The impact of BEPS on the global mining industry Bookmark has been added
The impact of BEPS on the global mining industry
Much of the public debate on BEPS has focussed on technology and consumer businesses, but the project will have a profound impact on mining groups, says a new report from Deloitte.
Johannesburg 08 February 2016 – Much of the public debate on BEPS has focussed on technology and consumer businesses, but the project will have a profound impact on mining groups, says a new report from Deloitte.
The BEPS project, with its 15 ‘Actions’, seeks to bring the international tax system up to date, with a proposed workable framework for inter-jurisdictional cooperation at the international level.
While the project targets OECD member states, South Africa enjoys observer status at the OECD and actively participates in that capacity. The Ministry of Finance also initiated its own review of South African tax law under the guise of the Davis Tax Committee. In addition, South Africa was instrumental in providing input into the UN Practical Guide on Transfer Pricing and is involved in the Africa Tax Administration Forum (ATAF).
The final BEPS package, comprising deliverables across all 15 Actions, was endorsed by G20 leaders on 15-16 November 2015.
Deloitte global mining tax leader James Ferguson says: “Since the OECD published the final BEPS papers in October last year, we now have much greater clarity on the proposed Actions and how they may be implemented - some through a multilateral convention and others through double tax treaty changes that will re-align international tax rules governing the allocation of profits, and yet others through changes in domestic rules on a country-by-country basis.”
He cautions that mining companies need to keep abreast of these rule changes, appraise their current corporate structures and business models, and be ready to take action where necessary.
Ferguson observes that the industry has gone through a period of unprecedented change in both developed and emerging markets as governments have introduced new measures ranging from mining royalties and windfall taxes, to increased export duties, the renegotiation of tax stability agreements and the enforcement of equity participation or indigenisation plans.
“One theme that has emerged out of its shadow for mining, and indeed other extractive sectors, is transparency – the public disclosure of tax and other payments to governments from their domestic extractive industries,” explains Ferguson.
Ferguson outlines several of the more important of the 15 Actions spelled out in the G20/OECD project and summarised in the Deloitte report.
Action 4 focusses on interest deductions. It is common for mining groups to raise funds internationally to invest in mining projects. Going forward, groups will need to take care to ensure that they do not breach potential new restrictions on interest deductions. This may be particularly difficult where a group has a portfolio of investments, ranging from exploration projects through to mature end-of-life mines.
Action 6 concerns the prevention of treaty abuse. Mining groups who raise capital internationally need to be able to effectively deploy that capital across their projects. Often in emerging economies, where double taxation treaties are limited in number and scope, it is common to seek to utilise the most beneficial treaties through investing through intermediary countries. With the project’s proposed changes to treaties this will become increasingly difficult, pushing up cash costs and potentially rendering some projects uneconomic.
BEPS Actions 8, 9 and 10 represent the work on the transfer pricing of intangibles, risk and capital, and other high risk transactions respectively, with Action 10 focussing specifically on the transfer pricing aspects of cross-border commodity transactions. There is some welcome news here in that the OECD has given some clear guidance and direction in an area where tax authorities have, in the past, taken divergent views.
The Deloitte report puts the matter into the following context: “With the global mining sector as a whole coming to terms with reduced commodity prices and diminishing prospects in China, the difficulties that may be imposed by BEPS are both an unwelcome distraction and an additional layer of uncertainty for the future of the mining industry.
The BEPS project, once embedded into domestic tax regimes and through an overlaying multilateral instrument, is widely expected to usher in the biggest change to the international tax landscape since the first model tax treaty was published by the OECD in 1963. Mining groups need to be ready for this.”