the Organisation for Economic Co-operation and Development to combat tax havens, and certain developing country governments imposing or proposing increased royalties on mining companies.
As part of a series of studies on the uptake and impact of CSR in developing countries, the United Nations Research Institute for Social Development (UNRISD) requested Manuel Riesco of the Centro de Estudios Nacionales de Desarrollo Alternativo (CENDA) to prepare a paper that would examine the fiscal performance of foreign mining companies in Chile, the extent and dynamics of tax avoidance, the issue of double standards, the role of government policies in shaping fiscal behaviour, and the nature of policy reforms that might enhance the developmental contribution of TNCs.
The Riesco study, presented in part I, attempts to understand why it is that a flourishing private mining sector pays so few taxes in Chile, and why the reported pre-tax profits of a large, modern, foreign-owned copper mine are on a par with those of what Riesco describes as “the ageing and ailing state-owned corporation, CODELCO”. To explain these situations, Riesco identifies an overly permissive neoliberal policy and legal environment; intracorporate financial flows that allow mining affiliates not only to repay loans to related off-shore financial affiliates at generous rates but also to benefit fiscally by being indebted; the sale of copper and by-products at reduced prices to companies that are part of the same corporate structure; and the over-charging of shipping, and treatment and refining charges, by these or other related companies.
The preliminary findings of the Riesco study were posted on the CENDA Web site, and were presented to two commissions of the Chilean Senate dealing with the mining industry and picked up by the press, fuelling a national debate on the question of why foreign mining companies paid no royalties and so few taxes. Certain regulatory authorities and business interests criticized the study. One of the companies examined in the study, BHP Billiton, sought a third-party opinion and subsequently submitted to UNRISD a paper, by Professors Gustavo Lagos and Marcos Lima from the Engineering Faculty of the Pontificia Universidad Católica de Chile, which was highly critical of the Riesco paper. In view of the polemic, UNRISD has decided to publish both papers in the form of a debate, which also includes a reply by Riesco and a rejoinder by Lagos and Lima.
In their paper, presented in part II, Lagos and Lima argue that it is not possible to conclude that the foreign-owned company, Minera Escondida, had underreported its income. Riesco’s calculations, they argue, do not take into account or give sufficient weight to various factors, including variations in the by-product content of the ores produced by CODELCO and Escondida; the volatility in world copper prices and treatment and refining charges; the fact that Escondida sells under long-term as opposed to spot contracts; and a variety of other factors that affect sales prices. They also note a range of regulatory institutions and controls that are in place to detect and prevent the types of anomalies identified by Riesco.
In their replies, presented in part III, the authors essentially stick to their guns. Riesco acknowledges the need for some fine-tuning of his calculations but confirms the role of transfer pricing in substantially lowering corporate profits and income declared in Chile. He argues that the by-product content of CODELCO ores is unlikely to be excessively greater than that of Escondida and that the nature of the long-term contract that results in lower prices is not so much an explanation as part of the problem of transfer pricing. Referring to the serious problems of under-staffing of the state oversight agency, COCHILCO, he questions this agency’s regulatory capacity. He also reaffirms the perversity of a situation where a vibrant sector of the economy pays no royalties, and he praises the recent attempt by the Chilean government to introduce a law that would impose a 3 per cent royalty on mining companies.
Lagos and Lima also maintain their original position, adding that the comparability of the financial performance of the state-owned and foreign-owned mines also reflects the fact that the state-owned company has become very competitive. Furthermore, they argue, the scenario described by Riesco suggests the existence of a major international tax fraud conspiracy which is unrealistic, involving as it would not only many companies but also the International Finance Corporation, boards of directors, auditors and so forth. Moreover, they say, numerous controls exist to prevent such a situation, not least regulations on product sales and international trade, sanctions imposed by securities exchanges, the response of shareholders and the threat of lawsuits.
Such differences in opinion clearly indicate the need for additional research. But they also suggest that the criteria that should inform the judgement as to what is acceptable fiscal behaviour are not only technical and legal, but also ethical and political. UNRISD leaves it to the reader to decide which set of arguments is more convincing.
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Pub. Date: 3 Oct 2005
Pub. Place: Geneva