IGF-OECD PROGRAM TO ADDRESS BEPS IN MINING. LIMITING THE IMPACT OF EXCESSIVE INTEREST DEDUCTIONS ON MINING REVENUE. Globally, there is a major change underway to combat tax base erosion under the base erosion and profit shifting (BEPS) process. Raising tax revenue is especially important for developing countries. Strong tax systems are central to financing development, and there is increased recognition of the importance of external support in building those systems. While real progress has been made on increasing tax revenues in low-income countries over the past two decades, in many countries revenue remains well below the levels needed to achieve the Sustainable Development Goals and secure robust and stable growth. Like other sectors of the economy, there are tax base erosion risks in the mining sector that can hinder domestic resource mobilisation (DRM), particularly from the operations of multinational enterprises (MNEs). About this practice note Tax systems that provide income tax deductions for interest without making any similar provision for equity create an incentive for the use of debt. While this is true of all industries, this note examines the particular base erosion risks from the use of debt by mining MNEs. This note responds to a concern of many developing countries that MNEs use debt “excessively” in mineral-producing countries (called “host countries” in this note for brevity) as a mechanism to shift profits abroad. This issue was one of the focus areas of the BEPS process. It was also identified as being of high priority for developing countries at an informal workshop on DRM from mining, hosted by the OECD in October 2016. Who is this practice note for? This note is for policy-makers and tax authorities in capacity-constrained developing countries where mining is occurring. Its aim is to assist countries with very limited resources to combat tax BEPS. It prioritises simplicity and ease of administration as policy objectives. It provides references to deeper analysis available to assist developing countries to navigate particular issues on interest deductibility wherever possible. For economic ministers and policy advisers, there is also a wider policy question of how countries strike a balance between tax base protection and encouraging inward investment. The decisions made on policies to limit base erosion have direct implications for the overall investment environment, and these policy issues are highlighted wherever possible. (…)
