Taxing Oil, Gas and Minerals Across Borders Poses Challenges for Developing Nations
IMF Blog, February 9, 2017
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Bibliographic details
- Authors: Philip Daniel, Michael Keen, Artur Swistak, Victor Thuronyi
- Published: February 9, 2017
Overview
- Authors: Philip Daniel, Michael Keen, Artur Swistak, Victor Thuronyi
- Publication date: February 9, 2017
- Core message: Seventy percent of the world’s poorest people live in countries rich in oil, natural gas or minerals, making effective taxation of extractive industries critical to poverty alleviation and sustained growth. National borders and cross-border arrangements substantially complicate taxation and open possibilities for tax avoidance by multinationals.
Scale and distinctive features of the problem
- Multinationals account for the vast bulk of government revenue from the extractive sector, except where state companies predominate.
- The technical challenges familiar from other multinational activities—central to the G20-OECD BEPS project—arise in the extractive industries but often on a larger scale and with distinctive twists.
- Some extractive-sector specifics that complicate taxation:
- For certain resources (example given: bromine and its compounds) there are no regularly reported market prices.
- High tax rates in the sector create especially strong incentives to manipulate transfer prices.
- Valuations are required not only for taxes on profits but also for royalties (charges on the value of production) common in the sector.
Transfer pricing, the arm’s length principle, and indirect transfers
- The arm’s length principle: transfer prices between related entities should match prices that would be set by unrelated parties.
- Practical issues:
- Active commodity markets (e.g., for oil) can sometimes provide starting points for transfer pricing, but not always.
- Hard-to-price intangibles play a smaller role in extractives than in industries like pharmaceuticals, yet significant transfer-pricing problems persist.
- Indirect transfers of interest:
- Defined as the use of a chain of companies to realize capital gains in a country where they will be lightly taxed rather than where the underlying asset is located.
- Example: a potential gain of $4 billion on a gold transaction in Mauritania wasn’t taxed there, illustrating the magnitude of sums involved.
Cross-border infrastructure and transboundary resource deposits
- Infrastructure that brings resources to market (pipelines, railroads) may span national borders, introducing legal and tax coordination challenges.
- Applying the arm’s length principle to cross-border infrastructure raises a broad range of possible outcomes, which can undermine the principle’s credibility in practice.
- Transboundary resource deposits:
- Pose coordination problems between countries and risks of conflict.
- Solutions discussed include various types of “unitization agreements” when sea boundaries are agreed, and joint development zones when boundaries are not agreed.
The book and its intended audience
- The new book, International Taxation and the Extractive Industries, draws on IMF advice to member countries and addresses the technical challenges described.
- The book explores: transfer pricing issues, indirect transfers, international law aspects of cross-border infrastructure, unitization agreements, joint development zones, and assessment of how international tax arrangements affect investment incentives in extractives.
- Intended readers: government officials, civil society, business, and academia dealing with extractive industry taxation and cross-border issues.
Key findings and examples
- Seventy percent of the world’s poorest people live in countries rich in oil, natural gas or minerals.
- A concrete illustration of tax avoidance scale: a potential gain of $4 billion in Mauritania on a gold transaction went untaxed there.
- Commodity markets can sometimes aid transfer pricing (e.g., oil), but lack of market prices for some resources (e.g., bromine) complicates valuation.
Policy implications and recommendations (implicit from content)
- Strengthen capacity to apply and critically assess the arm’s length principle in the extractive context, given the wide range of possible outcomes.
- Address valuation challenges for resources lacking regularly reported market prices and for royalties as well as profit taxes.
- Develop legal and fiscal frameworks for cross-border infrastructure and transboundary deposits, including negotiation of unitization agreements or joint development zones where appropriate.
- Tackle indirect transfers of interest to prevent realization of capital gains in low-tax jurisdictions when the underlying asset is located in the resource-rich country.
- Consider how international tax arrangements affect investment incentives in extractive industries when designing policy.
IMF Blog: Taxing Oil, Gas and Minerals Across Borders Poses Challenges for Developing Nations — Philip Daniel; Michael Keen; Artur Swistak; Victor Thuronyi; February 9, 2017
