One Partnership, Multiple Benefits: How IGF and CIAT are improving tax governance in Latin America and the Caribbean
For many countries, mining activity represents an essential source of resources for their economic development. Minerals and metals are non-renewable resources, and developing countries that fail to capitalize on the financial benefits from resource extraction now will lose out in the future.
When mining activity is developed by private companies, benefits to governments include those obtained from tax revenue. One risk to governments is called base erosion and profit shifting (BEPS), which occurs when multinational corporations shift profits from high-tax to low-tax countries to reduce their global tax bill.
The IGF and the Inter-American Center of Tax Administrations (CIAT) have partnered to help Latin American countries further develop their expertise to combat BEPS in the mining sector. We interviewed Jaqueline Terrel, Program Officer for IGF, and Isaác Gonzalo Arias, Cooperation and International Tax Director, from CIAT about this partnership.
Can you tell us about the goals of the new partnership between CIAT and IGF?
Gonzalo: Our partnership is focused on benefitting our member countries, in particular, tax administrations, to achieve their sustainable development goals. We believe the partnership with IGF will create valuable opportunities for our member countries to improve their capacity to control transfer pricing and international tax issues that often arise, especially within the extractive industries sector, and to mitigate the challenge of being dependent on natural resources. We have potential joint projects that will be realized as soon as we receive concrete requests from member countries.
Jaqueline: IGF will build on CIAT’s expertise in providing specialized technical assistance to tax administrations in Latin America. Our collaboration will include delivering high-quality training and technical assistance to IGF/CIAT members. Later this year, CIAT will collaborate with IGF and the Organisation for Economic Co-operation and Development to jointly deliver training on international taxation and the extractive industries. The goal is to improve revenue authorities’ capabilities in the area of taxation of natural resources, with particular focus on addressing BEPS risks. Some of the topics will include transfer pricing, tax treaties and tax incentives.
How important is the mining sector in Latin America and the Carribean (LAC)?
Jaqueline: Mining is an economic driver in LAC countries due to the region’s geological wealth. In 2016, the LAC region was the leading exploration destination, accounting for 27 per cent of global spending, primarily in Chile, Colombia and Mexico. In 2017 the LAC region accounted for a significant amount of the world mineral production, including 50 per cent of silver, 45 per cent of copper, 21 per cent of zinc and 20 per cent of gold.
LAC has also established itself as an important source of mining equipment and services. In 2013 LAC produced approximately 8 per cent of the global demand of mining machinery and represented 15 per cent of global mining equipment sales.
Consequently, mining makes a critical contribution to the wealth of many LAC countries. In Peru, for example, mining contributed nearly 10 per cent of GDP in 2017.
What challenges do tax administrations face when auditing multinationals in LAC?
Gonzalo: In general, because there are significant differences between LAC countries, there are three primary challenges: a lack of experience and knowledge about the business, limited resources and a need to better assess the non-compliance risks (i.e., to identify opportunities to use domestic special regimes and international transactions to avoid and evade taxes).
A number of measures could be taken by governments, including the identification and creation of information sources to carry out research to understand the business; the development of tools to process the information to identify non-compliance risks; training tax officials to develop skills to control multinational business; the implementation of cooperative compliance strategies; the provision of specific competencies to tax administrations adjusting the legislation to simplify processes; and the implementation of cooperative actions, including joint audits and exchange of information on economic sectors. It is also relevant for governments to promote good governance practices related to tax compliance.
What specific difficulties do LAC tax administrations face when auditing mining companies?
Jaqueline: Enforcing tax rules in mining is a challenge in the LAC region. This goes hand in hand with the complexity of transactions along the mining value chain. It is not sufficient to have advanced legislation if LAC tax authorities lack the necessary expertise and understanding of the mining business to effectively implement it. In addition, there are several government agencies regulating the mining sector. Mining revenue streams are collected by tax authorities and national mineral agencies. Therefore, cooperation and exchange of information between LAC tax authorities and mineral agencies are crucial. This is the crux of the partnership between IGF and CIAT—combining mining and tax expertise.
Many countries in LAC have adopted specific transfer pricing rules applicable only to the mining industry. Among these specific norms, the so-called Sixth Method stands out. Can you tell us about this approach?
Gonzalo: The “Sixth Method” is a catch-all phrase that encapsulates different transfer pricing regulations in a handful of jurisdictions used to price the import/export of commodities using a deemed transaction date.
In LAC, the Sixth Method was established in 2003 by Argentina and works to set a fixed price for commodity export transactions—usually from transparent markets at the shipping moment—to reduce the taxpayer’s ability to adjust the results according to their convenience. This allows countries to mitigate under-valuing exports, which can be detrimental to the tax base. In some cases—i.e., Uruguay—it also considers imports. Note that all LAC Sixth Methods have differences in their design and nature.
There are challenges to bear in mind when designing the Sixth Method, including determining the date of the transaction, selecting the commodities it applies to, choosing the corresponding market, the convenience to consider the existence of an intermediary and relationship criteria. It is also important to evaluate the convenience of introducing this measure as a way to apply the comparable uncontrolled price method or as a specific anti-avoidance rule. One mechanism to overcome these challenges is to leverage lessons learned among countries via the IGF/CIAT partnership.
This measure is currently used in 10 LAC countries and, depending on its design, it seems it is helping each country to develop a practical and effective tax system in the mining sector. The Cocktail on Transfer Pricing Measures for Developing Countries is a CIAT–GIZ document that will be published this year and will give countries direction on how to implement more effective transfer pricing rules, including the Sixth Method approach.