Technology, Business and Society Programme Paper 16: The “Pay Your Taxes” Debate: Perspectives on Corporate Taxation and Social Responsibility in the Chilean Mining Industry

Corporate citizenship or corporate social responsibility (CSR) if often defined as greater responsiveness on the part of transnational corporations (TNCs) and other companies to social, environmental and human rights concerns in both host and home countries, and as going beyond the minimum standards set out in law. Corporate taxation has received less attention, and this omission is curious not only because of the key role of taxation in social development, but also because responsibilities associated with taxation are central to citizenship. This should, presumably, apply as well to corporate citizenship.

The lack of attention to the question of taxation has played into the hands of critics who dismiss CSR as window-dressing, and point to the double standards that exist when companies promote CSR initiatives and simultaneously engage in legal forms of tax avoidance or illegal tax evasion to minimize their fiscal contributions.

As part of a series of studies on the uptake and impact of CSR in developing countries, UNRISD commissioned Manuel Riesco (Centro de Estudios Nacionales de Desarrollo Alternativo [CENDA]) to examine the fiscal performance of foreign mining companies in Chile. In particular, the Riesco study looks at why the flourishing private mining sector pays so few taxes in Chile, and why the reported pre-tax profits of a large, modern, foreign-owned copper mine are on a par with those of what Riesco describes as “the ageing and ailing state-owned corporation, CODELCO”.

To explain these situations, Riesco identifies an overly permissive neoliberal policy and legal environment; intracorporate financial flows that allow mining affiliates not only to repay loans to related off-shore financial affiliates at generous rates but also to benefit fiscally by being indebted; the sale of copper and by-products at reduced prices to companies that are part of the same corporate structure; and the over-charging of shipping, and treatment and refining charges, by these or other related companies.

The preliminary findings of the Riesco study fuelled a national debate on the question of why foreign mining companies paid no royalties and so few taxes in Chile. One of the companies examined by Riesco, BHP Billiton, sought a third-party opinion and subsequently submitted to UNRISD a paper, by Professors Gustavo Lagos and Marcos Lima (Engineering Faculty, Pontificia Universidad Católica de Chile), which was highly critical of the Riesco paper. In view of the polemic, UNRISD has now published both papers in the form of a debate.

In their paper, Lagos and Lima argue that it is not possible to conclude that the foreign-owned company, Minera Escondida, under-reported its income. Riesco’s calculations, they argue, did not take into account or give sufficient weight to various factors, including variations in the by-product content of the ores produced by CODELCO and Escondida; the volatility in world copper prices and treatment and refining charges; the fact that Escondida sells under long-term as opposed to spot contracts; and a variety of other factors that affect sales prices. They also note a range of regulatory institutions and controls that are in place to detect and prevent the types of anomalies identified by Riesco.

In their respective replies, both sides essentially maintain their positions. Riesco confirms the role of transfer pricing in substantially lowering corporate profits and income declared in Chile, and argues that the nature of the long-term contract that results in lower prices is not so much an explanation as part of the problem of transfer pricing. He also reaffirms the perversity of a situation where a vibrant sector of the economy pays no royalties

To their original position Lagos and Lima add that the comparability of the financial performance of the state-owned and foreign-owned mines also reflects the fact that the state-owned company has become very competitive. Furthermore, they argue, the scenario described by Riesco would suggest the existence of a major international tax fraud conspiracy, which is unrealistic—numerous controls exist to prevent such a situation, they assert, not least regulations on product sales and international trade, sanctions imposed by securities exchanges, the response of shareholders and the threat of lawsuits.

Such differences in opinion clearly indicate the need for additional research. But they also suggest that the criteria that should inform the judgement as to what is acceptable fiscal behaviour are not only technical and legal, but also ethical and political.

Order TBS PP 16 from UNRISD, 63 pages, 2005; US$ 12 for readers in industrialized countries and US$ 6 for readers in developing and transitional countries and for students.