Over the last six years, the Peruvian economy has experienced a sustained period of economic growth, driven by investment in the extractives sector, mainly mining, followed by agro-exports, textiles and services such as tourism and construction. Although, as mentioned in this month’s editorial, this growing economic dynamism has been accompanied by a threats of greater inflation caused primarily by the hike in oil prices and foodstuff on the international market.

The dynamism of extractives industries over the last four years has been marked by the extraordinary increase in the price of minerals such as gold and copper. The result of which is that mining and hydrocarbons currently make up 70% of exports (compared with 41% in 2001) and 30% of domestic taxes (this was 7% in 2001). This contribution to fiscal income has resulted in the growing transfer of resources to sub-national governments which – according to the Canon law (1) – have the right to a share in this income. The annual total of the aforementioned transfers is around US$2,300 million (?1,276 million) a year.

However, over the last few years socio-environmental conflicts between extractives companies and local communities have spread throughout several regions in Peru, due to perception by these communities that their economic and social rights are being violated. Additionally, they face a State that has little capacity and political will to uphold the quite permissive socio-environmental regulations. Consequently, communities are protesting because the canon resources don’t directly benefit them; and in turn the local and regional authorities have demanded that companies comply with the universal payment of royalties and have even suggested imposing a tax on the windfall profits that these companies make due to the high international minerals prices.

In this context of economic dynamism and social unrest, the subject of income transparency generated by the extractives industries – as well as their use by municipal and regional governments – gains great importance for the industry’s sustainability. Communities and regional social leaders feel that they have the right to access timely, complete and trustworthy information on the contributions made by companies that are exploiting non-renewable natural resources.

For this reason, the Citizen’s Proposal Group (GPC – Grupo Propuesta Ciudadana) welcomed the Peruvian government’s decision in 2004 to join the Extractive Industries Transparency Initiative (EITI), because we trusted that it could contribute to improving the transparency of payments made by companies and the income recorded by the State. This information is of great relevance because according to what is set out in the Canon Law it represents income for the producer regions. Also, in 2004 the country learned of cases whereby some companies paid less than they should have in taxes, or indeed paid no taxes at all, and improperly used their legal and administrative stability contracts (designed to promote foreign private investment for a fixed ten-year period. In these agreements, the Government guarantees certain privileges such as tax and exchange rates at the time when the agreement is signed). The worst hit by such practices are the regions of Ancash and Arequipa, as they stopped receiving tens of millions of dollars from the mining canon (2).

One criteria of the EITI is the: “Regular publication of all material oil, gas and mining payments by companies to governments and all material revenues received by governments from oil, gas and mining companies to a wide audience in a publicly accessible, comprehensive and comprehensible manner”. It then adds that: “Payments and revenues are reconciled by a credible, independent administrator, applying international auditing standards and with publication of the administrator’s opinion regarding that reconciliation including discrepancies, should any be identified” (EITI Conference, London, March 2005).

Currently in Peru, the National Superintendency of Tax Administration (SUNAT) publishes information on the overall total income tax that companies in the mining and hydrocarbon sectors pay. In addition, the State provides information on transfers to the regions according to: mining canon, oil canon (royalty) and sobrecanon (royalty surtax), mining royalties and validity rights. But that information is of no use to compare the mining canon and gas canon transfers that Peru’s Ministry of Economy and Finance makes as these are calculated on “declared income tax” and not on the “tax paid” which is what SUNAT publishes.

As a candidate country to the EITI, Peru’s multi-stakeholder working group was officially established in May 2006, with representatives from industry, the State and civil society (represented by GPC). It has an approved action plan with resources – channelled through the World Bank – for it to move forward. Nevertheless, the required national study has not yet begun because, up until May 2008, representatives of the working group had not reached agreement on important aspects of the study’s content. GPC’s approach – in the role of the civil society representative – stressed that the study should contain information on: a) the fixed tax declared by each participating company; b) a description of the process determining the calculation of the rate of tax to be paid by the participating company, taking into account existing regulations and applying international standards.

The industry representatives suggested that the study should be limited to the revision of the amount of tax declared by participating companies and be published in aggregate form only. GPC believes that this approach is not in accordance with the spirit of the EITI. If the idea of the EITI is that the companies in favour of transparency make public the total tax they pay the State – as in fact already happens with some mining companies – we don’t see the use of a study which doesn’t list, company by company, the declared tax and the basis on how this is calculated.

Following much discussion all parties finally reached an agreement which we hope will enable us to implement the initiative. This includes incorporating two categories for company participation: category A for companies who wish to accept the publication of its individual figures; and category B for those who want to take part but only accept the publication of aggregate figures. The implementation of this initiative will depend on whether the companies in category A represent a significant percentage of mining and hydrocarbon production. In this context it is important to report that the mining company Antamina took the decision to publish data on the tax and non-tax payments that it makes to the State on its website, which we welcome as it opens the way to increase the kind of transparency that we hope will gain more followers.

(1) Legislation detailing transfers from State to local and regional governments of a percentage of tax revenue generated by the extractives sector.

(2) Transfer from State to local and regional governments of a percentage of tax revenue generated by the mining sector.

What is the EITI?
The Extractive Industries Transparency Initiative was announced at the World Summit on Sustainable Development in Johannesburg, September 2002 by former UK Prime Minister Tony Blair. The idea was to combat the ‘resource curse’ that many developing countries suffer from. The theory behind the voluntary initiative was to set a global standard for companies to publish what they pay and for governments to disclose what they receive for the extraction of oil, gas and metals. All this data would be subsequently checked by an independent auditor in accordance with international standards and then published in a publicly accessible and comprehensible report.

The Multi-Donor Trust Fund for the EITI was established in August 2004 through an agreement between the United Kingdom’s Department for International Development (DFID) and the World Bank. Germany, the Netherlands and Norway joined in 2005. France joined in 2006 and Australia, Belgium, Canada and Spain joined in 2007. The US and the European Commission joined in 2008.