IGF Guidance for Governments:
Government Measures to Reduce and Eliminate
Illicit Flows of Money in Mining
Introduction: Needs and Challenges
For many resource-rich developing countries, mineral resources present an unparalleled economic opportunity to increase government revenue and national economic activity. However, the unfortunate reality is that most developing countries have struggled to maximize the expected revenues from the sector due to a range of challenges both internal and external. The end of the commodity super cycle has placed further financial pressure on many resource-rich countries, making it even more important to ensure that existing mining projects contribute their full share to government budgets.
At the same time, the broader issue of domestic resource mobilization to finance development has taken on a greater focus since 2015. The Sustainable Development Goals (SDG) have set out the new sustainable development agenda for the next 15 years. Subsequent analysis has developed the linkages between this agenda and the mining sector in some detail. Of particular relevance for this program is SDG 17, which includes the objective of supporting developing countries to increase domestic revenue mobilization through taxation and management of revenue from natural resources. Domestic revenue mobilization is central to countries achieving full implementation of all SDGs. However, this ambitious agenda is under threat because of various combinations of aggressive tax planning, tax evasion, weaknesses in tax regimes, use of certain tax incentives and other related issues. This program will help developing countries overcome challenges to domestic revenue mobilization to achieve the SDGs.
In 2016, IGF member country governments identified tax base erosion and profit shifting (BEPS) as their collective primary concern. This is indicative of the risk that BEPS poses to mining revenues. In addition, many tax authorities of resource-rich developing countries lack the sector-specific knowledge and technical expertise, as well as appropriate tax law, to respond to BEPS affecting mining revenue collection. This program will identify the reforms and mechanisms necessary to counter BEPS in the mining sector.
How will we meet this challenge?
In 2015, the G20/OECD delivered the BEPS project, which has sought to address significant gaps in existing national and international tax rules to tackle tax avoidance and aggressive tax planning by multinational corporations. The BEPS Actions will provide a major underpinning for the IGF program. Other areas, such as the use of aggressive tax incentives and the role of tax treaties in the mining sector, will be the subject of additional studies to identify options for tax policy design to reduce BEPS.
The program aims to provide developing country tax authorities and mining regulatory agencies with practical guidance and tools to address a range of BEPS issues affecting mining revenue collection. These materials will cover the following issues:
- Excessive interest deductions (including thin capitalization);
- Transfer pricing (i.e. under-invoicing of mineral sales to related parties, and over-invoicing of goods, services, and assets received);
- Mining tax incentives;
- Tax implications of mining contract stability clauses;
- Mineral valuation
- Tax treaty strategy and mining tax policy;
- Indirect transfer of assets;
- Financial arrangements (including metals streaming); and
- Hedging arrangements.
For each of these issues, we will provide analysis that is specific to the mining context, propose specific legal language, identify required administrative processes, and indicate the capacity and information requirements to enable implementation.
How will we do this?
By producing practical guidance and tools to counter base erosion and profit shifting in the mining sector in developing countries, we will accomplish the following tasks:
- Building on actions such as the OECD/G20-led Actions on BEPS, we will adapt existing guidance on international tax issues to be mining sector specific. We will take tax issues experienced by a range of sectors in the economy, for example double taxation treaties, and develop a framework by which governments of resource rich-countries can analyse the impact of tax treaty provisions on taxes imposed on the mining sector, as well as possible strategies to protect the mining tax base against specific treaty risks.
- Filling vital gaps in the available resources, we will develop new practical guidance and tools that specify the precise legal, administrative, organizational, and technical means required for tax authorities and mining regulatory agencies to address the tax issue. For example, we will look at “metals streaming”, a financing arrangement that may reduce the tax base of resource-producing countries, for which there is virtually no guidance.
- Keeping administrative capacity front of mind, we will deliver practical tools capable of being implemented by developing country tax authorities. Mining tax law is only as effective as the administrative capacity of the tax authority responsible for enforcing it. Developing country tax authorities face a range of challenges which impede tax administration, including limited resources, technical expertise, and access to tax information. All products will be designed to address these specific challenges.
- Creating a ‘one-stop shop’ website for developing country tax authorities seeking support on tackling BEPS issues in the mining sector. The website will be an up-to-date centre of expertise on international tax policy design and administration in mining, and a home to the guidance and tools that will be developed over the next two years. Presenting the results of the program on a website, side-by-side, will offer users a holistic view of how different mining tax issues interact, and the potential policy trade-offs.
IGF will deliver the program in collaboration with the OECD Centre for Tax Policy and Administration. The African Mineral Development Centre (AMDC) is also a committed partner to the IGF program, helping to ensure strong participation from African governments. IGF plans to seek out partnerships with various regional tax bodies, for example, African Tax Administration Forum (ATAF), and the Inter- American Center of Tax Administrations (CIAT).
To ensure that the IGF program is informed by, and responsive to, the needs of developing countries, a technical working group will be established, with representatives drawn from tax authorities, and mining regulatory agencies. There may also be scope to involve academics, international agencies, non-governmental agencies, and industry. Technical working group meetings have been built into the schedule: at the IGF’s Annual General Meeting, the OECD’s twice yearly Natural Resources Policy Dialogue, and dedicated events in Africa (location to be determined). The website for the program will be used to stimulate other public input opportunities. Stakeholder engagement is a critical to ensuring a responsive, comprehensive, and sustainable end-product.
IGF considers the next two years as the first stage of a longer-term intervention on BEPS in the mining sector. The first stage is primarily focused on designing the necessary tools and guidance, although, there will be some capacity building of government officials at IGF Annual General Meetings. The second stage will focus on supporting governments to implement the guidance, and will be designed later in 2018.
Initial funding for this project has been provided by Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ). However, additional funding is still required.