Pay your taxes!

Mining in Chile

One drawback of the increasing integration of companies into transnational corporations is that they may pay less tax in countries where they operate. Non-payment of taxes, transfer pricing, and intra-corporate financial flows are costing developing countries billions of dollars a year in lost revenues.

In the case of natural resource based industries - the most profitable industries in developing countries because of the associated ground rent - non-payment of royalties aggravates the problem significantly (see box right).

Research by the UN Research Institute for Social Development (UNRISD) shows that economic policies in Chile have been fiscally permissive with regard to the mining industry in particular. As a result overproduction was encouraged and world copper prices remained low, damaging employment in the mining sector internationally and locally and harming government revenues. Some mining companies in Chile claim to act responsibly: how do they deal with this issue and do they relate it to their Corporate Social Responsibility (CSR) stance?

Copper production in Chile has more than tripled since 1990 and now represents almost 40 percent of world copper exports. Yet since 1990 private mining companies, with only one relevant exception, did not pay taxes between 1993 and 2002. The value of copper exports over this period totalled over 34 billion US dollars; the net income of private companies amounted to roughly half that sum.

Disputada, a copper mine owned by Exxon until 2002, ostensibly operated at a loss for 23 years and thus under Chilean law was exempt from paying taxes. Yet the mine accumulated 575 million dollars in tax credits. In 2002 Exxon Mobile (Exxon merged with Mobil in 1999) then sold Disputada for 1.3 billion US dollars. Exxon had been exporting the mine's profits (disguised mostly as interest payments) to Exxon Financials, in Bermuda.

BHP Billiton's subsidiary Minera Escondida, on the other hand, is the only private mining company in Chile that pays significant taxes. However, a comparative study of the financial results of Minera Escondida and CODELCO - a large state-owned mining company in Chile - found that by selling its copper as concentrate (rather than refining it in Chile) mainly to a consortium of refiners related to BHP Billiton, Minera Escondida had fewer earnings than its state equivalent per ton of copper produced: the loss of tax revenue to Chile is estimated at between 125 and 212 million dollars a year between 1998 and 2002.

BHP Billiton may be a leader in CSR, voluntarily donating one percent of pre-tax income to projects in Chile and adopting high social and environmental standards of operation. Yet, questions arise regarding how high up the issue of contributing to government revenue is on its agenda. Moreover, in response to questions asked about taxation, the company points to its voluntary CSR activities as an indication of the company's contribution to society.

Public policy recommendations from the UNRISD research include:

• introducing royalty charges for all exported natural resources
• auctioning mining districts and other ground rent capturing schemes
• enhancing state capacity to regulate resource exploitation and transfer pricing.

CSR initiatives need to ensure that corporations pay the required taxes wherever they are operating - taxes that help support the social fabric from which firms generate their profits: political and technical efforts to reduce that contribution are not responsible business practice n

Manuel Riesco
United Nations Research Institute for Social Development
Palais des Nations 1211
Geneva 10
Switzerland
riesco@unrisd.org

See also

Pay Your Taxes! Corporate Social Responsibility and the Mining Industry in Chile by Manuel Riesco, in 'The Pay Your Taxes Debate: Perspectives on Corporate Taxation and Social Responsibility in the Chilean Mining Industry', Programme on Technology, Business and Society Paper No. 15, UNRISD, Geneva, 2005 (forthcoming)

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