On 15 October 2024 the UN Tax Committee discussed developments in their work on extractive industries taxation. The work of the relevant subcommittee has focused on the energy transition; the valuation of mining products for tax purposes; and tax incentives and the global minimum tax in the extractive industries.

Mineral Product Valuation

A report on mineral product valuation presented to the Tax Committee for a first reading was prepared after consultation with tax administrators from mineral-rich countries and other experts on the issues. The report outlines the significance of accurate product valuation in preventing profit shifting in the extractives sector. It looks at the available assessment techniques for tax administrations and explains the practical challenges.

The report notes that there are two primary means for the tax administration to look at the possibility of undervaluation of the extracted product. The administration could attempt a direct valuation of the products transferred to a marketing hub in related-party sales; or it could examine whether the marketing hub retains profits that exceed the level of profit appropriate to the hub’s functions, assets and risks.

Other ways of dealing with difficulties in valuation include administrative pricing, an example of which is the method used by Norway in valuing North Sea oil production. The government determines daily prices for oil production, based on global levels with suitable adjustments. Taxpayers may appeal the government’s valuation, but appeals are rare. Another approach is for governments to use advance pricing agreements which would apply pricing methods agreed by the government and taxpayer in advance of the transactions.

The valuation process could be improved by giving greater weight in the fiscal mix to royalties based on gross product value. The revenue yield from these royalties is less vulnerable to undervaluation of the product than is the case with revenue from taxes based on income. The tax administration should also ensure that its information gathering powers are strong enough to obtain relevant information for valuation purposes.

Energy Transition

The paper on the energy transition, presented to the Tax Committee for a second reading, examines the interaction of tax policy and the energy transition, focusing on energy production. The paper outlines various approaches to the energy transition, highlighting the differences between developed and developing countries in investment and energy production. The paper proposes tax policies to increase clean energy investment in developing countries and emphasises the important role of tax administrations at national and subnational levels. There is also practical guidance to assist tax authorities in managing the challenges which sets out practical examples to illustrate potential outcomes from the approaches taken.

Tax Incentives

The paper on tax incentives presented for first reading would be inserted as an annex to Chapter 5 (Incentives) of the UN Handbook on Selected Issues for Taxation of the Extractive Industries by Developing Countries. The paper looks at the interaction between the global minimum tax rules and incentives in the extractive industries, examining how incentives can remain effective without causing unintended consequences.

Extractive industry companies often have high sunk costs in the form of substantial capital expenditure at the start of a project. If an extractives project is unsuccessful, it may not be possible to recover the costs. The significant investment made by extractives companies in exploration and development may often be sourced from the private sector. There are long lead times until profits are earned and a long project life means economic and regulatory risk.

Owing to these features of the extractive sector the income is often subject to different tax treatment. A special regime or incentives may be available to the extractive companies to promote investment, reducing the high costs and project-related risks. The tax incentives that are used most frequently in the extractive sector include longer loss carry forward rules; accelerated depreciation rules; preferential treatment of long-term capital gains; incentives that encourage local procurement; and in some cases, tax holidays or reduced corporate income tax rates.

The Pillar 2 GloBE rules may impact profit-based tax incentives that effectively lower a company’s effective tax rate (ETR). Countries may consider changing their local tax laws to ensure that additional tax payable through Pillar Two is collected locally. Incentives that would otherwise lead to top-up tax may need to be adapted; or a domestic minimum tax could be needed. Otherwise, countries extending ETR-reducing tax incentives to extractive companies may be giving up tax revenue without any benefit to the jurisdiction or the extractive companies, because top-up tax would be paid through the income inclusion rule (IIR) or undertaxed payments rule (UTPR) to the residence jurisdictions of the multinational extractive companies.