The developing countries tend to take action in order to combat avoidance of tax by the multinational companies.
Mongolia and Zambia have told BBC that they want to put an end to the shifting of profits from their countries by the mining companies before these profits could be taxed.
The countries mentioned above are both major minerals’ producers and say that they lose dollars in billions in a year for tax revenue.
Organization for Economic Co-operation and Development has already warned that this can be dangerous.
The club of developed nations and Paris-based considers that a unilateral action from individual countries can lead to fragmented and confused rules without any clear standards.
Mr Z. Enkhbold, Mongolian Parliament’s speaker, told that international treaties of tax have been cancelled by Mongolia which were intended to be used by mining companies to get profits tax free from Mongolian operations. He also said that tax should be paid where there is local business and not in the offshore countries.In Zambia, one new law that comes in force in this month demands that the mining companies bring export proceeds to Zambia. When in Zambia, tax authorities of country will scrutinize other payments and dividends to determine if they’re justified before leaving the country.
The Vice-President of Zambia, Guy Scott, told that the government is roughly losing $2bn per year by the tax avoidance by corporate sector.He said that they were talking staggering sum of money which is more than what every year Zambia spends on education and health together.Mr Scott commented that it is like talking about the women who are pregnant but have no clinic to go for education regarding child health or antenatal care. He further said that everyone was looking at those people who would not be educated more than primary level.
The new law by Zambia is to increase transparency of finances of the mine companies.Mr Scott also said that they didn’t know that where accounts are and that at this moment they are transparent only if they themselves volunteer that they would be transparent.According to the Mongolian officials, they’re acting to try to stem the large tax losses in future in their fast growing sector of mining.The Mongolian finance ministry’s former official, Mr B Batjargal, said that Mongolia could lose about $5.5 billion in the revenue from tax over lifetime of country’s only biggest project, huge Oyu Tolgoi mine of copper.
According to Mr Batjargal, now GDP of Mongolia is $8-9 billion, so it is about the same GDP as of country. He went on to saying that as the projects of future mining come on the stream, potential losses of tax to Mongolia would be unimaginable and tremendous.Biggest threat to the tax revenues of Mongolia is by the bilateral treaty of double taxation with Netherlands that was signed by both countries in the year 2002.This treaty says that if any Dutch company makes investment in Mongolia, then it would be entitled to have the dividends paid back to Netherlands without Mongolian tax.
The company, Turquoise Hill, which developed mine Oyu Tongoi, is Canadian. Though, for the purposes of tax, the investment it makes is considered Dutch because it happened to be routed through some Dutch company that is established for this purpose: Oyu Tolgoi Netherlands BV.
Due to this, Turquoise Hill can receive dividends from the Dutch company, without any Mongolian tax.The records of this Dutch company show that it doesn’t have any employees. It’s among one in over 1000 alike companies at service of company formation that is situated in Prins Bernhardplein in just single building, in Amsterdam. Mr B Batjargal said that it isn’t only Turquoise Hill which is using Dutch tax treaty’s route.Mr B Batjargal said that around 70% of the foreign major direct investments happen to be coming through Netherlands, as tax shield.
Not only is Mongolia cancelling the treaty with Netherlands, it’s even termination the other 3 treaties with UAE, Kuwait and Luxembourg. Also, they provide for the dividends in order to go from Mongolia tax-free.After the date of Dutch treaty’s cancellation, that is January 1st, 2014, the position of tax of the project of Oyu Tolgoi is unclear.The giant of mining, London-based Rio Tinto has purchased controlling stake with Turquoise Hill so Rio Tinto would have to agree on new ways in order to get dividends in future from Oyu Tolgio mine outside Mongolia.
There’re many other treaties of double taxation between other countries and Mongolia, though all of these permit Mongolia to impose minimum tax of 5% on dividends.Actions that have been taken by Zambia and Mongolia have caused issues even beyond the borders of these countries. Now OECD is preparing for action plan that could deal with corporate avoidance of tax to show to the world leaders in this summer.
Pascal Saint-Amans, who manages tax negotiations internationally and the tax treaties for this organization said that he regards the unilateral actions, like cancellations of Mongolian treaty, as dangerous.
He says that it is another reason why leaders of countries in G20 and G8 need to arrive at an agreement about dealing with avoidance of corporate tax when they’ll meet in this summer.Mr Saint-Amans said that is there isn’t any agreement, then there’ll be many countries going away from the consensus saying that they aren’t bound by the rules and so they would decide on their own. He said that due to this, the risk will be that they would face double and triple taxation that is detrimental to the employment, growth and investment also.
Meanwhile, Mr Z Enkhbold, the Mongolia’s Speaker of parliament suggested the developing countries that they should review the agreements that they’ve and then decide which ones to cancel or leave.
According to him, this loophole that is in world’s economy has to be closed by them.