Taxation and corporate responsibility in Africa

For those following African issues, of all the current topics of global debate about the social impact of business or public-private sector relations one stands out more than others: corporate taxation.

 

Here the tax-tightening agenda of developed but revenue-strapped G8 governments now somewhat aligns with that of developing African governments.

 

The recent 'Africa Progress Panel' report highlighted the extent of unrealised revenues lost to African governments through practices such as transfer pricing; the Zambian government, most notably but hardly alone, has continued in recent months to move on its promise to tighten compliance with existing tax and duty requirements on foreign firms in its mining sector.


 

The relationship between tax issues and corporate responsibility ones is fairly simple, at least in the resource extractive industries in developing African countries.

 

A principal (and principled) argument available to a mining firm under pressure to 'do more' for its host community or country is that along with paying its employees, it pays taxes to the government, whose responsibility it is to provide services and infrastructure to the population. On this classic account, it is the government, not the firm, that should be primarily accountable to the public about the use made of tax revenues. For instance, in March 2012 I heard Ivan Glasenberg, CEO of Glencore, make this argument forcefully if rather unsubtly during a panel on 'resource nationalism' in Africa.

 

Likewise, when faced with government attempts to raise a firm's taxes, royalties and duties, an argument available to a firm which has made extensive local social investments is that the firm should be spared further increases since it is carrying some of the state's social spending burden.

 

The public relations or political risk vulnerability for firms is that if it transpires that their effective taxation levels or volumes are in fact far lighter than is widely assumed, the first-mentioned argument loses its force.

This is particularly so for firms in sectors that despite their revenue by nature do not create a lot of local jobs, something that would otherwise help illustrate their social value even if their tax footprint is low.

 

Of course the dilemma for firms which spend heavily on their social investment side, believing that it is pointless to wait for the government to translate taxes and royalties into palpable gains for the host community, is that the firm's uptake of this responsibility removes the incentives on the government for doing so. Moreover, the firm may pay tax to the central government but be answerable for local conditions to a provincial or municipal government, whose relations with central government may be beyond the firm's control. 

 

Technically speaking, tax issues are matters of legal obligation -- one is either liable or not -- whereas issues of 'corporate responsibility' tend by definition to relate to things done despite there being no legal requirement to do them.

 

The recent first issue of our firm's 'Business and Society Monitor' observed that taxation is one issue that has largely not been framed in the language of 'corporate responsibility' -- no doubt for the legal / voluntary reason just mentioned, yet despite the close relationship between tax and corporate social investment discussed above.

Given the often blurred or highly technical nature of compliance (which underpins the distinction between 'avoidance' and 'evasion' of tax), the Monitor implicitly noted that it would be unsurprising if mainstream corporate ethics, corporate responsibility and related debates increasingly focus on taxation issues. A parallel development is that increasingly social investment issues are covered in investment contracts, so that they become legal issues; this can be in a firm's interest, since it delimits the extent of its otherwise open-ended non-legal responsibility.

 

Like the issue of revenue transparency that the UK will push at this year's G8, taxation issues relate to much broader questions for African policymakers about competitiveness in attracting foreign investment, in the absence of cooperation from peer (competing) governments on uniform approaches to revenue management.

 

One strategic consideration for major extractive industries in Africa is their interest in reducing the share of national revenue for which their industry accounts. That implies that those in the oil sector, for instance, should be interested in boosting the non-oil economy (and non-oil or oil-related employment) in their host country, increasing the number of tax-paying firms and decreasing their exposure as single dominant sources of government revenue. Initiatives such as Tullow Oil's 'Invest in Africa' scheme reflect an understanding that for an oil firm, a booming non-oil sector is directly in its commercial and government relations interests.

 

Jo

 

For a recent post distinguishing (corporate) responsibility from (government) duty, see here.

 

These issues are raised in multiple previous blogs, see for example here on social investment by the mining sector in Africa.