Our lives are built on and intertwined with various natural resources. Among them, mineral resources are used across a wide range of fields. Looking at data from 1984 to 2015, the majority of the world’s mineral extraction is concentrated in regions known as developing countries or least developed countries. Furthermore, while more than half of minerals are extracted in countries considered politically unstable or highly unstable, in recent years the share of extraction in these regions has been on the rise. Mineral resources can be a source of wealth and income to escape poverty for developing and least developed countries, yet in many mineral-rich developing and least developed countries there are still people living in a state known as absolute poverty, surviving on $1.90 a day or less. Despite their abundant resources, what problems lie behind the fact that these countries and the people living there are not able to fully enjoy the benefits?

Photo: Anna Vaczi / Shutterstock.com

Issues related to mining royalties

As noted earlier, many of the countries where mineral resource development takes place are developing or least developed countries. Because it is difficult for these countries to raise the vast sums required for mine development, they attract well-capitalized foreign companies. In return for obtaining the right to mine in specific areas and sell the extracted minerals as commodities abroad, foreign companies are in some cases obliged to pay a tax to the resource-owning country known as a mining royalty (royalty). While royalty rates can be set based on the rate of return from mining, in many cases they are determined by the quantity or value of the minerals extracted.

If the royalty rate rises, the government’s tax revenue increases, which can be allocated to development or expanded social protection. On the other hand, companies must pay more tax, reducing their profits. If royalties become so high that foreign firms cannot generate profits, they may lose the incentive to mine in that country or shift to jurisdictions where profits are easier to realize. In such cases, even if a mine exists, there may be no actor to operate it, reducing the resource-owning country’s tax revenue. However, since royalty rates are set in conjunction with other taxes paid by foreign firms, it is difficult to define a single appropriate rate. In practice, leveraging the fact that developing countries cannot undertake mine development without foreign participation, companies often pressure governments to cut royalties or oppose increases—even when current rates are fair or already extremely low.

For example, in the Republic of Zambia, known for copper production, although the total value of copper produced was USD 5.7 billion in 2010 and USD 7.2 billion in 2011, companies’ total tax payments related to copper production were only USD 780 million and USD 1.5 billion, respectively. The Zambian government later proposed raising the copper royalty to 20%, but due to corporate opposition and a change of president, the copper mining royalty was fixed at 9% for open-pit mines and 6% for underground mines. In other words, in terms of royalties alone, more than 90% of the value of extracted copper can be said to flow into the hands of foreign companies.

Copper mine in Zambia Photo: Virgil Hawkins

Issues of tax avoidance and evasion by legal and illegal means

In addition to royalties, foreign companies that develop mines in a country must pay other taxes such as corporate income tax and taxes related to the import and export of products. However, there are cases where these taxes are drastically reduced, preventing resource-owning countries from fully benefiting from the mineral resources within their borders.

For instance, the French company Areva (now known as Orano), which mines uranium in the Republic of Niger, secured arrangements under which customs duties, VAT (value-added tax), and taxes on fuel used in mining are exempted, and in addition, 20% of Areva’s total revenues in Niger are excluded when converting to the applicable corporate tax rate, as stipulated. Although negotiations between Areva and Niger in 2013 led to a new contract with some improvements, such as higher royalties, many problems remain. In recent years, in order to lower reported income from uranium mining, Areva renegotiated with Niger to reduce the price of uranium. As a result, even though Areva’s uranium production in Niger changed very little between 2014 and 2015, the royalties the company paid to Niger in 2015 were €15 million (approximately 2 billion yen) less than in 2014.

Beyond the “tax planning” carried out through legal means like the above, there are many cases of tax avoidance using tax havens and tax evasion through underreporting profits. In such cases, before selling extracted minerals to customers abroad, the foreign mining company sells them at a price far below market to an affiliate located in a low-tax jurisdiction. The goods are then resold to the end customer, allowing the company to understate profits and thereby cleverly avoid obligations such as income taxes and customs duties. GNV has previously covered the problem of tax avoidance in detail. We have also discussed a case in Bolivia related to this.

Why do resource-owning countries end up agreeing to unfavorable terms with foreign companies? This is closely related to the fact that many are developing or least developed countries. Developing countries want to bring in experienced foreign companies to develop their resources. In contract negotiations, foreign firms not only have far more development capital and knowledge of mining than resource-owning countries, but can also use abundant funds to hire multiple highly skilled lawyers to negotiate to their advantage. As a result, many developing countries have little choice but to accept terms favorable to foreign companies.

One reason tax evasion via tax havens cannot be prevented is the lack of progress in international treaties and legal frameworks. At the United Nations International Conference on Financing for Development held in 2015, not only was the proposal by developing countries to establish an international body on tax issues blocked by developed countries, but even calls to strengthen the existing UN Committee of Experts on tax matters were rejected.

Third International Conference on Financing for Development (FfD3) Photo: UNECA (CC BY-ND 2.0)

It is understood that behind such tax avoidance and extreme exemptions lies a problem of transparency in the contracts concluded between foreign companies and resource-owning countries. For example, in Myanmar, secrecy and corruption surrounding the development of oil, gas, and minerals have long prevented citizens from sharing in the benefits. To avoid conflicts of interest among actors involved in resource extraction, the Myanmar government has long refrained from disclosing detailed information about companies engaged in natural resource extraction. Concealing such information makes it difficult to identify corporate wrongdoing or collusion with corrupt politicians, and allows for the details of contracts and the way profits from resource extraction are allocated between companies and the state to be kept hidden. To improve this situation, the Myanmar government has committed to enhancing transparency between companies engaged in resource extraction and the government.

This is not a movement confined to Myanmar. There is a multilateral framework for improving transparency and accountability regarding financial flows from corporate activities to resource-owning countries in the extractive industries, known as the EITI: The Extractive Industries Transparency Initiative. Fifty-two countries, including the aforementioned Zambia, Niger, and Myanmar, are members. In countries such as Afghanistan, results are beginning to emerge, such as compiling investigative reports on the extractive sector and related companies in line with the EITI Standard.

Benefits are not easily returned to society

Mining brings various economic effects and is expected to return benefits to local residents. Examples include taxes paid by mining companies, the development of infrastructure and other foundations for daily life, and job creation. However, due to its nature, mining is less likely than other industries to return benefits to society via the so-called trickle-down approach, whereby the wealthy become wealthier, the economy is stimulated, and wealth is then distributed to the poor. Mines are often located in isolated areas away from surrounding communities, and necessary livelihood facilities are available within the mine sites themselves. Thus, workers at the mines have relatively little need to go outside the mines to spend money. Furthermore, mechanization of mining and the frequent importation of specialized heavy machinery make it difficult to generate employment and develop local industries. Given these characteristics, the redistribution of benefits and compensation for impacts on residents and the environment caused by mining are also responsibilities that mining companies are expected to fulfill.

Corruption among government officials in resource-owning countries also prevents developing countries from receiving sufficient benefits from mining and returning those benefits to their citizens. Problems of collusion, such as politicians taking bribes, occur at multiple stages, including during bidding, contract negotiations, and renegotiations.

Mine in Bolivia Photo: Rafal Cichawa / Shutterstock.com

Impacts on local communities from environmental destruction

The relationship between resource-owning countries and foreign companies is not the only factor hindering economic development. Environmental destruction associated with mining and conflicts over profits are also major problems for resource-owning countries. In the Democratic Republic of the Congo, pollution caused by copper and cobalt mining has become a serious issue. Contaminants are carried along the Congo River, causing impacts such as respiratory diseases and congenital physical defects in various parts of the country. Rio Tinto, which had operated a copper mine in Papua New Guinea, had not engaged in extraction for more than a quarter century due to conflict, and in 2016 decided to withdraw, leaving a mine site partially developed. At the site, acid from mining is flowing into rivers, forcing local residents who rely on rivers as the basis of their daily lives to relocate.

Many developing countries lack adequate environmental laws and other regulations, making it easier for foreign companies to operate with fewer rules to follow. The unscrupulous activities accompanying these mining developments not only deprive citizens—who should have been able to benefit—of those gains, but also cause health damage and other harms.

Developing and least developed countries with mineral resources have the potential to become prosperous, yet they have lost opportunities in their relationships with foreign companies. Whether we are conscious of it or not, for people who benefit from mineral resources in their daily lives, this issue is not irrelevant. As citizens living on the same planet, how should we confront this problem?

Oil pipeline running through the Amazon rainforest Photo: Dr Morley Read / Shutterstock.com

Writer: Azusa Iwane