IGF-OECD BEPS in Mining Program. ISSUE 3: Limiting the BEPS Impact of Tax Incentives

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1 IGF-OECD BEPS in Mining Program ISSUE 3: Limiting the BEPS Impact of Tax Incentives October 20 th 2017 With thanks to Emil Sunley, Saila Stausholm, Jaqueline Terrel, Iain Steel (ODI)

2 Tax Incentives Defined Any special tax provisions granted to qualified investment projects or firms that provide a favourable deviation from the general tax code (Platform on Tax Collaboration). 1. Preferential tax treatment of mining in the general tax code (e.g. Corporate income tax rate is 35% for all taxpayers, but 30% for mining); 2. Specific tax incentives in the mining law; (e.g. 10% import duties in general tax code, reduced to 5% in mining law) 3. Specific tax incentives in mining contracts (project-level) (e.g. CIT is 20% for the first ten years of production)

3 No. Tax Incentives Tax Incentives Are Wide Ranging Chart 1. Types of Tax Incentives in Mining No. countries w/ incentive in >1 contract No. countries w/ incentive in law Accel. Depreciation CIT & RRT CAPEX Relief Loss carry forward Property/ license fee Royalties Customs Duties Tax credits/ allowances Stabilisation WHT Source: IGF research using resourcecontracts.org, and African Mining Legislation Atlas

4 Tax Incentives May Have a BEPS Impact Direct Tax Loss: Loss of tax to which the incentive applies directly, plus losses from flowon effects to other taxes. BEPS Impact = TOTAL Tax Losses Tax Avoidance: Loss of tax due to investors exploiting incentives to maximise tax benefits beyond what was intended by gov t.

5 Example, the BEPS Impact of EPZ Status Country A Parent Country B (host country) Mine CIT 35% 3% royalty on received sale price Tax Abuse: Reduced Royalties and Income Tax Sells mineral product to processing 30% below market price BEPS Impact = TOTAL Tax Losses Export Processing Zone Processing Facility Tax free Direct Tax Loss: All taxes Tax Avoidance: Reduced Royalties and Income Tax

6 Risk of BEPS Depends on Type of Incentive Tax Incentive Potential BEPS Impact Risk* Tax holiday High-grading; abusive TP Economic Processing Zone Differential tax treatment leads to TP HIGH Withholding tax relief Investment tax credit Investment allowance Accelerated depreciation Sliding scale royalty Excessive interest; high management fees Cost increase; base manipulation; double dip As above; but risk is lower as less generous Cost increase; base manipulation Tax planning to avoid higher royalty bracket MEDIUM Import duty relief Non-mining items claimed LOW Fiscal stabilization may freeze all of the above. *Risk is a combination of the likelihood of the indirect tax loss occurring, and the fiscal impact

7 Annual revenue (USD millions) Estimating Costs Baseline Fiscal Regime (no tax incentives) Government Revenue 47% 53% Investor Government Import duty Royalty Income tax WHT on services WHT on interest WHT on dividends

8 Annual revenue (USD millions) Scenario 1: 10 Year Tax Holiday 44% 56% Government Revenue Investor Government Baseline Scenario 1

9 Annual revenue (USD millions) Scenario 2: 10 Year Tax Holiday Plus High-Grading 38% 62% Government Revenue Investor Government Baseline Scenario 2

10 Annual revenue (USD millions) Scenario 3: 10 Year Tax Holiday, High-Grading, and Reduced Royalty Rate 32% 68% Government Revenue Investor Government Baseline Scenario 3

11 Limiting the BEPS Impact of Tax Incentives 1. Tax incentives should directly relate to the amount of investment; 2. Avoid tax incentives that create competing fiscal regimes side-by-side; 3. Limit the most damaging incentives, notably tax holidays; 4. Avoid providing tax relief linked to outbound payments to foreign entities (e.g. withholding tax on management fees); 5. Clearly define the base to which the tax incentive applies; 6. Cost incentives before you give them, in particular, the potential BEPS effect.