This practice note has been prepared under a programme of cooperation between the Organisation for Economic Co-operation and Development (OECD) Centre for Tax Policy and Administration Secretariat and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), as part of a wider effort to address some of the challenges developing countries are facing in raising revenue from their mining sectors. It complements action by the Platform for Collaboration on Tax and others to produce toolkits on top priority tax issues facing developing countries. It reflects a broad consensus between the OECD and IGF, but should not be regarded as the officially endorsed view of either organization or of their member countries. The lead organisation for this practice note was the OECD. It is currently a consultation draft. 1.1. Domestic resource mobilisation in developing countries 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 policymakers and tax authorities in capacity-constrained developing countries where mining is occurring. 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. How is it structured? There are several issues around the use of interest deductions in developing countries that host country tax authorities are grappling with. In particular: · how do MNEs legitimately use debt finance within a corporate group (what is “reasonable” and necessary for mining to occur?); and · how can countries protect themselves against base erosion that has little or no commercial justification? This practice note is structured to examine these issues, in four main sections: · Background on the financing needs of mining companies and how debt finance is used (Section 2). · The base erosion behaviours and structures that developing countries have identified as being of concern (Section 3). · How BEPS Action 4 operates to limit interest deductions, and other policy tools available, focusing on the mining sector (Section 4). · Conclusions on best practices in limiting tax base erosion for developing countries (Section 5).
