On 30 November 2021, the Intergovernmental Forum on Mining, Minerals, Metals, and Sustainable Development (IGF) released a new practice note on tax treaty practices in mining countries, which was consulted on earlier in the year. The practice note covers three main areas:
- An overview of tax treaties in general, including the treaty models, renegotiating a treaty, and terminating a treaty;
- The Benefits and Costs of Tax Treaties in a Mining Context; and
- Negotiating Tax Treaties That Protect the Right to Tax Mining Income.
With respect to negotiations, the practice note highlights four main risk areas to be addressed in order to protect against the most material risks to mining revenues, with specific recommendations for each:
- Establish and retain the right to levy capital gains on indirect transfers of mining assets;
- Provide an exhaustive definition of immovable property;
- Design broad rules on a PE; and
- Retain the right to tax income from management and technical services.
IGF Releases Tax Treaty Practice Note on Protecting the Right to Tax Mining Income
International tax treaties that protect foreign investors from "double taxation" can also prevent governments from collecting expected tax revenue. The Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development's (IGF) new practice note aims to help developing countries that have signed treaties or may be considering doing so.
"This is a tool to empower decision-makers and negotiators to improve their tax treaty practice and safeguard their right to tax mining income," said Alexandra Readhead, the IGF's Lead, Tax and Extractives. "It shows how governments can better protect their tax base with fairer and more sustainable treaties."
Tax treaties can pose unique risks for mining countries because the industry commonly involves multinational investors. This gives rise to a range of cross-border transactions and a key question for governments: Which country has the right to tax the income from these transactions, and under what conditions?
"Under tax treaties signed without proper consideration for mining, governments can end up collecting substantially less revenue from the sector than under their domestic law," Readhead said. "This can put governments in a financial bind and undermine trust in industry."
The new IGF publication, Protecting the Right to Tax Mining Income: Tax Treaty Practice in Mining Countries, is a practical tool to help governments limit financial risks linked to tax treaties—especially in resource-rich developing countries where the mining sector may be a particularly important source of government revenue.
The practice note outlines the costs and benefits of entering tax treaties as well as how to manage or renegotiate existing agreements. It explains how poorly crafted treaties can lead to tax avoidance and concludes with general recommendations to help governments avoid or reduce revenue risks.
The IGF report draws on several recent examples where tax treaties enabled foreign investors to avoid paying taxes in the resource-hosting country to illustrate material risks to governments.
- Learn more about the IGF's work on tax base erosion and profit shifting.
- For more information, please contact David Perri, Senior Communications Officer for the IGF at email@example.com.
The IGF supports more than 75 member nations committed to leveraging mining for sustainable development to ensure negative impacts are limited and financial benefits are shared. It is devoted to optimizing the benefits of mining to achieve poverty reduction, inclusive growth, social development, and environmental stewardship. The International Institute for Sustainable Development has served as Secretariat for the IGF since October 2015. Core funding is provided by the governments of Canada and the Netherlands.