tax incentives and exemptions - oecd.org · governance of tax incentives and exemptions • why do...

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 Investor’s 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 investor’s 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.


• 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?


• 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?


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


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

tax incentives and exemptions - oecd.org · governance of tax incentives and exemptions • why do...

Documents