IGF/OECD Program on Tax Base Erosion and Profit Shifting in the Mining Sector

1. IGF/OECD Program on Tax Base Erosion and Profit Shifting in the Mining Sector Presented by Howard Mann and Alexandra ReadheadOECD, PARIS, 25 JUNE 2018

2. Agenda • Brief recap of the IGF-OECD ‘BEPS in Mining Program’ • Introduction of debt finance and mineral valuation toolkits • Presentation of ‘The Hidden Cost of Tax Incentives’ • Discussant: Mr Ibrahim Coulibaly, Director General of Mining and Geology, Ministry of Mines, Cote d’Ivoire • Fiscal stabilisation in mining: issues and questions • Discussant: Mr Fabien Knot, Senior Adviser, PM’s Office, Cameroon 5. Upcoming work on tax treaties and hedging instruments

3. IGF-OECD ‘BEPS in Mining Program’ What is it about? A program to equip developing country governments with the knowledge, skills and tools to counter tax base erosion and profit shifting (BEPS) in the mining sector. When did it start? 2017; a collaboration between IGF, and OECD CTPA. What will it deliver? Practical guidance and tools to counter BEPS in mining. Some topics include: excessive interest deductions, transfer pricing, tax incentives. NEW: New partnership with the African Tax Administration Forum, ISLP, and the UN Subcommittee for Extractive Industry Taxation

4. Brand New Toolkits

5. Consultation Draft: Tax Incentives • Released for public comment on 18th of June • Deadline for submission is the 6th of July • Available here: https://bit.ly/2ImiqFh Implemented by:

6. Tax Incentives | Needs Analysis • Guidance on design and use of tax incentives, but not sector specific (Platform for Collaboration on Tax ); • Wealth of literature on mining fiscal regime design (IMF, UN, WB), but nothing devoted to incentives specifically; • Limited awareness of how mining investors may change their behaviour in response to incentives to maximise the tax benefit beyond what government intended.

7. Our Objective To equip governments of resource-rich developing countries to identify and cost potential behavioural responses by mining investors to tax incentives.

8. Structure • The toolkit is divided into three sections:  • A step-by-step guide to reviewing mining tax incentives  • A detailed risk review of potential behavioural responses • An information checklist • Supplementary materials (forthcoming): • Illustrative financial model to demonstrate the impacts of incentives • Database of tax incentives in mining contracts for 22 countries (using resourcecontracts.org!)

9. Tax Incentives Defined In this toolkit, a ‘tax incentive’ means:  ……any special tax provisions  ……granted to mining investors  ……that provide favourable deviation  ……from the general tax treatment that applies to all corporate entities. 

10. Incentives Covered

11. Sources of Law 1. The general income tax code (e.g. a lower rate of corporate income tax for mining) 2. The mining law (e.g. a reduced rate of tax collected on mining imports) 3. The mining contract (e.g. complete exemption from paying taxes for a period) EXCLUDED: Tax treaties, and investment laws.

12. Type of Incentive and the Related Response

13. Example: Economic Processing Zone Status Country A Parent Country B (host country) Export Processing Zone Sells mineral product to processing facility Mine Processing Facility @ 30% below market price • Corporate income tax 35% • 3% royalty on received sale price • Tax free • Tax Cost: All taxes TOTAL Revenue Impact Behavioural Response: • Reduced royalties and income tax

14. Estimating the cost of incentives Baseline Fiscal Regime (no tax incentives) Government Revenue

15. Scenario 1: 10 Year Income Tax Holiday Government Revenue

16. Scenario 2: 10 Year Tax Holiday Plus High-Grading Government Revenue

17. Scenario 3: 10 Year Tax Holiday, High-Grading, andReduced Royalty Rate Government Revenue

18. Conclusions • Use financial models to estimate the cost of incentives • Avoid tax incentives that create parallel fiscal regimes side-by-side  • Limit the most damaging incentives, notably tax holidays • Clearly define the cost-base to which the incentive applies • Consider the BEPS risks of lower tax rates on outbound payments • Avoid tax incentives that create cliff edges • Tax incentives should not be open ended

19. Discussion

20. Stabilization Clauses, Investment Treaties & BEPS Stabilization clauses: • limit capacity to change laws applicable to covered investor • directly: changes in law legally do not apply • indirectly through impact of “economic equilibrium” clauses • can maintain “deals” without regard for fairness, etc. Includes limitations on government actions to alter tax rules, • including addressing BEPS specific issues Raises issues relating to: • existing investments covered by stabilization clauses • issues relating to future provisions on fiscal stability

21. Governments are losing the two foundational elements of their side of the bargain: jobs and revenue And they are reacting: “Resource nationalism” (Is this always bad thing?) Tax bills Environmental and social management conflicts growing: government affirmations of rights, roles and community interests New forms of relationships (JV’s, equity shares, board of director roles, service contracts, etc.) And they are looking anew at all fiscal provisions Context | Changing Times

22. Some mines in the next decade will run without humans and instead rely on robots, virtual models and sensors, according to Anglo American Plc. Anglo is betting on technology, such as computerized drills with “chiseling ability as good as a human” to increase productivity, cut costs and reduce environmental impact, Tony O’Neil, Technical Director at Anglo, said at the Mines and Money Conference in London. “The industry that everybody currently knows will be unrecognizable” in five to seven years, O’Neil said. Context | Jobs…the 100% Goal Bloomberg News, November 29, 2017: “Robots will run mines within the next decade, Anglo says”

23. Three current tax disputes worth 200M USD++ Acacia mine, Tanzania ConocoPhillips and Perenco v Vietnam Rio Tinto in Mongolia Context | Company Tax Practices Billions of dollars in perceived losses to governments in mining • Perceived by government and communities, • BUT, perception = reality • And in many cases perception is also correct

24. Stabilization Not Always Good ICMM (2009: “Mining agreements have often locked in fiscal conditions to safeguard companies from future (arbitrary) legislative changes. These clauses have become a contentious issue. Some argue that investors were provided with enhanced protection at a time when the bargaining position of countries was particularly weak (UNCTAD, 2007). As the tables have been turned, this has given rise to renegotiation demands. Some argue that renegotiations are not in the long-term interest of developing countries and thus should only be pursued in exceptional circumstances. Others are more accommodating under the belief that a significant change in external factors may substantially modify the economics of a project or that the project’s initial terms were too unfavorable for the government. They distinguish between countries that may have good reasons to seek renegotiations and those that do not. They also take a closer look at whether the original deals should be considered legitimate or not. Considerations often related to the political or legislative processes and the circumstances under which agreements have come about.”

25. Summary of Arbitration Awards • The tribunals will reflect on the right to regulate • Including that the government has agreed clearly to limit their right to regulate • And the investor relied on that limitation • Whether or not it is not valid under domestic law is irrelevant • Tribunals will read the stabilization clauses very literally • give the investor exactly what it says • no more, but no less • Tribunals will read investment treaty clauses more favourably to investors when have stabilization clauses • Fair and equitable treatment • Expropriation

26. Fiscal Stability & Stabilization Clauses, Not Same • Need to find ways to support fiscal stability that: • Are targeted, defined and appropriate • Do not stabilize capacity of government to address BEPS issues • Are not so broad as to be aimed at broader rent seeking • Need to recognize that government and other thinking is changing: • Traditional: Government entitled to a fair share of rent through taxes, and company gets the rest • New direction: Company entitled to a fair return on its investment, government gets the rest • Global international tax architecture is changing • Resource sectors cannot isolate themselves from these changes • Political: a bad deal will not survive a stabilization clause

27. Are there exceptions to limitations? • Public policy, “ordre public international” • Broad recognition today that addressing BEPS issues is a matter of international public order (doctrine from corruption cases) • “Rebus sic stantibus”: tax practices of company change fundamental circumstances of the original deal • Governments must be allowed to implement new international agreements/standards in response to BEPS practices • Also ensures measures are not arbitrary or discriminatory • Government can enforce implementation of obligations of investors • Implementation of development benefits of investment? • Paying taxes is part of the foundational elements • Political: a bad deal will not survive a stabilization clause

28. Options for Future Stability • If stabilization is included, very specific language, should be used: • What is covered • How long • Alternative/complementary approaches to old style stabilization: • Reverse presumption: stabilize agreed rate or return, not taxes • Move from stabilization to predictability, variable levels of taxes/royalties • Include a government obligation against arbitrary and discriminatory treatment of investors (Ruggie recommendation, Principles of Responsible Contracting, Annex to Guiding Principles, IBA Model Mine development Agreement) • Defined renegotiation provisions

29. Broader Supporting/ Balancing Options • Counter-balance investor rights with express recognition of obligation of investor not to use BEPS practices • GAAR provision • And include right of government to prevent this • Express right to implement international best practice/standards provision in relation to operations, taxation, accountability • Include obligations for EITI to apply to covered projects • Some investment treaties exclude taxation or limit access to dispute settlement for tax issues (eg., Canada-EU CETA)

30. Discussion

31. Next Steps Consultation period for tax incentives toolkit ends Interest limitation and mineral valuation toolkits published New work starts on tax treaties, hedging, and costs July August October Tax incentives toolkit published Fiscal stabilization draft circulated for comment IGF AGM – ‘BEPS Day’ Friday 19th Preliminary findings on hedging, treaties, costs

32. Thank You More information: http://igfmining.org/tax-avoidance-guidance-document/

33. Annex: Sample Arbitration Awards

34. Fair and Equitable Treatment Tecmed v. Mexico, 2003 • ...this provision …requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations. ...

35. Fair and Equitable Treatment Parkerings v. Lithuania, 2007 It is each State’s undeniable right and privilege to exercise its sovereign legislative power. A State has the right to enact, modify or cancel a law at its own discretion. Save for the existence of an agreement, in the form of a stabilization clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment. As a matter of fact, any businessman or investor knows that laws will evolve over time. What is prohibited however is for a State to act unfairly, unreasonably or inequitably in the exercise of its legislative power.

36. Expropriation Metalclad v. Mexico, 2000, NAFTA case 103. Thus, expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.

37. Expropriation Methanex v. United States, 2005, NAFTA case But as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment, is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.

38. Key Points • Many expropriation and FET cases take different approaches • But even the one’s most supportive of the state right to regulate have caveats, “unless the state has given an undertaking not to do so…” • Only developing countries “obliged” to do so • FET: all cases raise issue of “legitimate expectations of the investor” • Any written promise by a government, and many unwritten statements, can create this legitimate expectation • So what does that mean in practice?

39. Sample Cases Enron v. Argentina, 2007 261. This Tribunal notes, however, that the stabilization requirement does not mean the freezing of the legal system or the disappearance of the regulatory power of the State. As noted by the tribunal in CMS: It is not a question of whether the legal framework might need to be frozen as it can always evolve and be adapted to changing circumstances, but neither is it a question of whether the framework can be dispensed with altogether when specific commitments to the contrary have been made. The law of foreign investment and its protection has been developed with the specific objective of avoiding such adverse legal effects.

40. Sample Cases Enron v. Argentina, 2007 262 What seems to be essential, however, is that these expectations derived from the conditions that were offered by the State to the investor at the time of the investment and that such conditions were relied upon by the investor when deciding to invest.

41. Sample Cases Enron v. Argentina 264. Argentina in the early 1990s constructed a regulatory framework for the gas sector containing specific guarantees to attract foreign capital to an economy historically unstable and volatile. As part of this regulatory framework, Argentina guaranteed that tariffs would be calculated in US dollars, converted into pesos for billing purposes, adjusted semi-annually in accordance with the US PPI and sufficient to cover costs and a reasonable rate of return. It further guaranteed that tariffs would not be subject to freezing or price controls without compensation. Foreign investors were specifically targeted toinvest in the privatization of public utilities in the gas sector. Substantial foreign investment was undertaken on the strength of such guarantees, including the investment made by Enron in TGS.

42. Sample Cases Bogdanov v Moldova, 2013 183. Indeed, the protection of legitimate expectations must now be considered as firmly rooted in arbitral practice, and "a reversal of assurances by the host state which have led to legitimate expectations will be considered as a violation of the principle of fair and equitable treatment"

43. Sample Cases Bogdanov v Moldova, 2013 186. On the other hand, as pointed out by the Parkerings tribunal quoted by daimants above, "it is each state's undeniable right and privilege to exercise its sovereign legislative power ... Save for the existence of an agreement, in the form of a stabilisation clause or otherwise, there is nothing objectionable about an amendment brought to the regulatory framework existing at the time an investor made his investment" 187. In other words, if the Republic of Moldova has enacted new legislation deteriorating the conditions of Claimants and if such legislation fails within the scope of the stabilisation clause, then this would, at least prima facie, amount to a breach of the fair and equitable standard of the Treaty. But if such new legislation falls outside the scope of the stabliisation clause, its enactment by the Republic will not have deprived Claimants of any legitimate expectations created by the assurances in that clause.

44. Sample Cases Bogdanov v Moldova 188. The question, therefore, is what exactly the Republic promised by issuing the stabilisation clause. According to the wording of the clause itself, it covers new laws "deteriorating the conditions of Free Zone residents activities with regard to the customs and tax regimes stipulated by the present law". Since the tax regime stipulated by Law 625 only concerns value added tax, the stabilisation clause in fact only relates to the specific customs and VAT privileges for residents of the Free Zones which are stipulated in Law 625. It created a legitimate expectation that the rules in Law 625 exempting them from customs duties and VAT would remain unchanged, but it did not extend to legislation in other fields.