Mining

Corporate Tax Avoidance 2013-05-27 14:38

Zambia and Mongolia have announced that they want to prevent mining companies from shifting profits out of their countries before being taxed. As major producers of minerals, both countries lose billions of dollars each year in much-need tax revenue. The Organization for Economic Co-operation and Development (OECD) has warned that this trend could be dangerous. Unilateral action from individual nations has the potential to create a set of rules lacking in clear standards. Mr. Z. Enkhbold, speaker of the Mongolian Parliament, said that Mongolia is cancelling international tax treaties that are used by mining companies to take their profits without taxation. Mr. Enkhbold said, “Tax must be paid where the real business is located, not in offshore countries.”

Real Impact

Zambia’s new law, enforced this month, requires mining companies to bring the proceeds of export sales back to Zambia. The country’s tax authorities will then inspect dividends and payments to see if they are justified before they leave the country. Zambia’s Vice-President, Guy Scott, announced that the government is losing $2 billion each year due to corporate tax avoidance. This is more than what the country spends on health and education combined every year. This new law is designed to increase the transparency of mine companies’ finances, an important step.

‘Unimaginable’ Losses

Mongolian officials are acting in an attempt to stem large future tax losses in the rapidly growing mining sector. Mr. B. Batjargal, former director of Mongolia’s Ministry of Finance, stated that Mongolia may lose around $5.5 billion in tax revenue over the lifetime of the giant Oyu Tolgoi copper mine. Potential tax losses to Mongolia are unimaginable due to future mining projects. The greatest threat comes from Mongolia’s bilateral double taxation treaty with the Netherlands, which was signed by both countries back in 2002. This treaty allows Dutch companies that invest in Mongolia the entitlement to pay back dividends to the Netherlands free of Mongolian taxation. Although Turquoise Hill Resources, the company that developed Oyu Tolgoi, is Canadian, its investment is routed through a Dutch company. As a result, Turquoise Hills can receive dividends free of Mongolian tax.

Treaty Cancelled

According to Mr. Batjargal, Turquoise Hills is not the only company using the Dutch tax treaty route. Over 70% of all major foreign direct investments are coming through the Netherlands as a tax shield. Due to this, Mongolia is cancelling its treaty with the Netherlands, in addition to terminating three other treaties, which have similar standards, with Luxembourg, Kuwait, and the UAE. The tax position of the Oyu Tolgoi project will be unclear after January 1, 2014, the cancellation date of the Dutch treaty. Since Rio Tinto has a degree of control in Turquoise Hills, Rio Tinto will have to figure out alternative ways to get future dividends from the Oyu Tolgoi mine out of Mongolia.

‘Dangerous’

These actions taken by Mongolia and Zambia are creating concern beyond their borders. An action plan is being prepared by the OECD in an attempt to tackle corporate tax avoidance. Pascal Saint-Amans, who oversees tax treaties and international tax negotiations for the OECD, regards unilateral actions such as the Mongolian treaty cancellations as “dangerous.” This is a reason why leaders in the G8 and G20 need to come up with an agreement that would effectively deal with corporate tax avoidance when they meet this summer. According to Mr. Saint-Amans, without an agreement, there is a risk that “we will end up with double taxation, triple taxation, which is also detrimental to investment and growth and employment.” Mr. Z. Enkhbold said, “We need to close this loophole in the world economy.”

 

Source: http://www.bbc.co.uk/news/business-22638153
 

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