EITI Update:
Transparency in Peru's Extractives Sector
By Epifanio Baca, Grupo Propuesta Ciudadana
Over the last six years, the Peruvian economy has experienced
a sustained period of economic growth, driven by investment in
the extractives sector, mainly mining, followed by agro-exports,
textiles and services such as tourism and construction. Although,
as mentioned in this month's editorial, this growing economic dynamism
has been accompanied by a threats of greater inflation caused primarily
by the hike in oil prices and foodstuff on the international market.
The dynamism of extractives industries over the last four years
has been marked by the extraordinary increase in the price of minerals
such as gold and copper. The result of which is that mining and
hydrocarbons currently make up 70% of exports (compared with 41%
in 2001) and 30% of domestic taxes (this was 7% in 2001). This
contribution to fiscal income has resulted in the growing transfer
of resources to sub-national governments which - according to the
Canon law (1) - have the right to a share in this income. The annual
total of the aforementioned transfers is around US$2,300 million
(?1,276 million) a year.
However, over the last few years socio-environmental conflicts
between extractives companies and local communities have spread
throughout several regions in Peru, due to perception by these
communities that their economic and social rights are being violated.
Additionally, they face a State that has little capacity and political
will to uphold the quite permissive socio-environmental regulations.
Consequently, communities are protesting because the canon resources
don't directly benefit them; and in turn the local and regional
authorities have demanded that companies comply with the universal
payment of royalties and have even suggested imposing a tax on
the windfall profits that these companies make due to the high
international minerals prices.
In this context of economic dynamism and social unrest, the subject
of income transparency generated by the extractives industries
- as well as their use by municipal and regional governments -
gains great importance for the industry's sustainability. Communities
and regional social leaders feel that they have the right to access
timely, complete and trustworthy information on the contributions
made by companies that are exploiting non-renewable natural resources.
For this reason, the Citizen's Proposal Group (GPC - Grupo
Propuesta Ciudadana) welcomed the Peruvian government's
decision in 2004 to join the Extractive Industries Transparency
Initiative (EITI), because we trusted that it could contribute
to improving the transparency of payments made by companies and
the income recorded by the State. This information is of great
relevance because according to what is set out in the Canon Law
it represents income for the producer regions. Also, in 2004
the country learned of cases whereby some companies paid less
than they should have in taxes, or indeed paid no taxes at all,
and improperly used their legal and administrative stability
contracts (designed to promote foreign private investment for
a fixed ten-year period. In these agreements, the Government
guarantees certain privileges such as tax and exchange rates
at the time when the agreement is signed). The worst hit by such
practices are the regions of Ancash and Arequipa, as they stopped
receiving tens of millions of dollars from the mining canon (2).
One criteria of the EITI is the: "Regular publication of
all material oil, gas and mining payments by companies to governments
and all material revenues received by governments from oil, gas
and mining companies to a wide audience in a publicly accessible,
comprehensive and comprehensible manner". It then adds that: "Payments
and revenues are reconciled by a credible, independent administrator,
applying international auditing standards and with publication
of the administrator's opinion regarding that reconciliation including
discrepancies, should any be identified" (EITI Conference,
London, March 2005).
Currently in Peru, the National Superintendency of Tax Administration
(SUNAT) publishes information on the overall total income tax that
companies in the mining and hydrocarbon sectors pay. In addition,
the State provides information on transfers to the regions according
to: mining canon, oil canon (royalty) and sobrecanon (royalty
surtax), mining royalties and validity rights. But that information
is of no use to compare the mining canon and gas canon transfers
that Peru's Ministry of Economy and Finance makes as these are
calculated on "declared income tax" and not on the "tax
paid" which is what SUNAT publishes.
As a candidate country to the EITI, Peru's multi-stakeholder working
group was officially established in May 2006, with representatives
from industry, the State and civil society (represented by GPC).
It has an approved action plan with resources - channelled through
the World Bank - for it to move forward. Nevertheless, the required
national study has not yet begun because, up until May 2008, representatives
of the working group had not reached agreement on important aspects
of the study's content. GPC's approach - in the role of the civil
society representative - stressed that the study should contain
information on: a) the fixed tax declared by each participating
company; b) a description of the process determining the calculation
of the rate of tax to be paid by the participating company, taking
into account existing regulations and applying international standards.
The industry representatives suggested that the study should be
limited to the revision of the amount of tax declared by participating
companies and be published in aggregate form only. GPC believes
that this approach is not in accordance with the spirit of the
EITI. If the idea of the EITI is that the companies in favour of
transparency make public the total tax they pay the State - as
in fact already happens with some mining companies - we don't see
the use of a study which doesn't list, company by company, the
declared tax and the basis on how this is calculated.
Following much discussion all parties finally reached an agreement
which we hope will enable us to implement the initiative. This
includes incorporating two categories for company participation:
category A for companies who wish to accept the publication of
its individual figures; and category B for those who want to take
part but only accept the publication of aggregate figures. The
implementation of this initiative will depend on whether the companies
in category A represent a significant percentage of mining and
hydrocarbon production. In this context it is important to report
that the mining company Antamina took the decision to publish data
on the tax and non-tax payments that it makes to the State on its
website, which we welcome as it opens the way to increase the kind
of transparency that we hope will gain more followers.
(1) Legislation detailing transfers from State to local and regional
governments of a percentage of tax revenue generated by the extractives
sector.
(2) Transfer from State to local and regional governments of a
percentage of tax revenue generated by the mining sector.
What is the EITI?
The Extractive Industries Transparency Initiative was announced
at the World Summit on Sustainable Development in Johannesburg,
September 2002 by former UK Prime Minister Tony Blair. The idea
was to combat the 'resource curse' that many developing countries
suffer from. The theory behind the voluntary initiative was to
set a global standard for companies to publish what they pay
and for governments to disclose what they receive for the extraction
of oil, gas and metals. All this data would be subsequently checked
by an independent auditor in accordance with international standards
and then published in a publicly accessible and comprehensible
report.
The Multi-Donor Trust Fund for the EITI was established in August
2004 through an agreement between the United Kingdom's Department
for International Development (DFID) and the World Bank. Germany,
the Netherlands and Norway joined in 2005. France joined in 2006
and Australia, Belgium, Canada and Spain joined in 2007. The US
and the European Commission joined in 2008
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