Policy Analysis

What Is at Stake for the Mining Sector in the Global Digital Tax Reforms?

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) is discussing proposals to address the tax challenges that come from a digitalized economy - and which could have implications for mining.

By Alexandra Readhead, Thomas Lassourd on March 12, 2020

Governments of the 137 countries and jurisdictions that are members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) (IF) met in Paris in January to discuss possible solutions for addressing the tax challenges arising from the digitalization of the economy.

This process could have a massive impact on all countries, regardless of the importance of digital businesses in their economies. Some of the proposals on the table would change international taxation rules for all consumer-facing businesses, and others cover all sectors of the economy, including mining. All of them could eventually be enforced globally.

In 2019, the IF agreed on a Programme of Work that cemented a two-pillar approach (Organisation for Economic Co-operation and Development [OECD], 2019d). The approach raises issues that are politically and technically complex, thus making it difficult for anyone not closely following the debates to understand what is at stake in their respective industries. Based on the outcome of their discussions (OECD, 2020), the Pillar 1 (OECD, 2019f) and Pillar 2 (OECD, 2019a) proposals published last year, and public comments submitted to the OECD (OECD, 2019c), we describe below what we think is at stake at this stage for the mining sector.[1]

According to the outcome statement issued in late January 2020 (OECD, 2020), the member countries of the IF have only reached agreement on parts of Pillar 1, and not at all on Pillar 2. 

IGF member countries, therefore, still have time to shape the content of the reforms and should pay attention to the following elements of each Pillar.

They should also be sure to do so promptly, given that the IF process is aiming to endorse a “consensus-based solution” by the end of the year.

Pillar 1

There are three proposals under Pillar 1 (OECD, 2019f), which are referred to as “amounts” and are numbered A, B, and C. All three amounts are different “types of taxable profit that may be allocated to a market jurisdiction,” according to the January 2020 statement. Amounts B and C do not depend on Amount A; however, they can affect each other, and the design of one can have implications for the effectiveness of the other.

Amount A

“Amount A” establishes a new taxing right in the market jurisdiction (i.e., where goods and services end up). The aim is to catch (a) digitalized businesses that operate remotely, based in a separate location relative to the countries where their sales arise, which allows them to avoid having a taxable presence; and (b) consumer-facing businesses that already have a physical presence in the market country. For reasons we have previously explained (Readhead, 2019), which have been reiterated by ATAF and the Natural Resource Governance Institute (NRGI) (2019), our position is that the mining sector should be excluded from Amount A.

The IF shares our view, stating that mining taxes are “a price which is properly paid to the resource owner” for the exploitation of their natural resources.

Extractives are out of scope for Amount A, although it is not yet clear whether this will be ensured by a dedicated carve-out for the extractive sector or by carefully drafting the scope of this taxing right.

Regardless of the mechanism used to keep extractives out of scope, it is vital that the entire mining value chain be kept out, to ensure that taxing rights remain in the resource-rich country. Fortunately, the IF seems to be on the same page:

  • The mechanism will apply to “extractive industries and other producers and sellers of raw materials and commodities.” These other producers and sellers include smelters, refineries, and traders, among others. The alternative would mean that the right to tax profits from processed, more valuable mineral products would be transferred away from the resource-rich country.
  • Extractive companies that sell consumer-facing products, such as diamonds or petrol, are also out of scope for Amount A. This will prevent profits from a mine in Botswana—which would otherwise be subject to tax—being inadvertently transferred to the mine’s online sales arm in the United States, for example.

Early signs are promising, but a lot depends on how the final carve-out is drawn up. It is critical that the entire mining value chain is kept out of scope. The counterfactual would be disastrous for resource-rich countries.

Amount B

“Amount B” ascribes a fixed return to distributors that buy products from related parties for resale and in doing so perform “baseline marketing and distribution activities” in the jurisdiction where the final customer is located (“market jurisdiction”).

Crucially, Amount B does not depend on Amount A. This means although mining is out of Amount A, it can be subject to B. We are concerned that this may further reduce the tax base of resource-rich countries.

It is currently unclear whether Amount B will apply solely to distribution activities in the market country, or if it would include distributors in intermediate jurisdictions. Both types of arrangements exist in the mining sector.

Companies sell their mineral production to a related distributor, located in an intermediate jurisdiction, which is usually low-tax. The distributor on-sells it to a third party in the market country. They may be assisted by company staff that are based in the market country that perform technical marketing services, such as determining the quality of coal required by steel refineries. The result would be multiple Amount Bs in the same value chain. This could have the following effects:

  1. More money could be taken away from resource-rich countries, as well as those where mining companies are headquartered. Amount B would be on top of the marketing fees that are already deducted from the sale price paid to the mine by related distributors in intermediate jurisdictions.
  2. It could also validate the use of offshore marketing hubs in the mining sector. These hubs are a significant source of profit shifting, and hence tax controversy (Khadem, 2020).  Including them in Amount B would legitimize what are otherwise frequently hollow structures. On the other hand, setting a fixed return could limit the risk of tax avoidance, depending on how Amount B is defined. For example, if the Australian Tax Office’s (2017) approach were to be adopted, this would cap the remuneration of offshore marketing hubs at a low return on operating expenses.  

These effects would seem inappropriate and excessive, given that minerals require limited marketing in the first place. 

The January 2020 outcomes statement (OECD, 2020, p.11) would seem to support this view, stating that “extractives and other commodities are … generic goods which are sold, and whose price is determined, on the basis of their inherent characteristics.”

While further research is required, we think a carve-out for mining for Amount B may be necessary to protect the tax base of resource-rich countries and avoid encouraging the use of offshore marketing hubs.

Amount C

“Amount C” covers any additional profit where the distributor’s activities exceed the baseline marketing activities compensated under Amount B. Like Amount B, C does not depend on A, which means mining is potentially within scope.

A general problem with Amount C is that it would, in effect, incentivize tax planning. Multinationals will contractually allocate more risk to the distributor to get it into Amount C and increase its remuneration. This would likely bring back all the complex transfer pricing disputes that Pillar 1 was meant to avoid.

We have the same concerns about Amount C as for Amount B, only under Amount C the risks are likely to be greater for resource-rich countries. Market jurisdictions may argue that the type of marketing services performed there exceed the baseline activities and should receive higher remuneration. Offshore hubs will be incentivized to claim Amount C, further shifting profits out of resource-rich countries, and transferring them to low-tax jurisdictions. Thus, a carve-out from Amount C should also be considered.

We remain concerned that mandatory and binding arbitration is proposed as the approach for resolving disputes regarding Amounts B and C. While there is a lack of consensus among IGF member countries, some are strongly opposed on the basis that it infringes unduly on their sovereignty.

Pillar 2, also known as Global Anti-Base Erosion (GloBE)

As noted above, Pillar 2 is far less advanced than Pillar 1. Pillar 2 (OECD, 2019a) proposes setting a minimum rate of effective taxation for multinational companies to reduce profit shifting. The proposal contains four rules based on two country-based taxing rights:

1. The right to tax any undertaxed foreign income of multinational companies in the jurisdiction where the shareholders of the low-taxed entity are located, with the so-called:

  1. “income inclusion rule” that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate, and
  2. “switch-over rule” to be introduced into tax treaties that would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment (PE) or derived from immovable property (which is not part of a PE) are subject to an effective rate below the minimum rate.

2. The right to tax payments to foreign affiliated entities by companies operating within their jurisdiction when these payments are not taxed at a minimum level, with the:

  1. “undertaxed payment rule” that would operate by way of a denial of a deduction or imposition of source-based taxation (including withholding tax) for a payment to a related party if that payment was not subject to tax at or above a minimum rate and
  2. “subject to tax” rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source and adjusting eligibility for treaty benefits on certain items of income where the payment is not subject to tax at a minimum rate.

Countries in the IF do not seem to agree (OECD, 2019e) on the objective of the proposal. Some governments, and many academics, international organizations, and civil society groups (ICRICT, 2019), support the near-total elimination of tax competition between countries. Other governments, supported by industries that rely on preferential tax treatment, recommend improving the 15 existing BEPS actions (OECD, n.d.) to provide stronger protection against aggressive tax planning, rather than adopt a minimum tax. This would limit the motivation for tax havens to offer very low or zero rates of tax on company profits while maintaining the power of governments to offer tax incentives in exchange for meaningful investment and economic activity.

In the mining sector, the IGF Secretariat encourages governments to adopt a rigorous approach when considering tax incentives. Our work has shown (IGF, n.d.) that such incentives are often unnecessary to attract investment in profitable extraction projects, and even when they are, the types of incentives used may not be the most cost-efficient way to achieve the intended policy outcome.

We are, therefore, in favour of a minimum tax on multinational profits, to the extent that it would reduce the pressure on governments to engage in costly tax competition. It would also need to take into account the realities of the mining sector, such as the long lead time to production and the impact on profitability for long periods.

Pillar 2 will ultimately be defined through the IF political process, which is complex and difficult. Because of the disagreements on its objective, the outcome might be a set of rules that aim for an effective global minimum tax, but with limitations and carve-outs (Taxnotes, 2020) that would limit its effectiveness (ICRICT, 2020) and increase its complexity. If IGF member countries want to shape the rules of Pillar 2 to protect their taxing rights and increase their ability to fight tax avoidance, they should weigh in on the following points:

1. Sequencing

Countries disagree about which of these four rules should take precedence over the others. The order of rules presented under Pillar 2 seems to imply that the income inclusion rule, which would be applied mostly by countries that are home to multinational companies, would take priority over the undertaxed payment rule. The latter would be most effective for developing countries where multinational companies operate. That order is supported by most corporations but rejected by developing country voices, including ATAF, which supports the opposite order of priority so that developing countries have a better chance of collecting additional revenue from undertaxed foreign income (ATAF, 2020). The importance of this debate depends on whether the GloBE rules are meant to generate revenue for governments directly, or indirectly, by curtailing companies’ use of tax havens and aligning profits with economic activity.

In the mining sector, there is an added complexity. Many mining projects operate under stabilization provisions (IGF, 2020). These provisions could prevent the application of a minimum tax by host countries for many years, or decades, unless all actors operate under the OECD’s (2019b) Guiding Principles for Durable Extractive Contracts, which state the rights of governments to adopt and apply bona fide anti-avoidance measures to mining operators.

2. Tax Rate

The minimum tax rate is a very sensitive parameter that will be the subject of intense negotiations in this process. No rate has been put forward by the proposal yet. The mining sector is often subject to a higher rate of tax than other business activities because of the existence of location-specific rents and public ownership of the resource, typically between 25% and 35% (International Monetary Fund, 2010).  Unless the minimum tax rate is aligned with statutory tax rates for the mining sector, the GloBE rule is unlikely to change taxpayer behaviour in the mining sector. ATAF makes a similar point in its 5th Technical Note (ATAF, 2020), as most of its members have statutory rates in that same range, beyond the mining sector.   

3. Blending of Income

To enforce a minimum tax on profits made abroad, in each jurisdiction where they operate, multinational companies would have to declare foreign profits and taxes. There are three options on the table for how the foreign income and taxes would be declared, also known as blending: by entity, by country, or globally. Based on the effective tax rate on foreign income discussed above, each jurisdiction could then apply a rule from Pillar 2.   

Large multinational extractive companies prefer worldwide blending of income, based on group financial statements because it would reduce compliance costs and enable mixing low-taxed income with high-taxed income to show a higher blended rate on average. The impact of global blending on junior miners, smaller and state-owned mining companies is not as clear and should be properly assessed. ATAF and other developing country voices favour jurisdiction-based blending (ATAF, 2020). This could provide more tools to their tax administration to identify and capture undertaxed payments, but potentially create additional sources of conflicts between countries to divide taxable income.

We think that the case for the worldwide blending of income is stronger if the minimum global tax rate is set at higher levels (above 25%) and recommend further impact analysis before the IF agrees on a rate.

4. Payments Included

Extractive industries are typically subject to additional payments to host country governments in addition to corporate income taxes. These additional payments can include royalties, bonus payments, a share of production, or capital gains taxes. The more payments that are included, the easier it will be for companies to reach the minimum tax rate. We think that mineral royalties, as compensation for the right to extract a country’s non-renewable resources, should be excluded from the calculation of the minimum effective rate, but other payments connected to profits and income taxes could be included.


The goal of the IF is to reach an agreement by the end of 2020. This is ambitious, given how much countries need to agree on in the next 10 months, and how little they know of the potential impact of the outcome. Rigorous analysis of the potential impact of the proposals, under various scenarios and different parameters, will be critical to the decision-making process.

We encourage IGF member countries to engage closely with the IF process and coordinate with each other in order to safeguard—and potentially strengthen—mining revenues. In the coming months, the IGF Secretariat will share additional analysis on the different elements of the two pillar proposals and work with developing country representatives to strengthen the position of resource-rich developing countries in the IF political process ahead of the next meeting in July.


African Tax Administration Forum. (2019). Home page.

African Tax Administration Forum. (2020). Inclusive Framework issues Statement on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy.

African Tax Administration Forum. (2020). Media statement on the outcomes of the Inclusive Framework meeting 29 to 30 January 2020.

Australian Taxation Office. (2017). Practical compliance guideline PCG 2017/1.

Hearson, M. (2020). Corporate tax negotiations at the OECD: What’s at stake for developing countries in 2020?

Independent Commission for the Reform of International Corporate Taxation (ICRICT). (2019). ICRICT response to the OECD Consultation on Global Anti-Base Erosion Proposal (“GloBE”) - Pillar Two.

Independent Commission for the Reform of International Corporate Taxation. (2020). The OECD’s proposed reform will fail to generate meaningful additional tax revenue, especially for developing countries.

Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF). (n.d.). Minimizing the risks of tax incentives in mining.

Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development. (2020). Fiscal stabilization.

International Monetary Fund. (2010). The taxation of petroleum and minerals : Principles, problems and practice.

Khadem, N. (2020). BHP loses tax case over Singapore marketing hub, hit with $125 million bill. Australian Broadcasting Corporation.

Natural Resource Governance Institute (NRGI). (2019). Should the OECD’s proposal for a “unified approach” on corporate taxation exclude extractive industries?

Organisation for Economic Co-operation and Development (OECD). (n.d.). BEPS actions.

Organisation for Economic Co-operation and Development. (2019a). Global anti-base erosion proposal (“GloBE”) – Pillar Two.

Organisation for Economic Co-operation and Development. (2019b). Guiding principles for durable extractive contracts.

Organisation for Economic Co-operation and Development. (2019c). OECD invites public input on the Secretariat Proposal for a "Unified Approach" under Pillar One.

Organisation for Economic Co-operation and Development. (2019d). Programme of work to develop a consensus solution to the tax challenges arising from the digitalisation of the economy.

Organisation for Economic Co-operation and Development. (2019e). Public comments received on the Global Anti-Base Erosion (GloBE) Proposal under Pillar Two.

Organisation for Economic Co-operation and Development. (2019f). Secretariat proposal for a “Unified Approach” under Pillar One.

Organisation for Economic Co-operation and Development. (2020). Statement by the OECD/G20 Inclusive Framework on BEPS on the two-pillar approach to address the tax challenges arising from the digitalisation of the economy.

Readhead, A. (2019). Resource-rich countries and the digital tax agenda.  Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development.

Taxnotes. (2020). Want a Pillar 2 exemption? Get in line.

[1] For a good recap of the pillars and issues at stake for developing countries, we recommend the African Tax Administration Forum’s (ATAF’s) Technical Notes (ATAF, 2019) and a summary brief from the ICTD (Hearson, 2020).

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