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  • Transparency in the Governance of Tax Incentives and Exemptions

    Chris Lenon, Chair BIAC Tax Committee 7 February 2012

    OECD, Paris

    Session II B: Business, Civil Society and International Organisation Perspectives

  • Governance of Tax incentives and exemptions

    What is the policy objective of providing Tax Incentives and Exemptions?

    How does a government ensure it is receiving value for money in providing Tax Incentives and Exemptions?

    In this context, how can the Taskforce work to control and maximise the value of tax exemptions to all parties?

    Is there a need for principles/best practices in incentives and exemptions?

  • Governance of Tax incentives and exemptions

    Why do governments offer incentives and exemptions to investors?

    Should some forms of economic activity be incentivised? If so, how?

    How should countries compete for investment and capital given that there is a finite supply?

    Which incentives/exemptions are most efficient? Why do investors seek investment agreements?

  • Three examples: Guinea, Mongolia and Madagascar

  • Guinea: Simandou (iron ore)

  • Guinea: Infrastructure

    Rail: A 710 km/440 mile trans-

    Guinean railway connecting the mine to the port (same distance as Paris to Nuremburg or Washington to Boston). Impact on neighbouring states.

    Port: Deep water port and processing

    facilities; two-berth facility located 17 km/10 mi offshore. No existing deep water ports in Guinea.

  • Mongolia: Oyu Tolgoi (copper/gold)

  • Mongolia: Infrastructure

    Large coal and copper reserves

    Provides infrastructure to Chinese market

    $5.6B investment Exports $54bn Will represent 25-35%

    of GDP GDP increases by 95%

    during production

    (Source: Ivanhoe Mines)

  • Mongolia: Oyu Tolgoi investment agreement

    Template established Long term investment Transparent reporting

    Terms of Investment

    Stable tax environment Generates tax and royalty revenue

    Taxation

    Flexible energy options Provision for roads

    Infrastructure

    90% Mongolian employees 5 year training & strategy plan Scholarships for local students

    Employment & Training

    New regional council Transparent community plans Participative and cooperative

    Regional development

    Detailed environmental impact assessments and protection plan

    Environment

  • Madagascar: QMM (Ilmenite) Infrastructure

    US$1B invested, leaving infrastructure legacy worth more than US$350M

    Infrastructure and Regional Development Plan across sectors and stakeholders including the World Bank, USAID, government, etc.

    Power and water supply facilities have been upgraded by US$7M and World Bank agreed to an additional US$4M. US$275M port development; Malagasy government investment of US$35M.

  • Governance of Tax Incentives and Exemptions: The Government policy challenge

    The challenge is to find the balance between attracting

    investment, assessing its value and conceding taxing rights to attract investment in a world in which capital and investment are finite.

    Is value about total taxes and receipts from the project over its life or the present value of those taxes and receipts?

  • Governance of Tax incentives and exemptions: The Government policy challenge

    The Investor will probably have more information about

    the investment and how it fits within the global economy and the Investors global portfolio than the Government.

    How does a Government level this playing field? Support from International organisations (OECD, IMF,

    World Bank) Support from Consultants

  • Governance of Tax incentives and exemptions: The investors perspective

    The evaluation of the investment opportunity will consider all risks and rewards from an investment tax is a part of this.

    The larger the upfront investment, the more emphasis there will be on protecting the recoupment of that investment.

    Stability and certainty are key elements effect on discount rate for project.

  • Governance of Tax incentives and exemptions: The investors perspective

    Is there a contract which has the force of law? Does it prevail over inconsistent laws? Is there a stabilisation agreement at the time of the

    investment? If so, for how long does it apply? Are there renewal rights? What are the termination rights? How are disputes resolved?

    What is the governing law?

  • Governance of Tax incentives and exemptions: The investors perspective

    Is there a government share of project and terms for acquiring share? What are carried interest/loan terms from project cash flows?

    Interaction of government share with tax regime for the project balance in extracting rent from the project.

    Non-project uses of project assets and infrastructure. Value of infrastructure and economics to country

    economy during project and after. How is the project financed?

  • Governance of Tax incentives and exemptions: The investors perspective

    Construction phase: VAT Customs duties Other import taxes Registration duties WHT on services WHT on royalties WHT on loan interest Effect on total capital

    investment, hurdle rate

  • Governance of Tax incentives and exemptions: The investors perspective

    Operating phase: VAT Customs duties Other import taxes Registration duties WHT on services WHT on royalties WHT on loan interest

    Corporate income tax Minimum corporate

    income tax Tax depreciation

    accelerated vs standard Tax credit for

    reinvestment Tax loss carry forward

  • Governance of Tax incentives and exemptions: The Governance Dilemna Value for Money

    Which incentives? VAT Customs duties Other import taxes Registration duties WHT on services WHT on royalties WHT on loan interest

    Which exemptions? Corporate income tax Minimum corporate

    income tax Tax depreciation

    accelerated vs standard Tax credit for

    reinvestment Tax loss carry forward

    Transparency in the Governance of Tax Incentives and ExemptionsGovernance of Tax incentives and exemptionsGovernance of Tax incentives and exemptionsThree examples:Guinea, Mongolia and MadagascarGuinea: Simandou (iron ore)Guinea: InfrastructureMongolia: Oyu Tolgoi (copper/gold)Mongolia: InfrastructureMongolia: Oyu Tolgoi investment agreementMadagascar: QMM (Ilmenite) InfrastructureGovernance of Tax Incentives and Exemptions:The Government policy challengeGovernance of Tax incentives and exemptions:The Government policy challengeGovernance of Tax incentives and exemptions:The investors perspectiveGovernance of Tax incentives and exemptions:The investors perspectiveGovernance of Tax incentives and exemptions:The investors perspectiveGovernance of Tax incentives and exemptions:The investors perspectiveGovernance of Tax incentives and exemptions:The investors perspectiveGovernance of Tax incentives and exemptions:The Governance Dilemna Value for Money

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