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International taxation and the extractive industries


International Taxation and the
Extractive Industries

The taxation of extractive industries exploiting oil, gas or minerals is usually
treated as a sovereign, national policy and administration issue. This book offers
a uniquely comprehensive overview of the theory and practice involved in
designing policies on the international aspects of fiscal regimes for these industries, with a particular focus on developing and emerging economies.
International Taxation and the Extractive Industries addresses key topics that are
not frequently covered in the literature, such as the geo-political implications of
cross-border pipelines and the legal implications of mining contracts and regional
financial obligations. The contributors, all of whom are leading researchers with
experience of working with governments and companies on these issues, present
an authoritative collection of chapters.The volume reviews international tax rules,
covering both developments in the G20-OECD (Organisation for Economic
Co-operation and Development) project on base erosion and profit shifting and
more radical proposals, identifying core challenges in the extractives sector.
This book should become a core resource for both scholars and practitioners.
It will also appeal to those interested in international tax issues more widely and
those who study environmental economics, macroeconomics and development
economics.

Philip Daniel is Honorary Professor at the Centre for Energy, Petroleum and
Minerals Law and Policy at the University of Dundee, UK, and Senior Fellow,
Natural Resource Governance Institute. He served in the Fiscal Affairs Department of the IMF from 2006 to 2015.
Michael Keen is Deputy Director of the Fiscal Affairs Department of the
International Monetary Fund. Before joining the Fund, he was Professor of
Economics at the University of Essex, UK.
Artur Świstak is an economist in the Fiscal Affairs Department of the International Monetary Fund, where he works on tax policy issues. Prior to joining
the IMF in 2011, he worked for the Polish Ministry of Finance as a chief of tax
policy analysis division.
Victor Thuronyi is a graduate of Cambridge University and Harvard Law
School. He has practiced tax law, served in the U.S. Treasury Department and
taught tax law before joining the International Monetary Fund (1991–2014).


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132 International Taxation and the Extractive Industries
Edited by Philip Daniel, Michael Keen, Artur S´wistak and Victor Thuronyi


International Taxation and
the Extractive Industries

Edited by Philip Daniel, Michael Keen,
Artur Świstak and Victor Thuronyi


First published 2017
by Routledge
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and by Routledge
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© 2017 International Monetary Fund
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views of the IMF, its Executive Board, or any other entity mentioned
herein. The views expressed in this book belong solely to the authors
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asserted in accordance with sections 77 and 78 of the Copyright, Designs
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British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Names: Daniel, Philip, editor.
Title: International taxation and the extractive industries : resources
  without borders / edited by Philip Daniel, Michael Keen, Artur Swistak
  and Victor Thuronyi.
Description: Abingdon, Oxon ; New York, NY : Routledge, 2017.
Identifiers: LCCN 2016018657 | ISBN 9781138999626 (hardback) |
  ISBN 9781315658131 (ebook)
Subjects: LCSH: Mineral industries. | Natural resources—Taxation. |
  Taxation—International cooperation.
Classification: LCC HD9506.A2 I636 2017 | DDC 336.2/783382—dc23
LC record available at https://lccn.loc.gov/2016018657
ISBN: 978-1-138-99962-6 (hbk)
ISBN: 978-1-315-65813-1 (ebk)
Typeset in Bembo
by Apex CoVantage, LLC


Contents

List of figuresvii
List of tablesix
List of boxesx
Contributorsxi
Forewordxv
  1 Introduction and overview

1

PHILIP DANIEL, MICHAEL KEEN, ARTUR ŚWISTAK
AND  VICTOR THURONYI

  2 International corporate taxation and the extractive
industries: principles, practice, problems

11

MICHAEL KEEN AND PETER MULLINS

  3 An overview of transfer pricing in extractive industries

42

STEPHEN E. SHAY

  4 Transfer pricing – special extractive industry issues

79

JACK CALDER

  5 International tax and treaty strategy in resource–rich
developing countries: experience and approaches

111

PHILIP DANIEL AND VICTOR THURONYI

  6 Extractive investments and tax treaties: issues
for investors

133

JANINE JUGGINS

  7 Taxing gains on transfer of interest

160

LEE BURNS, HONORÉ LE LEUCH AND EMIL M. SUNLEY

  8 Fiscal issues for cross-border natural resource projects
JOSEPH C. BELL AND JASMINA B. CHAUVIN

190


vi  Contents

  9 International oil and gas pipelines: legal, tax, and
tariff issues

215

HONORÉ LE LEUCH

10 The design of joint development zone treaties and
international unitization agreements

242

PETER CAMERON

11 Fiscal schemes for joint development of petroleum in
disputed areas: a primer and an evaluation

264

PHILIP DANIEL, CHANDARA VEUNG AND ALISTAIR WATSON

12 Taxes, royalties and cross-border resource investments

306

JACK M. MINTZ

13 Tax competition and coordination in extractive
industries

332

MARIO MANSOUR AND ARTUR ŚWISTAK

Index359


Figures

1.1 Proportion of natural resource taxes paid by
2
multinational enterprises
1.2 Government receipts from natural resources, averages 2000–2013
2
2.1 Estimating the revenue loss from BEPS
22
2.2 Numbers of BTTs and TIEAs, 1975–2013
26
3.1 Transfer pricing between two countries – example 1
46
3.2 Transfer pricing between two countries – example 2
47
3.3 Low-tax intermediary – example 3
49
3.4 Host country tax minimization – example 4
64
4.1 Exploiting the use of average prices
88
6.1 Typical life cycle of a mine
136
6.2 Typical cash waterfall
145
7.1 Indirect transfer of interest
173
7.2 Multi-tiered indirect transfer of interest
175
7.3 Indirect transfer of interest involving non-corporate
intermediary176
8.1 Illustration of a single-country versus cross-border
resource project
191
8.2 Summary of key results
203
9.1 Schematic arrangements of cross-border pipeline projects
225
11.1 Malaysia–Thailand JDZ
270
11.2 Malaysia–Thailand project life revenues and AETR from a
stylized 900 MMBbl field
273
11.3 Nigeria–São Tomé e Príncipe project life revenues and
AETR from a stylized 900 MMBbl field
279
11.4 Project economics: stylized petroleum project examples
282
11.5 Average effective tax rates for EEZs and JDZs
284
11.6 Timor Sea – joint petroleum development area
286
11.7 Fiscal regime for Bayu-Undan
293
11.8 Sunrise fiscal regime
294
11.9 Timor-Leste and JPDA PSCs
296
11.10 Australia and Timor-Leste: fiscal regimes; 900 MMBbl field
297
12.1 Decomposing the effective tax and royalty rate 2012
314


viii Figures

13.1 Composition of tax revenue in Sub-Saharan Africa:
resource vs. non-resource; 1980–2010
13.2 CIT rates in Sub-Saharan Africa
13.3 Worldwide mine production and prices of copper, 2000–2012
13.4 Worldwide production and prices of natural gas, 2000–2012
13.5 AETRs for copper mining in selected countries
13.6 AETRs for natural gas production in selected countries

333
339
340
340
341
342


Tables

2.1 Tax treatment of foreign sourced dividends received by
15
corporate taxpayers, 2015
3.1 Example 3: EBT and taxes by company
48
5.1 Namibia: double taxation agreements and provisions
120
5.2 Southern Africa: withholding tax on payments for services
to subcontractors
122
5.3 Withholding rates and the capital gains article in double
taxation agreements with Kenya
124
8.1 Ranges of parameters in determining the access fee
200
8.2 Key assumptions and financial results under three scenarios
203
10.1 Joint development arrangements – sample of models
246
11.1 Cost recovery limits and shares of excess cost recovery and
profit petroleum to contractors
271
274
11.2 Royalty rates for Thailand III
11.3 Rates of special remuneratory benefit using Thai Baht
274
11.4 Summary of Nigeria fiscal terms
277
280
11.5 Contractor profit share in STP PSC
11.6 Contractor profit share from PSC
281
11.7Timor-Leste: PSC fiscal terms and sharing between
governments289
11.8 The tax regime applying to Timor-Leste’s PSCs
291
11A.1 Petroleum fiscal terms in simulated countries and their
joint development areas
301
12.1 METRRs by jurisdiction (in percent), 2012
314
12.2 METRRs by jurisdiction for a Canadian parent
2012321
12.3 Financing cost by type of investors, 2012
322
12A.1 Data appendix: non-tax parameters by country, 2012
330
13.1 Taxes generally applicable to extractive industries
346


Boxes

2.1 Crediting of resource taxes in the United States
2.2 International tax planning – tools of the trade
2.3 International tax planning by multinational
enterprises – evidence
2.4 Treaty shopping
2.5 Indirect transfers of interest
7.1 Examples of structuring direct and indirect transfers of
mining or petroleum rights
7.2 Economic effects of taxing gains on transfers of interest
7.3 Possible impact of transfer on host country future tax revenues
9.1 Examples of existing landlocked export pipelines
9.2 Selected cross-border transit pipelines
9.3 Examples of pipeline transit fees
11.1 The Malaysia–Thailand JDZ production sharing contract
11.2 Petroleum exploration and development in treaty areas

17
19
20
27
29
161
164
167
219
221
234
271
295


Contributors

Joseph C. Bell is Of Counsel at Hogan Lovells in Washington, DC. His current
practice is principally devoted to resource management and fiscal issues in
developing countries in Africa, Asia and the Middle East and the negotiation
and re-negotiation on behalf of governments of long-term concession and
investment agreements in the agricultural and mining sectors. He is Chair
of the Board of the International Senior Lawyers Project, www.islp.org, cochair of the Advisory Board of the Natural Resource Governance Institute,
http://www.resourcegovernance.org and a member of the Council on Foreign Relations.
Lee Burns is Honorary Professor, Graduate School of Government, University
of Sydney. Lee specialises in international and comparative tax law. Lee has
authored many papers and articles on international tax and has advised the
Australian Treasury and the Board of Taxation on the reform of Australia’s
controlled foreign company and foreign trust regimes. Since 1991, Lee has
provided assistance on the design and drafting of tax laws under the technical
assistance program of IMF to more than 30 countries. In recent years, Lee’s
technical assistance work has focused particularly on the design of tax law
regimes for extractive industries.
Jack Calder, now retired, had a long career in the UK Inland Revenue, in
the course of which he occupied various senior positions, including latterly
that of Deputy Director of the Oil Taxation Office. He then worked for a
number of years as a consultant for the IMF and other organizations, advising governments in a wide range of developing countries on the administration of their natural resource revenues. He is author of Administering Fiscal
Regimes for Extractive Industries: A Handbook.
Peter Cameron is Director of the Centre for Energy, Petroleum and Mineral
Law and Policy at the University of Dundee and Professor of International
Energy Law and Policy. He is Co-Director of the International Centre for
Energy Arbitration, Professorial Fellow of the Law School at the University of
Edinburgh, Fellow of the Chartered Institute of Arbitrators and member of the
London Court of International Arbitration. He is the author or editor of more


xii  Contributors

than a dozen book-length publications, mostly on international investment and
energy. He has given oral and written testimony in a number of international
arbitrations.
Jasmina B. Chauvin is a Research Fellow at the Center for International
Development at Harvard University and a doctoral candidate in Strategy
at Harvard Business School. Her research seeks to understand the drivers
of firm location and firm productivity, with a particular focus on the role
of trade and of transportation barriers. Prior to starting her doctoral studies,
Jasmina was policy advisor to the government of Liberian President Ellen
Johnson Sirleaf. Previously she worked in infrastructure and energy finance
at Citigroup and as a freelance consultant to the World Bank, the National
Resource Governance Institute and various national governments.
Philip Daniel is Honorary Professor at the Centre for Energy, Petroleum and
Minerals Law and Policy, University of Dundee, and Senior Fellow, Natural Resource Governance Institute. He Chairs the Advisory Board of the
Oxford Centre for the Analysis of Resource Rich Economies in the Department of Economics, University of Oxford. Philip Daniel previously worked
for nine years at the Fiscal Affairs Department (FAD) of the IMF, part as
Deputy Head,Tax Policy Division and part as Advisor in FAD’s Front Office.
He is co-editor of The Taxation of Petroleum and Minerals: Principles, Problems
and Practice.
Janine Juggins is EVP Global Tax Unilever. Before joining Unilever, she was
the Global Head of Tax at Rio Tinto. Janine has more than 25 years of international tax experience gained with companies in the engineering, energy,
mining and FMCG sectors working in both the U.S. and the UK. She has a
special interest in tax and development issues. She graduated in French with
German from Manchester University, UK, and subsequently trained as a
Chartered Accountant with KPMG in London. She is also a Chartered Tax
Advisor, UK, and Associate Corporate Treasurer, UK.
Michael Keen is Deputy Director of the Fiscal Affairs Department of the
International Monetary Fund. Before joining the Fund, he was Professor of
Economics at the University of Essex and Visiting Professor at Kyoto University. He was awarded the CESifo-IIPF Musgrave Prize in 2010, and is
an Honorary President of the International Institute of Public Finance. He
has led technical assistance missions to more than 30 countries and is coauthor of books on The Modern VAT, the Taxation of Petroleum and Minerals
and Changing Customs.
Honoré Le Leuch has more than 40 years’ professional experience in international oil and gas activities and is an acknowledged consultant on petroleum legislation, taxation and contracts, institutional and regulatory regimes,
economics and negotiation. He was formerly with IFPEN and its affiliate
Beicip-Franlab. H. Le Leuch is an Honorary Lecturer at the Centre for
Energy, Petroleum and Mineral Law and Policy (CEPMLP) of the University


Contributors xiii

of Dundee. He is a co-author of the reference book on International Petroleum
Exploration and Exploitation Agreements: Legal, Economic, and Policy Aspects.
Mario Mansour is Deputy Chief, Tax Policy Division, IMF Fiscal Affairs
Department. Before joining the IMF in 2004, he managed tax policy projects in the Middle East and Eastern Caribbean islands for a consultancy
(2000–03), and was a tax policy analyst for the Canadian Federal Department of Finance (1992–2000), where he started his career, specializing in
business and international taxation and micro-simulation modeling. Mario
has advised on tax policy issues in more than 30 countries. His recent publications cover taxation issues in the Middle East and Africa, tax coordination
in West Africa and fiscal stabilization in the oil and gas sector.
Jack M. Mintz is the President’s Fellow at the University of Calgary after stepping down as the founding Director of the School of Public Policy, July 1,
2015. He is also the National Policy Advisor for EY as well as serving on
several private and public boards. He has served as the Clifford Clark Visiting Economist at the Department of Finance 1996–1997, when he chaired
a panel whose report became the basis for business tax reform in Canada.
Peter Mullins is a Deputy Division Chief with the Tax Policy Division of the
Fiscal Affairs Department of the International Monetary Fund in Washington, DC. Peter has extensive experience in tax policy and tax law, having
been involved in the area for more than 25 years. Peter has provided advice
to more than 40 countries on a range of tax policy issues including corporate tax, personal tax,VAT, international tax issues, natural resources taxation
and property taxes. Prior to joining the IMF in 2005, Peter was the General
Manager of the Business Tax Division in the Australian Treasury. He has
worked in both the private and public sectors, including many years as a
senior official in the Australian Tax Office.
Stephen E. Shay is a Senior Lecturer on Law at Harvard Law School. Before
joining the Harvard Law School faculty as a Professor of Practice in 2011,
Mr. Shay was Deputy Assistant Secretary for International Tax Affairs in the
United States Department of the Treasury. Prior to joining the Treasury in
2009, Mr. Shay was a tax partner for 22 years with Ropes & Gray, LLP.
Mr. Shay has published scholarly and practice articles relating to international taxation and testified for law reform before Congressional tax-writing
committees. He has had extensive practice experience in international taxation, including in transfer pricing counseling and controversies. Mr. Shay is a
1972 graduate of Wesleyan University, and he earned his J.D. and his M.B.A.
from Columbia University in 1976.
Emil M. Sunley served at the IMF as an Assistant Director in the Fiscal Affairs
Department, specializing in tax policy advice to transition countries, postconflict countries and countries with petroleum extraction or mining. Prior
to that, he was a tax director at Deloitte and Touche, Deputy Assistant Secretary for Tax Policy at the U.S. Treasury and a senior fellow at the Brookings


xiv  Contributors

Institution. He is a graduate of Amherst College and earned his Ph.D. in
economics at the University of Michigan.
Artur Świstak is an economist in the Fiscal Affairs Department of the International Monetary Fund, where he works on tax policy issues. He has advised
more than 15 countries on their tax reforms, including on natural resources
taxation. Prior to joining the IMF in 2011, he worked for the Polish Ministry of Finance as a chief of tax policy analysis division. Mr. Świstak holds
M.A. and M.P.S. degrees. Currently he is pursuing his Ph.D. in economics.
Victor Thuronyi is a graduate of Cambridge University and Harvard Law
School. He has practiced tax law, served in the U.S. Treasury Department
and taught tax law before joining the International Monetary Fund in 1991.
He has worked on tax reform in numerous countries. He is the author of
Comparative Tax Law (2003) and other writings on tax law and policy. He
retired in 2014 as lead counsel (taxation), IMF.
Chandara Veung was formerly a research assistant in the Tax Policy Division
of the Fiscal Affairs Department. He managed databases of fiscal regimes
for extractive industries, regularly analyzed them using the FARI modeling
framework as part of the IMF’s missions and conducted modeling trainings.
He is currently pursuing an MBA at Harvard Business School.
Alistair Watson was formerly a technical assistance advisor in the Tax Policy
Division of the Fiscal Affairs Department and is now a freelance consultant.
He specializes in extractive industry fiscal regime design and analysis and
helped develop the modeling framework FAD uses in this work. After FAD,
Alistair worked as a commercial director with Baker Hughes, a major oil
field services company, and since returning to freelance he works with the
IMF, World Bank and a number of consulting firms.


Foreword

The topic of this book may sound esoteric. It is not. What is at stake are the
economic prospects not only of one of the world’s important economic sectors, the extractive industries, but the prospects for many of the world’s poorest
people.
The reason is simple. Revenues from the extractive industries make a critical
contribution to the fiscal position of resource-rich countries, including many
lower-income countries struggling to find the means to strengthen their infrastructure and protect their vulnerable; much of those revenues come from multinationals; and multinationals are hard to tax in ways that secure reasonable
revenue without discouraging investment.
So for many countries a central part of their development agenda involves
the international dimension of the tax treatment of multinational enterprises
active in the extractive industries. For some, too, the regional and cross-border
dimension of projects or policies adds further tax issues. Managing these complex challenges is, for them, key to achieving the robust revenue base and effective institutions needed for sustained growth.
These issues lie at the intersection of two broader topics to which the Fund
has devoted considerable attention. The first is the design and implementation
of fiscal regimes for the extractive industries. In this, the present book complements two earlier Fund publications, Daniel and others (2010) and Calder
(2014). The second is the taxation of multinationals more widely. This has been
the focus of much attention in recent years, notably with the G20-OECD project on base erosion and profit shifting (BEPS), now entering its implementation phase. The Fund itself has long been active in supporting our members in
this area, as described in IMF (2013), including through analytical work (such
as IMF, 2014). Despite significant progress, however, considerable challenges
clearly remain.
In drawing together these two themes, this book draws deeply on the Fund’s
extensive technical assistance work with our members. Much of this has been
made possible by the generosity of donors contributing to a dedicated trust fund
to support our work in the extractive industries – including the preparation of
this book. It is a pleasure to thank, for this, the governments of Australia, the
European Union, Kuwait, the Netherlands, Norway, Oman and Switzerland.


xvi  Foreword

Addressing the highly technical difficulties raised in the various chapters will
require a mix of legal, economic and administrative skills, as well as a detailed
understanding of how the extractive industries operate. This book does not
provide any simple or single route to success. But it will, I hope, help those
seeking to navigate these always difficult, sometimes murky and often stormy
waters.
Christine Lagarde
Managing Director, IMF

References
Calder, Jack. (2014), Administering Fiscal Regimes for Extractive Industries: A Handbook (Washington, DC: International Monetary Fund).
Daniel, Philp, Michael Keen and Charles McPherson, eds. (2010), The Taxation of Petroleum
and Minerals: Principles, Practices and Problems (London, New York: Routledge).
International Monetary Fund. (2013), Issues in International Taxation and the Role of the IMF
(Washington: International Monetary Fund). Available at http://www.imf.org/external/
np/pp/eng/2013/062813.pdf
International Monetary Fund. (2014), Spillovers in International Corporate Taxation. Available at
www.imf.org/external/np/pp/eng/2014/050914.pdf


1Introduction and overview
Philip Daniel, Michael Keen, Artur Świstak
and Victor Thuronyi

Issues and context
The mismatch between where natural resources are found and where they,
or their derivatives, are needed means that the business of finding, developing
and selling them has for centuries been inherently international. The modern
manifestation of this is the importance within the sector of large multinational
enterprises – and their dominance where the state does not own all assets above
the ground, as well as the resources below. Several state-owned enterprises
have now themselves become important multinationals in the resource sector.
Among resource-rich countries, for instance, multinationals account for the
vast bulk of fiscal receipts from private business activity in the sector, especially
in petroleum: in Ghana, Liberia, Peru and Trinidad and Tobago, they account
for all such receipts (see Figure 1.1). In designing fiscal regimes for the extractive industries, international aspects – including the opportunities for tax planning by multinationals to avoid their liabilities – thus need to be center stage.
This book aims to provide a comprehensive (and comprehensible) account of
these sometimes difficult issues.
The importance for resource-rich countries of managing these difficulties
needs little emphasis. Receipts from the extractive sector are a – often – the
major source of revenue in many countries (Figure 1.2), especially, though not
only, in Africa and the Middle East (where state-owned enterprises have a central and even dominant role). The central task for policy makers is to design
fiscal regimes for the extractive industries that raise sufficient revenue, provide adequate incentives to invest and are implementable at reasonable cost
to both the government and taxpayers. These challenges receive considerable
attention when resource prices and the potential revenue are high. But those
are precisely the circumstances in which achieving these objectives is easiest. It
is when resource prices seem set for a lengthy subdued spell, as at the time of
writing, that the trade-offs can be most brutal, the resilience of regimes most
tested, coherence in the design and implementation of taxation in the extractive industries most needed – and the importance of ensuring effective taxation
of multinationals is most pronounced.


2  Daniel, Keen, Świstak and Thuronyi
100
90

Percent Paid by MNEs

80
70
60
50
40
30
20
10

Afghanistan
(2011)

Ghana
(2014)

Liberia
(2013)

Nigeria*
(2012)

Peru*
(2012)

Trinidad
(2013)

Tanzania
(2014)

Petroleum

Mining

Petroleum

Petroleum

Mining

Petroleum

Petroleum

Mining

Petroleum

Mining

Petroleum

Mining

Petroleum

-

Yemen
(2011)

Notes: data from EITI; excludes payments made by state-owned companies
*: Only includes income taxes

Figure 1.1  Proportion of natural resource taxes paid by multinational enterprises

100
90

Mining and Petroleum Revenue

80

Mining Revenue

70

Petroleum Revenue

60
50
40
30
20
10
Brunei
Iraq
Equatorial Guinea
Libya
Saudi Arabia
Oman
Kuwait
Bahrain
Angola
Congo Republic
Nigeria
Timor-Leste
Algeria
Yemen
Iran
United Arab Emirates
Chad
Qatar
Azerbaijan
Sudan
Venezuela
Botswana
Trinidad and Tobago
Myanmar
Kazakhstan
Syria
Cameroon
Mexico
Ecuador
Bolivia
Malaysia
DRC
Indonesia
Papua New Guinea
Russia
Vietnam
Guinea
Norway
Mauritania
Mongolia
Ivory Coast
Chile
Zambia
Uzbekistan
Colombia
Peru
Namibia
Niger
Ghana
Kyrgyz Republic
Sierra Leone
Tanzania
Australia
South Africa
Brazil
Lesotho
United Kingdom
Canada
Philippines

0

Figure 1.2  Government receipts from natural resources, averages 2000–2013 (Selected countries, in percentage of total revenue excluding grants.)

The difficulty of taxing multinationals – not only or even especially in the
extractives, has attracted considerable concern and attention in recent years.
Discontent is apparent not only in public disquiet at the success of aggressive


Introduction and overview 3

tax planning by many multinationals but also in the discourse and actions of
many emerging and developing countries that have perceived themselves as
being placed at a disadvantage by current arrangements. This discontent has
been especially apparent in the extractive industries. Mongolia’s renunciation
of its tax treaty with the Netherlands, for instance, was prompted by dissatisfaction at the consequent treatment of a large copper mining project;1 and
one of the more controversial responses to the difficulties of transfer pricing – the ‘sixth method’ – is used specifically in relation to natural resources
and other broadly homogeneous commodities for which some benchmark
market price can be found. Substantial discontent is perhaps not surprising, as
the basic structure of the current international framework was set out at the
time of the League of Nations, when the extent of transactions within firms
and importance of hard-to-value intangibles were much less and political
power relations very different. It has led to an ambitious attempt to strengthen
that system, in the G20-OECD project on base erosion and profit shifting
(BEPS).2 While the implications remain to be seen (and are considered in
various chapters of this book), it seems clear that while they may mitigate
they will not eliminate many of the challenges that arise – including not least
in the extractive industries. What is increasingly clear is that the revenue at
stake is substantial and quite possibly greater (relative to GDP) in non-OECD
economies: Crivelli, de Mooij and Keen (2016) put it, for them, at around
1 percent of GDP, which, given that tax revenues are commonly in the order
of 15 percent of GDP in low-income countries, is a sizable amount. And there
is increasing evidence too that the sums at issue can be especially large in the
extractive sector.
Many of the international tax issues that arise in the extractive industries
are, of course, far from unique to the sector. Profit shifting through intra-firm
lending, for instance, is a generic difficulty with multinationals. But, as in other
areas, common problems often loom especially large by virtue of the sheer
scale of their operations and the unusually high nominal tax rates that are commonly applied, since these amplify the gains from shifting profits to lower tax
jurisdictions. Moreover, the location of resource deposits often does not respect
national boundaries or requires cross-border co-operation for development and
export of products. These features present special cases of the wider international fiscal challenges.
This book does not address all aspects of international taxation but focuses
on two sets of issues: those that have proved especially important, problematic
and recurrent in the extractive industries and those that arise from specific
aspects of the operations of extractive enterprises, such as those that arise from
cross-border infrastructure or joint developments in disputed maritime zones.
In focusing on these issues, this book complements both Daniel, Keen
and McPherson (2010), which focuses mainly on domestic aspects of fiscal
regime design, and Calder (2014), which focuses on administrative issues. As
there, the present book mainly takes the perspective of resource-producing


4  Daniel, Keen, Świstak and Thuronyi

emerging-market and developing countries. That is where the international
tax challenges for the extractive sector arise in most pronounced form and,
within the wider fiscal scheme of things, are most significant for both revenue and wider economic performance. Their significance in Africa, for
instance, is highlighted and explored in Africa Progress Panel (2013). These
are also the cases in which the IMF, through its technical assistance and
other activities, tends to become most closely involved3 with many of the
authors of this book playing leading roles. An appendix later in the chapter
lists some of the international tax issues that are most frequently encountered in this advisory work and that guided the selection of topics for this
book.

This book
The book can be thought of as falling into four parts. The first sets the scene
for the discussion of international tax issues in the extractive industries. The
second part takes up generic issues in international taxation with an eye to
the specifics of the application to the extractives, focusing on transfer pricing
issues, tax treaty strategies and design and the taxation of capital gains associated
with natural resources. Cross-border issues, including those related to international pipelines and joint development zones, are taken up in the third part of
the book. The fourth part takes up some core policy issues: the interactions
between components of fiscal regimes and inter-governmental tax competition
and coordination in the extractive sector.
Setting the scene for the chapters that follow, Michael Keen and Peter Mullins provide in Chapter 2 an overview, with an eye to the extractive industries, of the current international tax framework, common tax planning devices
and recent initiatives to address them. They also review the emerging evidence
pointing to the considerable scale of profit shifting both in general and, perhaps
especially, in the extractives and in non-OECD countries. This chapter also
highlights three specific issues that later chapters examine in more depth: the
difficulties of the arm’s length principle and transfer pricing, treaty abuse and
the taxation of capital gains on asset transfers.
On the first of these issues, transfer pricing, Stephen Shay provides in Chapter 3 an overview of major rules that apply in the context of extractive industries in resource-rich developing countries. He considers a number of examples
and discusses steps that developing countries can take to mitigate transfer pricing tax avoidance by multinationals. Jack Calder complements this analysis in
Chapter 4 by focusing on complications added by ring-fencing, special methods for valuing extractive industry sales and special rules for costs. In addition,
he considers a number of tax administration issues, particularly special benchmarking and ‘physical audit’ procedures.
Chapter 5 by Philip Daniel and Victor Thuronyi outlines the principal international tax and fiscal regime issues faced by developing countries engaged


Introduction and overview 5

in natural resource extraction or exploration. The focus of the chapter rests
on corporate tax issues for extractive industries. It considers the principal elements in tax treaty strategy that form an integral part of tax policy making.The
chapter concludes with a brief discussion of defensive steps that developing
countries can take unilaterally.
The role of tax treaties in the extractives sector is further taken up in Chapter 6 by Janine Juggins, who – writing from the investor’s point of view –
provides an overview of the different types of taxes that arise over the life cycle
of a mine, followed by a discussion of the relevance of tax treaties to investment
financing decisions, the role that tax treaties play in relation to capital gains
and in supplementing gaps in domestic tax law. Further to that, she considers
the importance of tax treaties as a component of foreign investment tax policy
development and choices.
In Chapter 7 Lee Burns, Honoré Le Leuch and Emil M. Sunley focus on
the tax treatment of gains arising on a transfer of a mining or petroleum right
under both domestic tax law and tax treaties – which has proved a controversial issue in many countries. They investigate the complexities concerning the
characterization, valuation, timing and geographic sourcing of the gain both
made directly by the holder of the right or indirectly by a person disposing of
an interest in the entity holding the right.
Joseph C. Bell and Jasmina B. Chauvin in Chapter 8 set the scene for discussion of cross-border projects. They focus on potential arrangements for allocating the taxable income from a project crossing national boundaries among
different national entities, using as an example a hypothetical mining project
with the mine and infrastructure in two different countries.
In Chapter 9 Honoré Le Leuch focuses specifically on the key role of crossborder pipelines in the global oil and gas industry and their commercial structure and taxation. He highlights the striking differences and challenges between
the two main categories of transnational pipelines and provides a brief review
of the international law applicable to landlocked countries and transit countries.The chapter also highlights the special issues pertinent to the design of the
tax regime applicable by each state to the segment of a transnational pipeline
under its jurisdiction, as well as possible interactions between the regime and
international taxation and double tax treaties.
Joint development zones are discussed in Chapter 10 by Peter Cameron
and Chapter 11 by Philip Daniel, Chandara Veung and Alistair Watson. Chapter 10 discusses design of joint development zones (JDZs) treaties and international unitization agreements. This outlines the conceptual framework for
both arrangements and the differences between them, focusing largely on legal
aspects and international obligations. It compares JDZ and unitization structures, providing examples of actual operations and challenges therein. Chapter 11 then examines the fiscal structure of JDZs and sets out examples from
around the world, drawing lessons for the future use of this important institutional structure.


6  Daniel, Keen, Świstak and Thuronyi

Interactions between different tax regimes and instruments are the topic of
Chapter 12, by Jack M. Mintz. He shows how to assess the impact of oil tax and
royalty regimes on investment decisions by calculating an effective tax and royalty rate for marginal projects. The analysis highlights several cross-border fiscal
issues that affect the incentive to invest and the resource revenues derived by
governments. This chapter also looks at the impact of various financial strategies of multinational companies when investing abroad such as transfer pricing,
conduit financing and the discount rate for carrying forward unused deductions under rent-based royalties.
The book concludes with an analysis by Mario Mansour and Artur Świstak
of the issues of tax competition and coordination in the extractive industries.
In Chapter 13 they attempt to answer the key questions of whether tax competition is a reality in relation to the extractives and if so, why (which is far less
obvious than it may seem), which taxes it affects – and, critically, to what extent
and in what ways governments should consider coordinating their tax treatment of the extractive industries.

Appendix
International tax issues in some IMF FAD advisory work on
resource-rich countries

Coverage
This appendix draws upon advisory work between 2010 and 2014 in about
20 countries and upon regional workshops. Advice or analysis specific to individual countries remains confidential.

Scope
The international or BEPS issues arising included: source and residence taxation, double tax treaties (including border withholding taxes), transfer pricing, thin capitalization limitations, taxation of gains on transfers of interest in
immoveable property and mineral rights and the treatment of financial instruments. Recent activity reflected an upsurge of interest from the authorities in
the content and desirability of double taxation treaties and in the taxation of
gains on transfers of interest.

Source and residence taxation
A few countries inherited territorial systems at independence that had already
been substantially amended in the jurisdictions formerly governing. In some cases,
technical assistance (TA) recommended an explicit switch to worldwide taxation
of resident individuals and corporations. In other cases, recommendations to widen
the definition of permanent establishment (especially for provision of services) and
to strengthen or clarify definitions of domestic source income were made.


Introduction and overview 7

Double tax treaties
TA consistently recommended that governments refrain from concluding new
tax treaties, at least until a uniform and consistent national policy on treaties
has been formulated.The policy should ensure full taxing rights with respect to
extractive industries, border withholding on dividend, interest and royalty payments abroad and also payments for services.Where the existing treaty network
was limited, the recommendation sometimes included maintenance of full legislated rates of border withholding.
As an alternative to treaties, TA sometimes recommended tax information exchange agreements (TIEAs) or joining the Convention on Mutual
Administrative Assistance in Tax Matters. Full integration of treaty policy
with domestic tax policy was advised, making the point that many things
done in treaties could be done in domestic law in a non-discriminatory way.
One example concerns introduction of a rule that a cost is not deductible
unless the counterpart receipt is also taxable and perhaps taxable at some
minimum rate.
Some of the TA reports gave a detailed analysis of existing treaties and the
treaty-shopping opportunities the treaty network might present. More recent
TA has recommended introduction of a provision in domestic legislation that
would protect against treaty-shopping practices. The same suggestion (together
with a possible ‘principal purpose’ rule) came from the BEPS reports: should
a multilateral treaty instrument eventually become effective, the appropriate
national action might, of course, change.
TA has not called for repudiation of ratified treaties, but recommendations were made to clarify the validity or operation of very old treaties. In
some cases, treaties that were signed but not ratified had serious inadequacies, and the authorities were advised to review them before ratification. In
one case (Mongolia) the authorities independently decided to seek treaty
renegotiations.

Transfer pricing
The detail of treatment of transfer pricing policy issues deepened in more
recent advice.The standard position has called for adherence to the arm’s length
principle and implementation, by various means, of the OECD guidelines on
transfer pricing. In many cases, the introduction of advance pricing arrangements (APAs) was proposed. In more recent cases, TA suggested stronger powers for the authorities to make regulations on transfer pricing. Some TA called
for consistent transfer pricing rules for transactions among residents as well as
with non-residents.
Some TA (especially where oil and gas is involved) has suggested use for tax
purposes of transfer pricing rules devised for transactions among private parties (such as the ‘transfer at cost’ rules among affiliates for services under joint
operating agreements) or devised for production-sharing contracts.


8  Daniel, Keen, Świstak and Thuronyi

For the pricing of extractive industry outputs, reference prices (sometimes
with adjustments) have been put forward where these are available.

Thin capitalization limitations
The recommendation has usually been to strengthen overall limitations on the
deductibility of interest rather than to propose something specific for extractive
industries. In some cases, however, it was necessary to recommend removal of
provisions in production sharing contracts that permitted recovery of interest
as a cost. TA has offered both a debt-equity ratio test and a test of the ratio of
interest expense to income in different circumstances. In a few cases, both were
suggested in combination.
In one case legal advice called for reclassification of finance leases as loans
and also for use of rules analogous to those for thin capitalization for other
types of base-eroding payments.
TA usually advised against using a distinction between interest payments
nominally between third parties and those between affiliates.
Taxation of gains on transfers of interest in immoveable
property and mineral rights

Recent TA has recommended that such gains be taxed as income within the
corporate tax system rather than through a separate capital gains tax or segregated stream of capital transactions within the corporate income tax. The
recommendation to tax follows political preference rather than a specific economic analysis or consideration of alternatives. In earlier TA, the point was
made that (as, for example, in Norway) transactions within the petroleum tax
ring-fence could be considered post-tax – in the sense that no tax would be
due on any gain and no deduction available for any outlay – provided that the
overall taxation of resource rents was appropriate.
Recommendations have differed on whether to follow the course of segregating capital transactions (the U.S. model) so that payment of premiums
for acquisition can only be offset against future capital transactions of a similar
nature or to follow the more widespread treatment of the cost of acquisition of
mineral rights under which the cost is amortized (usually over the life of the
right). Both courses have justification, and the choice between has depended
on local circumstances.
In either case, a frequent issue has been whether to define mineral rights
as immovable property (or to make transactions in them taxable in their own
right as assets) and then to ensure that both domestic law and treaties permit
the taxation of transactions in such property by non-residents.
TA has adopted more than one approach to the problem of taxing indirect
transfers of interest through disposal of shares in companies holding mineral
rights or non-resident companies holding such companies. Recommendations


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