Many Ways to Lose a Billion: How Governments Fail to Secure a Fair Share of Natural Resource Wealth
Publisher: Publish What You Pay Canada
Author(s): Don Hubert
Date: 2017
Topics: Extractive Resources, Governance
Countries: Australia, Canada, Chile, Indonesia, Mongolia, Mozambique, Sierra Leone, Tanzania, Timor-Leste, Trinidad and Tobago, Uganda, United States
Countries rich in oil, gas and minerals often fail to secure a fair share of their natural resource wealth. Revenue loss from the extractive sector is particularly significant given the large number of countries that depend on natural resource revenues for a substantial portion of their annual budgets. Companies employ a wide range of strategies to minimize their payments to governments. Their efforts to avoid tax are facilitated by weak institutions, inadequate policies and regulations, badly negotiated contracts, and insufficient government monitoring and auditing. There has been a flurry of activity in recent years, at the international level and at national levels, to combat extractive sector tax avoidance. But much more still needs to be done. Reliable data on the scale of potential revenue loss is not available. However, the experiences of both developed and developing countries suggest that many billions of dollars in government revenue are at stake. The extraordinary success of the global movement for greater transparency surrounding extractive sector revenues has made it easier to assess whether governments are receiving a fair share from oil, gas and mineral extraction. But for greater transparency to translate into increased extractive sector revenues, the data must be analyzed and that analysis must be used. There are many mechanisms companies use to reduce their payments to governments, but the pathways are not unlimited. There are clear patterns to how companies reduce payments to governments. Knowing what to look for can help those seeking to conduct more effective data analysis. This paper sets out a revenue risk assessment framework that maps the main pathways through which governments lose extractive sector revenues (See Textbox 1). The framework is based on a comprehensive review of public domain information on risks to government revenue. The main pathways introduced in this report are all illustrated by real-world case studies. The framework distinguishes between revenue loss due to the tax rates applied to an extractive sector project, and revenue loss due to the tax base against which those revenues are assessed.