On 19 October 2018 the OECD announced that a first set of practice notes for developing countries on BEPS risks in the mining sector have been finalized.
The practice notes have been developed by the OECD’s Centre for Tax Policy and Administration and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF). These two international bodies are collaborating to look at some of the tax challenges encountered by developing countries when raising tax revenue from the mining sector. In the course of this collaboration a series of practice notes and tools will be put together for the governments of developing countries.
The mining sector offers an economic opportunity for resource-rich developing countries to increase tax revenue. The tax base is however threatened by base erosion and profit shifting (BEPS). Owing to lack of resources the tax administrations in developing countries often struggle to develop the capabilities required to combat BEPS and increase the amount of tax revenue collected from the mining sector.
The three practice notes now finalised relate to limiting the impact of excessive interest deductions on mining revenue; minimising risks to revenue from tax incentives in mining; and policy options for governments in monitoring the value of mineral exports. In addition to publishing the practice notes the OECD and IGF have also published public comments received on these issues.
Limiting the Impact of Excessive Interest Deductions on Mining Revenue
The guidance in the practice note builds on the recommendations in the report on action 4 of the BEPS project which looked at limiting base erosion involving interest deductions and other financial payments. In the practice note government policy-makers are given advice on how to strengthen their tax systems to guard against excessive interest deductions by companies operating in the mining sector.
Tax Incentives in Mining: Minimising Risks to Revenue
When tax incentives are offered to companies in a sector this involves a cost to the government from the loss of tax revenue. It is therefore important to ensure that the incentives are targeted well enough to produce the required benefits for the country. Tax incentives can pose risks of base erosion as companies try to make the best possible use of the incentives and this can lead to behaviour not intended by the legislation. Wider work on the issue of tax incentives has already been done by the Platform for Collaboration on Tax and this practice note looks specifically at incentives in the mining sector and the risks posed.
The practice note looks at measuring the efficiency and effectiveness of tax incentives. Governments must realise that for investors a consistent and predictable fiscal regime is the most important tax consideration and incentives are not the most important determining factor in investment decisions. Any incentives offered must be efficient and targeted. Some indicators of the efficiency of a tax incentive are that the investment would not have happened without it (i.e. it is not redundant); that revenue losses and social costs are low; and that the cost of administering the incentive are also low. To avoid redundancy of the incentive it must be targeted to marginal investors who would not otherwise have invested.
Monitoring the Value of Mineral Exports: Policy Options for Governments
To ensure that minerals are priced appropriately governments need high-quality, accurate testing facilities and controls. The guidance in the practice note gives advice on choosing the appropriate policy option for monitoring the value of mineral exports. This requires taking into account the type of mineral, the risk of undervaluation, existing government capacities, and the available budget.
