The purpose of this chapter is to give an overview of some of the taxation issues for extractive industries in developing countries and the interactions between them, options available, and the likely effect of choosing such options in particular circumstances. This is intended to assist policy makers and administrators in developing countries as well as to provide information to other stakeholders. Background contained in this chapter will provide a broader context for viewing the overall issue of natural resource development and the specific issues addressed in more detail in additional chapters. The work covered by this and each of the additional specific-issue chapters stems from a mandate given by the United Nations Tax Committee to the Subcommittee on Extractives Industries Taxation Issues for Developing Countries to consider, report on and propose guidance on extractive industries taxation issues for developing countries, focusing on the most pressing issues where guidance from the Committee may most usefully assist developing countries. The work will seek to provide policy and administrative guidance at a very practical level. This chapter is intended to broadly identify issues of taxation of the extractive industries; address several of the most significant ones in short form; help build awareness; and, ultimately, along with the additional specific-issue chapters, assist those faced with these issues to make policy and administrative decisions in relation to them. (…) The United Nations Handbook on Selected Issues for Taxation of the Extractive Industries by Developing Countries (the Handbook) is a response to the need, often expressed by developing countries, for clearer guidance on the policy and administrative aspects of applying taxes to enterprises, including multinational enterprises (MNEs) acting in the extractive industries and other local and international companies’ accessory to the business. Such guidance should not only assist policy makers and administrators in dealing with complex issues such as the quantification of the fiscal take, the costs of decommissioning, and loss of revenues derived from the indirect transfer of assets, but should also assist taxpayers in their dealings with tax administrations. The Handbook highlights some of the issues developing countries should bear in mind when negotiating new contracts for the exploration and exploitation of natural and mineral resources within their territories. The Handbook covers the following topics in chapter order: 1. Overview; 2. Tax treaty issues; 3. Permanent establishment issues; 4. Indirect transfer of assets; 5. Transfer pricing issues; 6. Tax treatment of decommissioning; 7. The government’s fiscal take; 8. Tax aspects of negotiation and renegotiation of contracts; and 9. Value added taxation issues. The objective of the Handbook is to focus on specific areas of interest for developing countries. The Handbook, as a product of the United Nations Committee of Experts on International Cooperation in Tax Matters, has a special role in reflecting the diversity of the United Nations Membership and placing taxation of the extractive industries in its developmental perspective, by exploring the challenges of taxing an industry that is of particular relevance to developing countries, including the least developed, where extensive natural resources are often located. This recognizes both the importance to development of fair and effective tax systems, but also the fact that foreign investment, on appropriate terms, is seen as an important path to development by most countries. Helpful guidance in this complex area must, in particular, be geared to the inevitable limitations in some countries’ administrations, and deficits in information and skills that many countries are affected by in this area. Issues, in particular, of building and retaining capability as well as the need for focus and efficiency in dealing with limited resources, bear strongly on the approach taken in the Handbook. Practical examples relevant to developing countries have been especially relied upon, because the experiences of other developing countries in addressing the extractives sector are an important way of finding effective solutions that work in their context, and of doing so in the most cost and time effective ways. Examples were also drawn from developed countries, such as Norway and the United Kingdom, due to their first-hand experience in defining some of the policy approaches that are still currently applied to tax the extractive industries, and to charge national rent, also known as fiscal take. Whereas other intergovernmental organizations have sought to provide guidance on selected tax issues for the extractive industries, such as transparency and transfer pricing approaches, the Committee of Experts in International Tax Cooperation felt that there is insufficient analysis of the basic features which should be taken into account by any tax administration when deciding to develop policies or taxation strategies for the extractive industries. The Handbook is therefore quite unique in its aim to provide governments with a basic outline of the challenges they will encounter when seeking to compute the administrative, fiscal, environmental and other related costs of exploring natural resources – so that the economic venture does not occur at the expense of the quality of life of the citizens and environment. This Handbook is intended to provide guidance only. It seeks to address relevant issues in the extractive industries in a clear form, to raise awareness of potential challenges and opportunities as well as the pros and cons of possible options for countries and agencies in differing positions, and ultimately to assist in making decisions on policy and administration that are informed and reflect country realities and priorities. To the extent of any inconsistency between this Handbook and the United Nations Model Double Taxation Convention between Developed and Developing Countries, the latter prevails. This Handbook has been the work of many authors, and particular thanks are due to the Members of the Subcommittee on Extractive Industries Taxation – Issues for Developing Countries contributing to this work. Participants included the following Members of the UN Committee of Experts on International Cooperation in Tax Matters: (…) Secretarial support for the Handbook was provided by Michael Lennard, and by Ilka Ritter and Tatiana Falcão. The editorial assistance of Mary Lee Kortes is also acknowledged. The Subcommittee especially expresses its gratitude to the relevant ministries and agencies of the governments of the Slovak Republic, South Africa, Tanzania and Zambia for generously hosting Subcommittee meetings, and also to the European Commission for financially supporting some key meetings. Finally, it should be noted that this Handbook is conceived as a living work that should be regularly revised and improved, including by the addition of new chapters and additional material of special relevance to developing countries. This will only improve its relevance to users and its significance as a work that can be relied upon in the capacity building efforts of the United Nations and others.
