By Julian Dierkes
The Dutch Centre for Research on Multinational Corporations (SOMO) published a report focused on a whole list of issues related to financial and governance structures for the Oyu Tolgoi project. The report was written by SOMO’s Vincent Kiezebrink and Rhodante Ahlers, and Mongolian NGO Oyu Tolgoi Watch’s D Sukhgerel.
The report is nearly 50 pages long and covers many different aspects of financial and governance arrangements around OT.
— SOMO (@SOMO) January 31, 2018
The most significant and novel information centres around the tax arrangements that Rio Tinto has made to move profits from OT production around the globe in order to minimize the taxes that are paid on these profits. In the report, these are chapters 4 and 5. But despite the best efforts of the authors, including some nice representations of ownership structures, these tax structures remain fundamentally obscure even to someone like me who is well-informed about the political context in Mongolia. And, perhaps, this is the biggest conclusion to take away from this investigation into tax structures, namely that they are inscrutable and deliberately so.
I think this report is a pretty significant contribution to discussions of the OT project in Mongolia and my guess is that it will receive significant attention. The report therefore deserves our closer attention for more detailed comments, and I hope that we’ll be able to write more posts to focus on specific aspects of the report.
Below are some of the issues mentioned in or questioned raised by the report that I hope we’ll be able to comment on:
- A lot of the discussion of Oyu Tolgoi, including the SOMO report, gloss over some assumptions that evaluations are based on. It would be better if these were explicit.
- Can we think of the relationship between Rio Tinto and the Government of Mongolia in wrestling terms?
- Expectations of Rio Tinto and of the government of Mongolia are very high when it comes to governance structures and the provision of maximum benefits to Mongolians. That is appropriate, but it is also unrealistic (from both perspectives, the investor’s and the government’s) that perfection will be achieved. After all, we are not all Norwegian.
- None of the tax schemes described in the report appear to be illegal. But isn’t it ironic that the EU initially black-listed Mongolia as a tax heaven, but that in this case Luxemburg appears to be very much in the business of corporate registration for the sole purpose of tax reduction. Hello, EU pot, meet a Mongolian kettle!
- What role do OECD governments play in enabling these kinds of schemes to minimize taxes? Given our location in Canada, what role has EDC financing played, and what about investment in TRQ by public pension funds?
- Some calculations that are made by Rio Tinto (and many other investors) appear fundamentally flawed. The OT project is expected to be productive for many decades. Does it really make sense for Rio Tinto to save x% on taxes by engaging in the schemes described in the report and not really addressed in the Rio Tinto response, when the deliberate obfuscation that is an element in all of these schemes clearly raises political risks associated with OT significantly? Yes, from an investor perspective, there have always been complaints about repeated efforts by individual Mongolian politicians or by governments to re-open discussions about the Investment Agreement, but a lack of transparency breeds mistrust which forces responsible Mongolian politicians into a continued examination of the relationship. Corporations would point to their obligation to maximize shareholder value, but should they not nudge shareholders into understanding long-term benefits vs. short-term tax savings? Should public funds that invest in TRQ and similar projects not be aware of that?