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Tax base erosion and profit shifting

BEPS – A Menu of Issues

January 1, 1970

More than 100 countries are working together to address tax base erosion and profit shifting through the G20/OECD BEPS initiative. The Inclusive Framework on BEPS aims to address significant gaps in existing national and international tax rules that are exploited by multinational corporations. The initiative has outlined 15 BEPS Actions that arm governments with the tools to combat aggressive tax planning and tax avoidance by multinational corporations.

This program builds on the OECD BEPS actions to include other causes of revenue loss in the mining sector, such as the use of harmful tax incentives, abusive hedging arrangements and metals streaming.

The program will cover the following issues:

    1. Excessive Interest Deductions: Companies may use related-party debt to shift profit away from mineral-producing countries via excessive interest payments to related entities.
    2. Transfer Mispricing: Transfer pricing is a business practice that consists of setting a price for the purchase of a good or service between two “related parties.” Transfer mispricing is when the related parties distort the price of a transaction to reduce their taxable income.
    3. Undervaluation of Mineral Exports: A feature of transfer mispricing specific to mining: companies may sell mineral products to a related entity at prices below market rates, thereby moving sales revenue and profits offshore, to take advantage of lower tax rates.
    4. Harmful Tax Incentives: Tax incentives are generally used to attract foreign investment. However, they may also erode the tax base and encourage profit shifting, for example, by encouraging companies to abuse tax-exempt entities in ways that were never envisioned by producing countries.
    5. Tax Stabilization: Tax stabilization clauses, often in association with investment treaties, can be problematic from a tax perspective because they can freeze the fiscal terms in the contract such that changes in tax law (including BEPS-related reforms and updates to international tax standards) may be applicable to existing mines.
    6. International Tax Treaties: Tax treaties are agreements between states that establish a common framework for the taxation of cross-border activity. There are potential tax treaty issues arising from mining that resource-rich countries should consider when designing tax treaty policy. Treaty shopping (companies structuring their investment to obtain benefits not intended by parties to the treaty) also presents BEPS challenges.
    7. Indirect Transfer of Mining Assets: Sale of ownership of mine assets (or the companies themselves) can generate significant income, which many countries seek to tax as capital gains. However, indirect sales that take place offshore may be harder to tax, potentially resulting in hundreds of millions of tax dollars foregone.
    8. Metals Streaming: Metals streaming involves mining companies selling a certain percentage of production at a fixed cost to a financier in return for funds for mine development and construction. Companies may agree to lower sale prices for long periods of time, thereby reducing royalty and tax collection.
    9. Abusive Hedging Arrangements: Hedging means locking in a future selling price to manage risks of price fluctuations. A problem arises when companies enter hedging contracts with related parties to set an artificially low sale price for production, reducing the mine’s taxable income.
    10. Inadequate Ring-fencing: Ring-fencing is one way of limiting income consolidation for tax purposes; however, getting the design right is critical to securing tax revenues while continuing to attract further investment.

The full workplan is available here.