OECD BEPS deal of little significance to mining right now

JOHANNESBURG – A data sharing agreement signed by 31 countries – including South Africa – in a bid to enhance transparency by multinational enterprises, is unlikely to have an immediate impact on mining companies.

Through the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reporting, signed by members of the Organisation for Economic Cooperation and Development’s (OECD’s) committee on Base Erosion and Profit Shifting (BEPS), tax administrators are hoping to get multinationals to pay taxes in the countries in which they earn their revenue, instead of shifting profits to low-tax jurisdictions.

“Under this multilateral agreement, information will be exchanged between tax administrations, giving them a single, global picture on the key indicators of multinational businesses. This is a much-needed tool towards the goal of ensuring that companies pay their fair share of tax…,” said Angel Gurría, secretary-general of the OECD.

“The fact that people are exchanging information should not really change anything fundamental from a transfer pricing point of view. If groups have the right structures in place, they should still be able to defend their pricing transfer pricing arrangements. However, the process of exchanging information probably makes it more likely that they will have to justify those arrangements to revenue authorities,” said Billy Joubert, director of transfer pricing and a BEPS specialist at Deloitte South Africa.

Globally, the tax practices of technology companies such as Apple, Amazon, Google and Facebook have come under fire. Local tax authorities are expected to set their sights on mining companies. “The Googles and Facebooks of Africa are mining companies,” Jessica van Onselen, Managing Director of JVO Consulting said.

A 2015 report by the African Union and United Nations Economic Commission for Africa, found that the continent is losing more than $50 billion a year in illicit financial flows (IFFs). According to the report, IFFs from the continent were the highest in extractive industries from 2000 to 2010, with 56.2% of IFFs coming from oil, precious metals and minerals, ores, iron, steel and copper.

The South African Revenue Services (Sars) recently recovered more than R5 billion lost through wasteful expenditure and transfer mispricing from 2011 to 2014. According to Oxfam South Africa executive director Sipho Mthathi, more than 50% of the money recovered came from the mining industry.

Now, with the commodities rout weighing on mining companies, Joubert said transfer pricing is no longer as big an issue for the industry as it was three or four years ago. “It’s most relevant where the money is being made and I’d argue that little money is being made in mining. But obviously as the commodity cycle turns and companies are more profitable it will become more important,” he said.

Van Onselen expects African efforts to combat BEPS to “change the mining industry” across the continent. “African governments are going to be watching these OECD developments closely and we can expect Pan-African bodies to follow suit to limit the potential for tax avoidance by multinational companies,” she said.

According to the OECD, first exchanges of information between countries will start in 2017 and will be based on information reported in 2016. “These big companies have the best tax lawyers around so it will be a number of years before this comes through and makes an impact,” said Francois Conradie, head of research at NKC African Economics.

He added that the OECD’s success would depend on how its measures are implemented, particularly as it relates to tax havens like the Cayman Islands and Jersey, both of which are tied to the United Kingdom, as well as Switzerland. The United Kingdom and Switzerland are signatories of the multilateral agreement. According to the OECD website, its BEPS project “…will have an impact on regimes that seek to attract foreign investors without requiring any economic substance.”