OECD | proposal on the taxation of the extractive industries
On November 16, 2023, the OECD issued a discussion paper on treaty provisions for the extractive industries. This sector's taxation is crucial for countries rich in such resources. The OECD proposal sets a very low threshold for granting taxation rights in respect of corporate and employee income. Additionally, the broad scope of the definition of "relevant activities" significantly affects service providers in the extractive industry.
Currently, there are approximately 200 double taxation agreements (DTAs) worldwide with provisions for the taxation of the extractive industry. The proposal, not aimed for the OECD Model Tax Convention itself but for the OECD Model Commentary (OECD-MC), advises states on incorporating these provisions into their treaties.
Lowering the Permanent Establishment Threshold
The core of the OECD proposal is a DTA provision that results in a permanent establishment if a relevant activity exceeds a duration of just 30 days in a variable twelve-month period, thereby allocating taxation rights to the state where the resources are located. The OECD proposal offers an option to cover either just offshore activities (Option 1) or both offshore and onshore activities (Option 2) as "relevant activities".
In Option 1, "relevant activities" are understood to include the exploration and exploitation of the seabed and its subsoil and their natural resources. Option 2 extends the term to also include the exploration and extraction of non-renewable natural onshore resources and other related specialized activities, excluding non-direct activities like transportation by ships and aircraft. According to the public consultation document “related spezialized activities” would include services such as assembly, installation and maintenance of specialised mining infrastructure and equipment, the performance of engineering and consultancy services, and the carrying out of seismic surveys.
Taxation Rights on Capital Gains
Capital gains taxation is redefined to include gains from the sale of assets related to natural resources, following Article 13 of the OECD Model Tax Convention. This means gains from immovable property, permanent establishment property, and shares related to exploration or extraction activities could be taxed by the state where the resource is located.
Taxation Rights on Employee Income
Employee income taxation is also addressed, suggesting that states could tax non-resident employees’ income from extractive activities exceeding 30 days in a 12-month period, modifying the general 183-day threshold. This would apply even if the employer has no permanent establishment in the state, expanding the scope of taxable employment income under Article 15 of the OECD Model Tax Convention.
Conclusion
Conclusion
The OECD’s proposal aims at modernizing tax regulations for the extractive industries, lowering the threshold for establishing a permanent establishment, and broadening taxable activities and income sources. This initiative seeks to balance the interests of resource-rich developing countries with the need for a standardized taxation framework. As expected, the short threshold has been criticised in the public comments provided to the OECD, as it will lead to excessive administrative burden and many small permanent establishments. Comments have called for the use of 183 days or six month as a threshold, as this would also be coherent with other tax thresholds (eg article 15 (2) OECD-MTC).