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Taxation of the Extractive Industries by Developing Countries

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Taxation of the Extractive Industries by Developing Countries Taxation of the Extractive Industries of the Extractive Taxation United Nations Handbook on Selected Issues for United Nations Handbook on Selected Issues for Taxation of the Extractive Industries by Developing Countries by Developing Countries United Nations Handbook on Selected Issues for Taxation of the Extractive Industries by Developing Countries asdf United Nations New York, 2017 Foreword 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 apply- ing 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 decom- missioning, 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 coun- tries should bear in mind when negotiating new contracts for the explo- ration 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. The tax treatment of decommissioning; 7. The government’s fiscal take; 8. Tax aspects of negotiation and renegotiation of con- tracts; and 9. Value added tax. 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 (United Nations Tax Committee), 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 iii Handbook on Taxation of the Extractive Industries 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’ administra- tions, and deficits in information and skills that many countries are affected by in this area. Issues, in particular, of building and retain- ing 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 devel- oping countries in addressing the extractives sector are an impor- tant 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 indus- tries, such as transparency and transfer pricing approaches, the United Nations Tax Committee felt that there is insufficient analysis of the basic features which should be taken into account by any tax adminis- tration 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 differ- ing positions, and ultimately to assist in making decisions on policy iv Foreword 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 particu- lar thanks are due to the Members of the Subcommittee on Extractive Industries Taxation—Issues for Developing Countries contribut- ing to this work. Participants included the following Members of the United Nations Tax Committee: Mr. Eric Mensah (Coordinator); Mr. Mohammed Baina (Morocco); Mr. Johan Cornelius de la Rey (South Africa); Mr. El Hadji Ibrahima Diop (Senegal); Ms. Liselott Kana (Chile); Mr. Enrico Martino (Italy); Mr. Ignatius Kawaza Mvula (Zambia); Ms. Carmel Peters (New Zealand); Ms. Pragya S. Saksena (India); Mr. Stig B. Sollund (Norway); Ms. Ingela Willfors (Sweden); and Mr. Ulvi Yusifov (Azerbaijan). Other participants were: Mr. Charles Bajungu (Tanzania Revenue Authority); Mr. Tomas Balco (Ministry of Finance of Slovakia); Mr. Rodolfo Bejarano (Red Latinoamericana sobre Deuda, Desarrollo y Derechos—Latindadd); Ms. Susana Bokobo (Repsol); Mr. Jorge Cabral (Receita Federal, Brazil); Mr. Hafiz Choudhury (M Group); Mr. Michael Durst (Attorney); Mr. Jan de Goede (International Bureau of Fiscal Documentation—IBFD); Mr. Alvaro de Juan Ledesma (Repsol); Mr. Olav Fjellså (Aker BP, Norway); Mr. Kwesi K. Obeng (Tax Justice Network Africa); Mr. Michael Kobetsky (University of Melbourne); Mr. Tomas Lassourd (Resource Governance Institute); Mr. Cephas Makunike (Tax Justice Network Africa); Ms. Nara Monkam (African Tax Administration Forum—ATAF); Ms. Nana Okoh (Gold Fields Ghana Ltd); Mr. Moises Orozco (Servicio de Administración Tributaria—SAT, Mexico); Mr. Miguel Pecho (Inter-American Centre on Tax Administrations—CIAT); Mr. Richard Stern (World Bank Group); Mr. Chris Sanger (Ernest & Young—EY); Mr. Karl Schmalz (United States Council for International Business); Mr. Brian Twomey (Reverse Engineering Services Ltd); Ms. An Theeuwes (Shell); Mr. Marius van Oordt (African Tax Institute); and Mr. Christophe Waerzeggers (International Monetary Fund—IMF). Chapter 5 of the Handbook, on transfer pricing, was prepared with extensive assistance of Mr. Joe Andrus, Ms. Melinda Brown (OECD), Ms. Monique van Herksen (Simmons & Simmons), Mr. Toshio Miyatake (Adachi, Henderson, Miyatake & Fujita), and Ms. Jolanda Schenk (Shell), all members of the v Handbook on Taxation of the Extractive Industries Subcommittee on Transfer Pricing. While consensus has been sought as far as possible, the views expressed in the Handbook may not reflect the understanding of all Subcommittee members. Secretarial support for the Handbook was provided by Mr. Michael Lennard, Ms. Ilka Ritter, Ms. Tatiana Falcão and Ms. Elena Belletti. We also wish to acknowledge the assistance of Ms. Mary Lee Kortes and Ms. Leah McDavid in compiling and editing this publication, as well as the assistance of Ms. Nathalia Oliveira, Ms. Suzana Hoefle, Ms. Janaina Muller and Mr. Ahtesham R. Khan. The Subcommittee especially expresses its gratitude to the relevant ministries and agen- cies of the governments of Slovakia, South Africa, United Republic of 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, includ- ing 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. vi Abbreviations used APA advance pricing agreement (or arrangement) ATAF African Tax Administration Forum BEPS the OECD/G20 Base Erosion and Profit Shifting Project CCA cost contribution arrangement CCSI Columbia Center on Sustainable Investment CFC controlled foreign corporation CGT capital gains tax CIAT Inter-American Centre of Tax Administrations CIF cost, insurance and freight CIT corporate income tax COP completion of production CUP comparable uncontrolled price DESA United Nations Department of Economic and Social Affairs DTA double tax agreement DTT double tax treaty E&P exploration and production EI extractive industries EIA environmental impact assessment EITI Extractive Industries Transparency Initiative EOI exchange of information ESHS environment, sustainability, health and security ESTM Extractives Sector Transparency Measurement Act (Canada) FARI Fiscal Analysis of Resource Industries FOB free on board G&G geological and geophysical G20 Group of
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