Who benefits when a country’s natural wealth is extracted and developed? The term “resource curse”’ has been coined to describe how some resource-rich countries have historically endured low levels of growth and development despite their abundant reserves of raw materials.

The problem has been slowly improving in recent decades. Today, transparency – the clear disclosure of information, especially about payments to governments – is playing an important role in lifting the resource curse. And there is heightened interest from the public, politicians and media about tax transparency in particular, as revelations about tax havens spark debate about how the benefits of economic activity are distributed. Multinational companies are the focus of much of this attention.

Recognised as an industry leader in tax reporting, Rio Tinto has reported on its tax payments and economic contributions in increasing detail since 2010.

Jonas Moberg, head of Secretariat at the EITI, welcomes the progress that the company and its peers have made.

“There have been fast and commendable improvements in transparency, and Rio Tinto and its peers have shown strong leadership. We hope that others will follow their example and that their practices will become the industry standard,” he said.

A country’s natural resources, such as oil, gas, metals and minerals, belong to its citizens. Extraction of these resources can lead to economic growth and social development. However, poor natural resource governance has often led to corruption and conflict. More openness and public scrutiny of how wealth from a country’s extractive sector is used and managed is necessary to ensure that natural resources benefit all.

Extractive Industries Transparency Initiative (EITI), Progress Report 2016

US$4.5 bn

paid in taxes and royalties in 2015

(in 2015, Rio Tinto’s underlying earnings figure was likewise US$4.5 billion)

Worldwide action

In recent years, a growing number of government initiatives around the world have aimed to promote greater transparency more broadly throughout businesses. New codes and policies on transparency are emerging fast at the national, regional and global levels.

In June 2016, the Organisation for Economic Co-operation and Development (OECD) held an inaugural meeting to kick off its project to combat base erosion and profit shifting (BEPS). These mostly legal tax strategies artificially shift profits to low or no-tax locations where little or no economic activity takes place. According to the OECD, BEPS affects developing countries disproportionately and results in lost tax revenues of up to US$240bn each year. The organisation’s BEPS project invites countries to join an inclusive framework that will help them put in place measures to protect their tax base.

Action is taking place at the regional level, too. An amendment to the EU’s Accounting Directive proposed in April 2016 would require multinationals operating in the EU with global revenues over €750m per year to publish “key information” on where they make profits and pay tax in the EU, on a country-by-country basis. The European Commission’s action targets tax avoidance that it says costs EU countries €50bn to €70bn a year.

Individual country initiatives include Australia’s voluntary tax transparency code (TTC), which sets principles and minimum standards for tax disclosure. Under the TTC, released in 2016, companies should improve the way they disclose tax information in annual reports as well as publishing an annual “taxes paid” report. Rio Tinto was the first to meet these new voluntary disclosure guidelines with its Taxes paid in 2015 report, which was published in June 2016.

And in the UK, the draft Finance Bill 2016 requires that large businesses (those that earn over £200m in the UK or £750m globally) publish their tax strategy as it relates to or affects UK taxation. The Bill also includes a “special measures” process for businesses that persistently engage in aggressive tax planning.

US$47.3 bn

paid in taxes and royalties since 2010

(which is equivalent to the 2015 GDP of Lebanon)

It’s a chance to build trust by demonstrating that they are paying their fair share of tax and providing revenue to the countries in which they operate

Ross Lyons, head of Tax, Rio Tinto

The challenges of transparency

As Ross Lyons, Rio Tinto’s head of Tax, emphasises, this recent shift towards greater transparency is a positive development.

“It’s one of the solutions that will ensure multinationals are more compliant,” he said. “This levels the playing field and increases revenues in countries, giving them the flexibility to reduce business tax rates and increase incentives for investment.”

And for companies like Rio Tinto, Ross sees transparency as an opportunity.

“At a time when there are questions over trust in multinationals, it’s a chance to build trust by demonstrating that they are paying their fair share of tax and providing revenue to the countries in which they operate.”

In short, transparency is good for business. But as Ross also points out, the many tax regimes emerging around the world are also creating challenges.

“There are different rules between, for example, Australia, the UK, Canada, plus the EU’s regime and Dodd-Frank in the US. Materiality levels vary widely, in some cases right down to disclosing every single dollar. This lack of uniformity can increase the cost of compliance for companies.”

The EITI’s Jonas Moberg also points out that it’s not enough for corporations alone to be more transparent.

“While companies have made great progress, there’s a long way to go. We also need practical, meaningful transparency in the countries where they operate. Our in-country teams are working with local and national governments, and NGOs to move this forward,” he said.

Leading the way in reporting

From the outset, Rio Tinto’s approach has been about trying to create clarity where it is needed. Laurel Green, chief adviser, External Affairs at Rio Tinto and an EITI board member, notes that the Taxes Paid report was originally a response to misconceptions about the company’s tax payments.

“We realised that more openness would clearly demonstrate that we pay more tax than was perceived,” she said.

This aim of fostering better understanding of the resources sector also drives Rio Tinto’s involvement in the EITI, a global standard to promote the open and accountable management of natural resources.

29.9%

average tax rate on underlying earnings over past five years

The EITI:
promoting transparency

The EITI:
promoting transparency

Rio Tinto has played an active role in the Extractive Industries Transparency Initiative (EITI) since its formation in 2003.

Rio Tinto has played an active role in the Extractive Industries Transparency Initiative (EITI) since its formation in 2003.

This global standard is founded on the core belief that the wealth from natural resources should drive economic growth, contribute to sustainable development and reduce poverty. Involving both countries and corporations, it sets out a framework for governments to disclose how much they receive from extractive companies operating in their country and for companies to disclose how much they pay. An independent party reconciles what each extractive company pays to the government with what the government receives. Today, 51 countries are implementing the EITI and over 90 major extractives companies are committed to supporting it. Around US$1.9 trillion of revenues have been disclosed in EITI reports.

Debates about tax rates and contributions are best served when factual information is provided

Chris Lynch, chief financial officer, Rio Tinto

Trust in transparency is absolutely key

Jonas Moberg, head of Secretariat, EITI

Rio Tinto was the first global mining company to provide comprehensive tax and economic contributions data, with its inaugural 2010 Taxes Paid report. The sixth report, covering the year to 31 December 2015, presents key data on tax payments, gross sales revenues and earnings, showing the contribution that Rio Tinto makes to public finances in the countries where it operates. This most recent report also includes detail on areas including tax planning principles and effective tax rates, as well as commentary on tax havens.

As Rio Tinto’s chief financial officer, Chris Lynch, underlines, the focus is on facts.

“Debates about tax rates and contributions are best served when factual information is provided,” Chris said. “This is what we have set out to do with our annual Taxes paid reports.”

Jonas Moberg emphasises that information must above all be trustworthy.

“When Australia began the EITI process, a heated debate about corporate tax payments quickly became a call for good, authoritative information on which to base conversations,” he said. “Trust in transparency is absolutely key.”

Although reporting on taxes paid involves significant (and increasing) effort and expense, the benefits ultimately outweigh the costs. Transparency has the potential to lead to more development and innovation, creating a virtuous circle that creates value for both multinationals and, more importantly, the companies and communities where they operate.

Award-winning reporting

Award-winning reporting

Rio Tinto’s Taxes Paid report won PwC’s Building Public Trust award for tax reporting in the extractives sector in 2011, 2013 and 2014 and was highly commended in 2015.

Rio Tinto’s Taxes Paid report won PwC’s Building Public Trust award for tax reporting in the extractives sector in 2011, 2013 and 2014 and was highly commended in 2015.

Although reporting on taxes paid involves significant (and increasing) effort and expense, the benefits ultimately outweigh the costs. Transparency has the potential to lead to more development and innovation, creating a virtuous circle that creates value for both multinationals and, more importantly, the companies and communities where they operate.

It is important to our shareholders, employees and many other stakeholders that we create a sustainable net benefit to local economies by providing employment opportunities, procurement, and the transparent payment of tax and dividends

Rio Tinto's Sustainable development report 2015