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Summary of "Ring-Fencing Mining Income" Practice Note

Core Content

This practice note provides guidance on the concept and application of ring-fencing in the mining sector, focusing on its implications for tax policy and administration in developing countries. It is a collaborative effort between the OECD and the IGF, with support from various international donors and organizations. The document serves as a tool for policymakers and tax administrators to understand the benefits and risks of ring-fencing, as well as how to design and implement such rules effectively.

Main Viewpoints

• Ring-fencing is a tax policy that prevents the consolidation of income and expenses across different mining projects or activities, thereby limiting the ability of companies to offset losses from non-mining activities against profits from mining.
• It is a common practice in many resource-rich developing countries, especially in Africa, and is increasingly used in the oil and gas sector.
• The primary purpose of ring-fencing is to accelerate government revenue collection and protect the mining tax base from permanent revenue losses due to BEPS (Base Erosion and Profit Shifting) or speculative activities.
• While beneficial for governments, ring-fencing can discourage investment, particularly in marginal or low-profit projects, by reducing the tax savings available to investors.

Key Information

1.0 Introduction

• The document is aimed at resource-rich developing countries and their tax administrators.
• It fills two key gaps: a lack of comprehensive guidance for designing and implementing ring-fencing rules and a lack of insights into implementation challenges.
• The publication is not a recommendation but an illustrative guide based on real-world examples and desk research.

2.0 Fundamentals of Ring-Fencing

• Ring-fencing is defined as a limitation on consolidation of income and expenses for tax purposes across different projects or activities.
• It is often implemented through special provisions in mining laws or mining contracts, such as in Sierra Leone, Guinea, and PNG.
• Ring-fencing is also used in oil and gas through production-sharing agreements (PSAs), which are more common in that sector than in mining.

3.0 Benefits and Risks of Ring-Fencing

3.1 Benefits

• Early government revenues: By preventing the offset of exploration and development costs against current production profits, governments can collect tax earlier, which is crucial for resource-constrained developing countries.
• Reduces BEPS and tax avoidance: It limits the ability of investors to structure their operations to shift profits and minimize tax liabilities.
• Level playing field: It may help new and existing investors compete more fairly by ensuring that all are subject to the same tax rules.

3.2 Risks

• Discourages investment: Mining companies may avoid investing in marginal projects due to reduced tax benefits.
• Increased administrative burden: Tax authorities may face complexity in apportioning revenues and expenses across different projects and activities.
• Tax uncertainty: Ambiguity in the legislative framework can lead to disputes and inconsistent interpretations of ring-fencing rules.

4.0 Designing Ring-Fencing Rules

• Appropriate use: Ring-fencing should be considered when the mining sector is at risk of BEPS, tax avoidance, or permanent revenue loss.
• Design considerations:
  • Scope of ring-fencing: Define which aspects of mining operations are subject to ring-fencing (e.g., exploration, production, non-mining activities).
  • Taxes to be ring-fenced: Typically includes corporate income tax (CIT) and additional profit tax (APT).
  • Applicability: Should apply to mining investors, including multinational enterprises (MNEs).
  • Exceptions: May be considered for non-mining activities that are not directly related to the mining operation.
  • Handling permanent losses: Need to be addressed through special provisions to avoid long-term revenue loss.

5.0 Implementation of Ring-Fencing Rules

• Legal integration: Ring-fencing rules should be integrated into the legal framework of the mining sector.
• Revenue and expenditure apportionment: Clear guidelines are needed to allocate revenues and expenses across different projects and activities.
• Mitigating transfer pricing abuse: Ring-fencing can reduce the risk of domestic transfer pricing abuse by limiting the ability to offset costs.
• Compliance requirements: Taxpayers must be required to maintain separate records for each project and activity, and to disclose relevant information.

6.0 Conclusion

• Ring-fencing is not a one-size-fits-all solution and must be tailored to the specific needs and capacities of each jurisdiction.
• It is important to balance the benefits of early revenue collection with the risks of discouraging investment.
• The success of ring-fencing depends on effective implementation, clear legislative design, and strong tax administration.

Key Considerations

• Country-specific analysis is essential before implementing ring-fencing rules.
• Transparency and clarity in the legislative framework are critical to minimizing disputes and uncertainty.
• Collaboration between tax authorities, international organizations, and civil society is recommended to ensure accountability and effectiveness.
• Compliance costs and administrative challenges must be addressed to ensure smooth implementation.

Supporting Information

• The publication is licensed under CC BY 4.0, which requires attribution and proper citation for any use or adaptation.
• The authors include Tomas Balco (OECD) and Jaqueline Taquiri (IGF), with contributions from various governments, international organizations, and industry groups.
• The survey was conducted on 38 resource-rich jurisdictions, with 25 having ring-fencing rules in place for mining.