Монгол»

The following is a summary of a piece that can be read in full on International Centre for Tax and Development's blog. A Mongolian translation of that longer piece can be read in full here. 

Governments of mining countries are vulnerable to investors using double tax agreements as a means of avoiding paying taxes. DTAs, as they are known, are bilateral, or multilateral agreements between countries that set out which country has the right to collect tax on different types of income. Interest expense on foreign loans is one such source of income. The DTA will specify how much tax the source country can collect on the interest paid by the local mining subsidiary, to its affiliate, usually in a lower tax jurisdiction. In most cases, the tax on interest expense (“withholding tax”) will be less under the DTA than domestic law, thus increasing the risk that investors use DTAs as a means of reducing their overall tax bill.

In a report issued by the Centre for Research on Multinational Corporations in February, Rio Tinto was accused of “illegitimately lowering” its withholding taxes paid to the government of Mongolia in relation to the Oyu Tolgoi copper mine. Rio allegedly did this by using a DTA between Mongolia and the Netherlands, in addition to which it negotiated an even lower rate of withholding tax in its amended mining agreement in 2011. This article reviews Rio’s tax arrangements, and concludes that although the concession had a material impact on government revenues, it would be an exaggeration to claim that that Rio avoided withholding tax on interest on shareholder loans, and there is no clear evidence of excessive interest deductions to support the suspicions of treaty abuse.

David Mihalyi is an economic analyst at the Natural Resource Governance Institute (NRGI). Alexandra Readhead is an independent consultant specializing in international taxation and extractive industries.