Howard Mann, IGF Secretariat, introduced the one-day BEPS workshop on Friday, October 20, explaining that corporations’ tax avoidance strategies are difficult to address, as they stay within the bounds of technical legality. He noted that BEPS in mining had been identified as the leading issue of concern to IGF government members, and is a particular risk to developing countries that do not have sectoral tax expertise. He described the upcoming two-year IGF-OECD BEPS in Mining Program, which aims to assist governments to develop country capacity for addressing the issue.
Dan Devlin, Senior Tax Adviser, Extractive Industries, OECD, explained that the programme is offering new tools to combat BEPS, and invited participants to provide country-specific views and perspectives.
Janvier Nkurunziza, Special Unit on Commodities, UNCTAD, cautioned that each case is unique. He reported on some common characteristics of BEPS, including capital flight, legal capital outflows, profit-sharing, non-financial outflows in the form of materials such as diamonds, and other illicit outflows, such as undeclared exports. On the latter, he lamented the difficulty of measuring export underinvoicing, mainly due to poor data quality and discrepancies in reported figures. He recommended strengthening monitoring systems and developing strong mechanisms for transparency. He urged partners to carry out due diligence processes and share data with each other so as to increase transparency of market and price information.
Elfrieda Tamba, Commissioner General, Liberia Revenue Authority, gave the keynote address, describing her experience of increasing tax revenue by 500% in her country. She noted that tax avoidance and evasion, exacerbated by low technical capacity within the government, had resulted in relatively low revenue from the minerals resource sector, relative to its potential. She identified the main challenges as: tax base erosion, undervaluation of exports, and mining license transfers. Tamba explained that in Liberia, compliance is improving through efforts to change the taxation culture, for example, through education and stakeholder engagement, and the training of government officials, which, she said, has improved inspection capacity.
Transfer Mispricing in Mining
Alexandra Readhead, IGF, explained that transfer pricing, despite being a legitimate business practice, may be used to unfairly reduce the tax paid by companies, when it gives a distorted appearance of profit or loss by mis-stating the cost of transactions between a parent company and its subsidiaries operating in different countries or tax regimes. To detect if transfer pricing is being abused, she suggested applying the ‘arm’s length principle’ when monitoring transactions between related entities, to ascertain that transactions are benchmarked to the prevailing market rates.
On the principles that underpin analyzing and uncovering transfer mispricing practices, Devlin identified: establishing rules, procedures, and documentation; understanding how the industry works in order to identify unreasonable declarations; and using available information networks to reveal dishonest practices. He acknowledged the challenges of sifting through large amounts of data and the cost of accessing commercial information. He observed that the OECD has made great strides in understanding the mechanisms of transfer pricing and uncovering mispricing. Participants posed questions about the extent to which the approach can apply to trade-related commodities, how different minerals should be addressed, and ways to monitor and control such practices.
Readhead stressed the need for countries to develop adequate legislation and to have correct documentation available to the tax authority on the different industries.
Thulani Shongwe, African Tax Administration Forum (ATAF), addressed transfer pricing audit challenges in Africa, which include exploiting capital allowances and marketing hubs. He highlighted ATAF assistance to countries to address the issue, including through a risk assessment model, improved accessibility to data, training opportunities, and a legislation modernization guide. He explained that legislation revision can benefit governments by placing the burden of proving transaction price on the taxpayer rather than on the revenue administrator
Readhead noted that transfer pricing may take place through transferring mineral commodities or obtaining goods and services through marketing or procurement hubs in another country. She highlighted several criteria to determine whether transfer mispricing is taking place. She noted, for example, that a marketing hub should: provide real expertise to the mining operation, such as knowledge about the characteristics of the commodity and the ability to find customers; have the ability to make decisions; and take on significant risk. In the case of a procurement hub, she suggested that its work should: be critical to the operation of the mine; create value, for example, through sourcing products in bulk; and promote group synergy. She argued that if a hub creates little value for the business, then its remuneration should be correspondingly small.
Devlin presented a toolkit aimed at providing practical guidance to developing countries to better protect their tax bases, which was prepared by the Platform for Collaboration on Tax (PCT), a joint initiative of the International Monetary Fund (IMF), OECD, UN and World Bank Group. He explained that the toolkit addresses transfer pricing and proposes ways in which developing countries can overcome the lack of data needed to implement transfer pricing rules, which has significant impact on the amount of tax an individual government can collect from a multinational enterprise.
Participants posed questions on how to: tax income on foreign transfers; encourage companies to procure locally; and address price fixing practices. Regarding local procurement, panelists suggested using the upcoming IGF document and available databases. Mann reiterated that the IGF-OECD BEPS in Mining Program will help governments reduce the opportunity for legal tax avoidance.
Debt Financing in Mining – Protecting the Mining Tax Base Against Excessive Interest Deductions
Devlin presented on tax base erosion via interest deductions. He said these can be difficult to address, since debt finance is a legitimate part of the financing mix required to fund large investments in mining. He emphasized two considerations for mining firms when deciding how a mining entity will be financed, including: the mix of funding; the timing of when financing will be raised; and how the mining entity will be financially structured in the host country. He suggested a number of tools to address the issue of tax evasion through debt, including through: ‘thin capitalization’ rules that require adequate capital for start-up; imposing maximum allowable interest rates; and creating rules to prevent companies from taking out back-to-back loans.
Participants posed questions on how governments can address tax avoidance that takes place through off-shore sales, indirect sales of mining companies, and debt accrual. Devlin referred to an International Monetary Fund study currently examining many of these issues, and said that the IGF will follow this closely to determine how applicable the findings are to the mining sector.
Mineral Valuation – Combating Mispricing by Strengthening Mineral Testing Facilities
Readhead, IGF, started the afternoon session by underscoring the importance of mineral valuation to avoid product underpricing. She introduced two strategies for governments to conduct mineral valuation: direct measurement of mineral quality; and monitoring company valuation processes. She compared the pros and cons of the two measures, indicating the former is an independent but costly approach, whereas the latter is efficient and less expensive, but prone to risk. She suggested that governments raise financing for mineral valuation through public-private partnerships.
On the challenges governments face when undertaking valuation of mineral exports, Matthieu Delorme, Cotecna Inspection SA, highlighted three distinct processes: quantification, sampling, and testing. He cautioned that mineral sampling and testing pose the greatest challenges to governments, as mineral samples are heterogeneous, and there are opportunities for corruption to occur in the chain of custody between the collection point and the laboratory. He cautioned that unless a country has appropriately qualified staff and the laboratories are adequately equipped and internationally accredited, governments could invest millions of dollars in facilities without achieving results.
Sahr Wonday, Director General, National Minerals Agency, Sierra Leone, stated that exports are evaluated based on quantity, quality and price. He noted that his government is now involved in evaluations of quantity with corporations, but that determining the quality of export minerals is the main challenge, as the country lacks a national laboratory and has to rely on companies’ internal systems.
Alhousseine Kaba, Ministry of Mines and Geology, Guinea, stated that his country is home to two- thirds of the world’s bauxite reserves, and therefore the government needs to have an accurate view of the quantity and quality of exports. He noted that presently, the government relies on companies’ data on quality to determine tax levels. He added that Guinea does not have its own national laboratory facilities to conduct testing, and is commencing government training on quality assessment.
In discussion, participants called for enhancing beneficiation studies to help ASM miners. Addressing a question on whether countries can share their testing facilities with other countries or related experiences with other countries, panelists described a collaboration between Tanzania and its neighbours, where the latter send mineral samples to Tanzania for testing, while constructing their own laboratory facilities.
Tax Incentives for Mining Investment – Minimizing Profit Shifting as a Result of Incentives
Readhead introduced the session on tax incentives for mining investment, which aimed to assist governments in decision making on appropriate offers to companies. She noted that incentives in the mining sector are difficult to administer as they occur at many levels and are not always necessary. In regards to BEPS’ impact on tax incentives, she stated that governments often fail to take corporate behavioural responses into account, including the possibility that companies may abuse the scheme.
Iain Steel, Budget Strengthening Initiative, Liberia, presented on the findings of financial models regarding the implementation of tax incentives to the mining industry, which reduces national fiscal revenue. He provided an example of revenue losses in three incentive scenarios, and called for countries to consider corporate behavioral responses before applying incentives.
Readhead highlighted strategies to limit tax incentives that may promote BEPS. She recommended limiting the most damaging incentives, and avoiding giving tax relief to outbound payments to foreign entities.
In discussion, participants asked about assessing employment benefits adequately, and the potential for renegotiation after a contract has been signed. Readhead noted that contracts have both positive and negative characteristics, and Mann warned against deviating from existing contracts, to avoid jeopardizing the viability of the venture and causing unrest among employees and mining communities.
Investment Treaties and Stabilization Clauses
Mann led the final session of the workshop. He explained that investment treaties are rules on government treatment of foreign investors, while stabilization clauses are provisions in a contract or law that fixes a legal regime to the time an investment was made. Noting that stabilization clauses are enforced as written, he clarified that they are exclusively applied to developing countries, not developed countries, and that they affect how governments address BEPS. He provided alternatives to the use of stabilization clauses, recommending that, if used, they should have a limited scope. Stating that arbitration tribunals determine the applicability of laws on investment treaties, he observed that the burden and risk of inconsistency fall on governments. He underscored that paying taxes is the highest level of action an investor can take on corporate social responsibility.
Addressing a question on the right to regulate clauses, Mann stated that a balanced treaty could provide more social stability, and called for careful drafting of national decisions. Countries shared their experiences of increasing mining royalties and service tax collection, through a revision of long-term stabilization clauses with foreign mining companies, which, in both countries, has led to demonstrations, strikes and social instability.
Concluding the workshop, Readhead commended the collective knowledge in the room and encouraged countries to continue sharing their expertise and concerns. Devlin highlighted the importance of conveying these messages to ministers and policy makers in order to bring about good financial governance in the mining sector, and Mann thanked all who had contributed to the workshop and closed the session.