Naomi Fowler ■ Addressing profit shifting in the mining sector through excessive interest deductions: our advice
The Tax Justice Network has responded to the following call by the OECD’s Centre for Tax Policy and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development:
For many resource-rich developing countries, mineral resources present an unparalleled economic opportunity to increase government revenue. Tax base erosion and profit shifting (BEPS), combined with gaps in the capabilities of tax authorities in developing countries, threaten this prospect. One of the avenues for international profit shifting by multinational enterprises is the use of excessive interest deductions.
Building on BEPS Action 4, this practice note has been prepared by the OECD Centre for Tax Policy and Administration under a programme of co-operation with the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), to help guide tax officials on how to strengthen their defences against BEPS. It is part of wider efforts to address some of the challenges developing countries are facing in raising revenue from their mining sectors. This work also complements action by the Platform for Collaboration on Tax and others to produce toolkits on top priority tax issues facing developing countries.”
We responded as follows:
Our view has been to remove intra-group interest deduction, because we believe it would create a level playing field between multinational and local companies, and ensure equal fiscal treatment between debt and equity, and subsequently rebalance the economy in favour of a level playing field for local and smaller businesses. Also, disallowing intra-group interest deduction provides an important building block in the direction of implementing unitary taxation. By subjecting an entire multinational group’s subsidiaries to uniform consolidated tax accounting, all intra-group transactions, which include loans, fees and other transactions, would be disregarded anyway. Even if deductions for interest payments via intra-company loans were disallowed entirely, the need to implement a cap on deductible interest payments would still be in place, in order to discourage companies from overleveraging themselves.
We recommend that in addition to disallowing deduction of interest paid on all intra company loans, countries adopt the tightest interest deduction cap under the OECD cap of 10% of EBITDA. In the long term, the TJN recommends that countries move towards the equal treatment of debt and equity for tax purposes. This, we believe will improve global tax fairness.”
We included as part of our submission a briefing paper we published in November 2017 entitled Shifting profits and dodging taxes using debt which we think is well worth sharing again here.
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