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)
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)
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 10 9 8 7 6 5 4 3 2 1 0 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
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.
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 facility @ 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
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
Annual revenue (USD millions) 100 90 Estimating Costs Baseline Fiscal Regime (no tax incentives) Government Revenue 47% 53% Investor Government 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Import duty Royalty Income tax WHT on services WHT on interest WHT on dividends
Annual revenue (USD millions) Scenario 1: 10 Year Tax Holiday 44% 56% 100 90 Government Revenue Investor Government 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Baseline Scenario 1
Annual revenue (USD millions) Scenario 2: 10 Year Tax Holiday Plus High-Grading 38% 62% 100 90 Government Revenue Investor Government 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Baseline Scenario 2
Annual revenue (USD millions) Scenario 3: 10 Year Tax Holiday, High-Grading, and Reduced Royalty Rate 32% 68% Government Revenue Investor Government 100 90 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Baseline Scenario 3
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.