LIMITING THE IMPACT OF EXCESSIVE INTEREST DEDUCTIONS ON MINING REVENUE

The document examines how multinational enterprises (MNEs) in the mining sector use debt financing to shift profits from host countries to offshore jurisdictions. It details common base erosion techniques—such as debt 'push downs', interest rate markups, and hybrid instruments—and evaluates various policy responses. The primary recommendation is the implementation of BEPS Action 4, which links net interest deductions to a fixed ratio of taxable EBITDA (between 10% and 30%). The guide also discusses complementary measures including thin capitalisation rules, interest withholding tax (IWT), and transfer pricing regulations, while emphasizing the need to balance tax base protection with the maintenance of an attractive investment climate.

• Mining is a capital-intensive industry requiring hundreds of millions of dollars in up-front expenditure for construction and infrastructure before revenue is generated, which creates a structural reliance on diverse financing sources.
• Multinational enterprises (MNEs) often centralize financing through a 'group treasury' located in jurisdictions with low operating costs, strong legal frameworks, and lightly taxed interest income to minimize corporate income and withholding tax costs.
• MNEs may engage in 'debt push down' or leveraged buy-outs, where an offshore entity borrows funds to purchase a mine and then lends those funds to the local operating entity to generate interest deductions that reduce the host country's tax revenue.
• Other high-risk base erosion techniques include using hybrid financial instruments to exploit differences in tax treatment between countries, and embedding financing costs into asset purchase prices to avoid interest withholding tax (IWT).
• BEPS Action 4 provides a framework to limit interest deductions by linking them to a fixed ratio of taxable earnings before interest, depreciation, and amortisation (EBITDA), with a recommended ratio range of 10 to 30 per cent.
• To accommodate the volatility of commodity prices and the high initial costs of mining, the document recommends allowing the carryforward of disallowed interest expenses, provided the loans have a legitimate business rationale.
• Thin capitalisation rules, which limit the debt-to-equity ratio (e.g., 1.5:1 in Australia and Canada), are an established but often easily circumvented method of limiting debt quantity.
• The 'Uruguayan Rule' is a specific measure that limits interest deductions based on the difference between the host country's and the foreign affiliate's income tax rates to negate profit-shifting incentives.
• For capacity-constrained developing countries, the recommended 'package' of defences consists of BEPS Action 4, interest withholding tax (IWT), and transfer pricing provisions.

APA

Devlin, D. (2018). LIMITING THE IMPACT OF EXCESSIVE INTEREST DEDUCTIONS ON MINING REVENUE. International Institute for Sustainable Development. https://www.iisd.org/system/files/2024-07/limiting-impact-excessive-interest-deductions-mining-revenue.pdf

Chicago

Devlin, Dan. LIMITING THE IMPACT OF EXCESSIVE INTEREST DEDUCTIONS ON MINING REVENUE. International Institute for Sustainable Development, 2018. https://www.iisd.org/system/files/2024-07/limiting-impact-excessive-interest-deductions-mining-revenue.pdf.

Wikipedia

{{cite report |last1=Devlin |first1=Dan |title=LIMITING THE IMPACT OF EXCESSIVE INTEREST DEDUCTIONS ON MINING REVENUE |publisher=International Institute for Sustainable Development |date=2018 |url=https://www.iisd.org/system/files/2024-07/limiting-impact-excessive-interest-deductions-mining-revenue.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{devlin2018limiting, author = {Devlin, Dan}, title = {{LIMITING THE IMPACT OF EXCESSIVE INTEREST DEDUCTIONS ON MINING REVENUE}}, institution = {International Institute for Sustainable Development}, year = {2018}, url = {https://www.iisd.org/system/files/2024-07/limiting-impact-excessive-interest-deductions-mining-revenue.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }