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Profit shifting changes could hit mining - report

Feb 08 2016 21:00
Carin Smith

Johannesburg – Mining companies need to keep abreast of rule changes regarding base erosion and profit shifting (Beps), Deloitte global mining tax leader James Ferguson said on Monday.

“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," according to a Deloitte report on Beps.

Ferguson cautioned mining companies to appraise their current corporate structures and business models, and be ready to take action where necessary.

The Deloitte report highlights the debate about Beps and points out that, although up to now the focus has mainly been on technology and consumer businesses, the Beps project will have a profound impact on mining groups.   

The international Beps project wants to bring the international tax system up to date and proposes a workable framework for inter-jurisdictional cooperation at an international level.

READ: Goldfields, Sasol tops in tax reporting

While the project targets Organisation for Economic Co-operation and Development (OECD) member states, South Africa enjoys observer status at the OECD and actively participates in that capacity.

Ferguson pointed out that the mining 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,” explained Ferguson.

“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," said Ferguson.

Some could be implemented through a multilateral convention and others through double tax treaty changes that will re-align international tax rules governing the allocation of profits. Others could be implemented through changes in domestic rules on a country-by-country basis.

READ: Top economies to fight corporate tax avoidance

According to the Deloitte report, the G20/OECD project on Beps includes a focus 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," warned Ferguson.

"This may be particularly difficult where a group has a portfolio of investments, ranging from exploration projects through to mature end-of-life mines."

There is also an aim to prevent treaty abuse. Ferguson pointed out that, often in emerging economies, where double taxation treaties are limited in number and scope, it is common for mining companies to seek to utilise the most beneficial treaties through investing through intermediary countries.  

With the Beps project’s proposed changes to treaties, this will become increasingly difficult, pushing up cash costs and potentially rendering some projects uneconomic, in his view.

Other so-called actions which form part of the Beps project include work on the transfer pricing of intangibles, risk and capital, and other high risk transactions, as well as the transfer pricing aspects of cross-border commodity transactions.

The OECD has now given some clear guidance and direction in this area where tax authorities have, in the past, taken divergent views, according to Ferguson.

According to the Deloitte report, 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.

In South Africa the Ministry of Finance has already initiated a review of SA tax law by means of the Davis Tax Committee. SA also provided input into the UN Practical Guide on Transfer Pricing and is involved in the Africa Tax Administration Forum (Ataf).

"Mining groups need to be ready for this,” said Ferguson.

ALSO READ: Two key encouraging messages in Budget 2015

deloitte  |  mining indaba  |  mining  |  tax  |  profits  |  sa ecnomy


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