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Any Tax Breaks for Mining Companies Must Be Carefully Designed

Posted on Apr. 13, 2020

Tax concessions may represent one of the few options available to developing countries seeking to prop up mining companies suffering from the global COVID-19 crisis, but such measures should be temporary and heavily targeted.

According to an April 9 guidance note and summary issued by the Intergovernmental Forum on Mining, Minerals, Metals, and Sustainable Development and the African Tax Administration Forum, revenue constraints limit developing countries’ options for extending aid to struggling workers and companies. Their inability to offer aid directly leaves tax policy as one of the only remaining options, the note says. However, the same countries also generally suffer from chronically inadequate tax revenue, so any tax concessions for the extractive sector require careful design, according to the note.

“As governments develop stimulus packages, they should aim for efficiency: obtain the best results with limited resources. The direct health emergency will require substantial financial resources, making it even more important for cash-strapped developing countries to provide targeted support to their economies,” the note says.

The guidance note says that any tax concession, regardless of the specific type of tax concerned, should be clear and detailed, including in its eligibility criteria and application procedures. Temporary tax measures should also have time limits and be phased out entirely after the COVID-19 crisis subsides, according to the note.

Possible measures specifically identified by the note include deferral of payroll taxes and VAT relief, including expedited refunds, exemptions for mining inputs, or allowing VAT credits to offset other tax liabilities. Although VAT relief carries the risk that unrelated goods and services will receive unintended benefits under the scheme, this risk can be minimized by carefully defining the list of eligible goods, the note says. Other proposed measures include an immediate deduction or credit for health-related expenses; import duty relief for imported mining supplies; and deferral, reduction, or waiver of mineral royalties.

The note says that aid should generally be restricted to companies that can corroborate their need for financial support through negative projected cash flows, collapsing commodity prices, or a weak debt coverage ratio.

In addition, companies that are eligible for aid should be subject to conditions regarding their employment and bonus practices, such as an employee retention requirement and cancellation of dividends or executive bonuses. The report’s proposed conditions also include an express commitment from the company and its directors regarding aggressive tax planning.

Beneficiaries should “abandon all artificial tax avoidance arrangements," such as treaty shopping, base erosion and profit shifting, and tax havens, according to the guidance note. "Governments could do this by requiring companies to adopt the B-team principles on responsible tax and become an [Extractives Industries Transparency Initiative] supporting company,” the note says. “They could also require company directors to sign a public pledge making them personally liable for aggressive tax planning, and subject to corresponding penalties.”

The list’s tax-related conditions includes adoption of “modern, transparent, and fair transfer pricing practices” and “transparent pricing for all mineral sales, based on international benchmark prices.”

Any temporary aid measures should be coupled with measures designed to recover the lost revenue in the future, such as an excess profit tax or the characterization of government aid as an equity interest in the beneficiary. Countries should also impose stiff penalties for abuses of the system.

The guidance note singles out two specific measures that countries should avoid, one of which is an income tax holiday. Tax holidays are generally economically inefficient, would offer the least benefit to the mines that are most in need, and entail a high risk of abuse, the note says. The other discouraged approach is relief from withholding taxes imposed on payments to nonresidents, including service charges, interest, and dividends.

“While withholding tax is a cost for the foreign companies receiving the payments, it is also relatively easy for governments to collect, which is important for developing countries as they have even more limited human and financial resources. Governments should maintain withholding taxes, although exceptions could be made for arm's-length third-party debt, where there is limited risk of abuse,” the note says.

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