in their countries of residence is very important to them. This is particularly so when the countries concerned have global taxation regimes (foreign source income earned abroad is taxed in the taxpayer’s country of residence), as in the United States and the United Kingdom. If foreign tax credits are available for taxes paid by the multinational in the source country, they can offset home country taxes (Mullins 2010, 384–88). Obviously, where this is permitted, there are detailed rules governing its operation.27 Such double taxation treaties are modified from time to time to take into account changing global tax practices. In situations where tax treaties do not exist to prevent double taxation, some parent companies may be tempted to set up an intermediary “paper company” in a tax haven as the owner of the subsidiary company in order to gain those tax benefits. Governments can prevent this by including provisions in their tax laws that deem such practice as tax evasion, subject to substantial penalties (Calder 2010b, 33). In recent years, tax treaties have attracted critical scrutiny. As one authority notes diplomatically, “The experience of resource-rich countries in entering into double tax treaties varies” (Mullins 2010, 388). Such treaties make sense in cases where there are relatively even flows of capital between signatory countries, but where capital flows mainly in a single direction, which is the case in most resource-rich poor countries, the basis for such treaties is less clear, since they work only to decrease host-state revenues (Daniel et al. 2016).
Confidentiality of EI agreements
All EI states have a fiscal regime embedded in the law. Some states have also negotiated and signed separate, generally confidential EI sector agreements that contain special fiscal regimes unknown except to the investor, the tax authority, and a very small number of officials who have access to the agreement (see chapter 8).28 During the commodity boom of 2007 and 2008, a number of these agreements in the mining sector came to light when governments found that tax payments did not increase commensurate with profitability because of fiscal concessions made in the contracts (ICCM 2009, 32). The risk of corrupt practices, poorly informed decisions, and mismatched negotiating capabilities can be avoided by keeping the mining fiscal regime in the law and refraining from modifying it in separate confidential agreements. If separate agreements are made, making them public and transparent will give governments and the state at large full knowledge of the tax regime.
6.6 EI FISCAL ADMINISTRATION
Many of fiscal administration requirements and procedures apply equally to EI and fiscal administration generally. The United Nations has classified the following actions as essential functions of any fiscal administration: In order to execute its basic mission, a tax administration performs certain fundamental functions: taxpayer registration and identification, assessment (including valuation), collection and audit. These functions have been classified as “essential.” . . . The “essential” functions have also been labelled “operational,” since they involve the actual collection of taxes and entail close relations with taxpayers (UN 1997, 19). The OECD (2013, 273–95) likewise defines the basic functions of tax administration as including assessment of taxes, including imposing sanctions to deter and penalize noncompliance, and the power to obtain relevant information from taxpayers. Given the very large amounts of money typically involved in oil, gas, and mining, and the transformative potential they have, it is critical to get the fiscal administration right.29 A well-designed but poorly drafted or implemented fiscal regime may fall far short of its tax-raising potential. The nonrenewable character of the resources underlines the importance of sound fiscal administration. The irony is that in the EI sector, the bulk of the revenues are often paid by a very few large taxpayers, so the scale of administrative capacity required should not be large. Moreover, for the investors the maintenance of good relations with the host government will tend to be of great importance. A basis for success in fiscal administration of the extractives does exist. Careful identification of fiscal objectives and selection of fiscal instruments is of little use if fiscal authorities prove incapable of implementing the resulting regime. Tax policy and administration
Several of the key fiscal objectives identified at the beginning of this chapter argue in favor of a progressive, profitsbased tax regime. Critics have faulted these regimes on grounds of their perceived complexity and difficulty of administration. However, the simpler systems with which the critics would replace them (such as royaltybased regimes) have drawbacks of their own in terms of
CHAPTER 6: FISCAL DESIGN AND ADMINISTRATION
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