sharing in governance of extractive industries
Governments of mining countries are vulnerable to investors using double tax agreements (DTAs) as a means of avoiding paying taxes. DTAs are bilateral, or multilateral agreements between countries that set out which country has the right to collect tax on different types of income. Interest expense on foreign loans is one such source of income. The DTA will specify how much tax the source country can collect on the interest paid by the local mining subsidiary, to its affiliate, usually in a lower tax jurisdiction. In most cases, the tax on interest expense (“withholding tax”) will be less under the DTA than domestic law, thus increasing the risk that investors use DTAs as a means of reducing their overall tax bill.
In a report issued by the Centre for Research on Multinational Corporations (SOMO) in February, Rio Tinto was accused of “illegitimately lowering” its withholding taxes paid to the government of Mongolia in relation to the Oyu Tolgoi copper mine. Rio allegedly did this by using a DTA between Mongolia and the Netherlands, in addition to which it negotiated an even lower rate of withholding tax (WHT) in its amended mining agreement in 2011. This article reviews Rio’s tax arrangements, and concludes that although the concession had a material impact on government revenues, it would be an exaggeration to claim that that Rio avoided WHT on interest on shareholder loans, and there is no clear evidence of excessive interest deductions to support the suspicions of treaty abuse.
The piece was contributed by Alexandra Readhead and David Mihalyi and can be read on ICTD's blog.
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