Guidance for Governments on
to Reduce and Eliminate
Illicit Flows of Money in Mining
Background and Objective
During the Executive Committee meeting in January 2016, participants agreed in principle to the development of a second guidance document to follow the ASM Guidance Document. The agreed subject was to identify guidance to governments to help reduce and eliminate illicit flows of money out of resource rich countries, in particular out of resource rich developing countries.
Illicit flows of money are said to deprive African governments of $80-100 billion a year. It is expected that similar phenomenon occur in other regions. The OECD suggests that global tax revenues are 4-10% less than they should be due to high levels of aggressive tax planning by multinational firms, with proportionally greater impacts of this on developing countries. As a result, developed countries are also now looking at how to address the loss of tax revenues from illicit money flows. Indeed, the OECD, in conjunction with the G20, concluded a series of linked studies in 2015 on how to reduce and eliminate tax practices that fall under the rubric of Base Erosion and Profit Shifting (BEPS), a more technical approach to what African governments have labelled illicit flows. The increasing global mobility of money make this a critical global financial issue today.
The objective of the guidance document will be to assist governments by identifying concrete and practicable steps that can be taken to address the recommendations in the OECD/G20 report on BEPS, specifically in the mining sector. By addressing this one sector, it is expected that early implementation of good practices can begin in a 2-3 year time frame, thus preventing ongoing losses to governments due to BEPS-linked cash flows in the sector. The importance of the sector for resource-rich developing countries has made this a major priority for many IGF members.
The Executive Committee requested the Secretariat to develop a short note on how the IGF can approach the preparation of this guidance document. The present note provides a first attempt to itemize such a process. At the same time, the Secretariat recognizes that the process will have to have some flexibility to be able to adapt as expert advice develops. Thus, the Secretariat would include regular updates to the Executive Committee as part of this process.
The proposed process for Phase 1 of the Guidance Document process consists of three steps, designed to lead to a report to the IGF members at AGM 2016. These steps are:
1. Identification of supporting experts
The Secretariat will identify key partners in the public and private sector. In particular, we will approach the OECD to help identify the right people to provide tax-related professional guidance. Outside expertise on mining and BEPS will also be sought. Expertise in developing country tax management capacities will also be relied upon to inform the process and ensure practical, achievable results.
2. Identification of the scope of issues
The OECD/G20 BEPS reports identify a range of 15 Actions (see attached Table 1) for states to take, the final one of which is the use of a multilateral treaty approach to amending bilateral tax treaties. Thus, 14 of the Actions identified are at the national level. In addition, these actions must take into account obligations under international tax and investment agreements.
Stage one of the project will be to prioritize these to a manageable number that are specific to the mining sector. The goal here is to have a project that is discreet enough to be manageable, but broad enough to produce effective results that do not produce their own “leakage”. If prioritization does not reduce the number of action items relevant to the sector, then the focus will shift to identifying those actions that are:
- Low hanging fruit from a developing country perspective;
- Likely to have the largest impact on government revenues;
- And most likely to be able to create longer-term benefits from priority action.
In addition, this element will allow for the review in detail of the OECD recommendations in terms of whether some adjustments may be needed to be effective in the mining sector in developing countries.
3. Plain language communications
The OECD reports and other related material can be highly technical and difficult to understand from the policy and government capacity perspectives. As a result, the Secretariat will work with the range of experts to ensure a plain language report is issued to clarify the technical issues for non-experts and assist governments in identifying necessary long-term capacity building needs as well as the measures to be recommended.
These steps would then allow the report to the 2016 AGM to include a set of recommendations on how to proceed for Phase 2, which would run from AGM 2016-AGM 2017. Given the breadth of issues in the OECD’s BEPS reports, it would be premature to forecast the likely recommendations to result from Phase 1.
List of OECD BEPS Actions
- Action 1 Addressing the Tax Challenges of the Digital Economy
- Action 2 Neutralising the Effects of Hybrid Mismatch Arrangements
- Action 3 Designing Effective Controlled Foreign Company Rules
- Action 4 Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
- Action 5 Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
- Action 6 Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
- Action 7 Preventing the Artificial Avoidance of Permanent Establishment Status
- Actions 8-10 Aligning Transfer Pricing Outcomes with Value Creation
- Action 11 Measuring and Monitoring BEPS
- Action 12 Mandatory Disclosure Rules
- Action 13 Transfer Pricing Documentation and Country-by-Country Reporting
- Action 14 Making Dispute Resolution Mechanisms More Effective
- Action 15 Developing a Multilateral Instrument to Modify Bilateral Tax Treaties