Tax treatment of gains on the sale of assets in the extractive sector in DRC: A much-needed mix of human rights, sustainable development and legal certaintyPosted: 23 July, 2018
Author: Eric Ntini Kasoko
Prospective Independent Tax Advisor; Researcher
The extractive industry consists of operations of exploration and/or exploitation of nonrenewable natural resources, especially gas, petroleum and mining operations. A distinction is to be made between the hydrocarbon sector (which comprises petroleum and gas activities) and the non-hydrocarbon sector (which relates to mining activities). Mineral-rich countries may choose to enact an all-encompassing piece of legislation to regulate both sectors. They may also opt for two or even three different pieces of legislation, each designed to regulate a specific sector.
In the Democratic Republic of Congo (DRC), the Law on Hydrocarbons deals with petroleum and gas operations, while other mineral resources are governed by the Mining Code. DRC’s national budget relying heavily on revenues deriving from extractive industries, the authorities decided to introduce a modern mining law in 2002, which offered income tax incentives intended to attract foreign investors. Lately, however, the country has changed its direct tax policy regarding mining companies by amending mining tax rules. Under the 2002 Mining Code, civil society organisations had been denouncing abusive tax avoidance strategies used by multinational mining companies to erode the country’s tax base and shift profits away from DRC to foreign jurisdictions. In particular, public opinion was outraged that the country did not tax non-residents on gains realised on the sales of local mining assets.
It is worth noting that mining and tax legislators distinguish typically between an asset sale and a share sale. When a mining asset located in country A is sold, both domestic law and tax treaty provisions generally allow for the taxation of the potential gain from the disposition of the local asset. However, the situation becomes tricky when the asset sold is legally owned by a company established in country B. This is especially the case when the ultimate shareholder (located in country B) sells the shares in its domestic subsidiary located in country A. A similar situation arises when the ultimate owner (in country B) sells the shares in its asset-owing subsidiary established in a country other than country A. When the asset-owing subsidiary is in a low-tax country, the sale of the shares would result in shifting the profits from the country in which the asset is located to the low-tax country. Basically, if a company sells a mining asset located in another country via a share transaction, it is an indirect transfer of the underlying asset (as opposed to a direct transfer of assets).
The Organisation for Economic Cooperation and Development and the United Nations encourage mineral-rich countries to levy a capital gains tax on “indirect” sales of mining assets. Article 13(4) of model tax conventions from both international organisations provides that, under certain conditions, capital gains on sales of the shares in extractive companies shall be taxable in the source country, i.e. the country in which the underlying asset is located. DRC has entered into income tax treaties with Belgium and South Africa, which are inspired by the above-mentioned model tax conventions. Strangely enough, while the tax treaty with South Africa clearly covers capital gains deriving from “indirect” transfer of assets, the tax treaty with Belgium contains an article 13(4) in which the word “indirectly” is missing. Article 13(4) normally constitutes an anti-evasion tax measure which, in the absence of the word “indirectly, can be easily circumvented by taxpayers seeking to shift profits to low tax regimes. This can be achieved by interposing a holding company between the ultimate shareholder and the local asset. What is even more strange is that the wording of the article 13(4) of the Belgium-DRC tax treaty seems to exclude from its application extractive resources (as opposed to other types of immovable assets).
Another shortcoming is found in the domestic tax regime pertaining to extractive industries. While DRC is not (yet) a major hydrocarbon-producing country, the Law on Hydrocarbons allows for the taxation of offshore indirect disposals of petroleum and gas assets. When read in conjunction with article 78, article 84 of the Law on Hydrocarbons seems to cover capital gains deriving from the sales of assets by non-resident persons via “share deal”. The difference between the formulation used in the domestic law and that contained in the Belgium-DRC tax treaty creates legal uncertainty for taxpayers and the taxman. A good articulation between national norms and international norms is generally necessary to protect taxpayers’ rights while at the same time securing national tax revenues.
Concerning the mining sector, even though DRC is a major mineral-producing country and substantial gains on sales of assets have been realised by non-resident companies in recent years, the 2018 new Mining Code does not provide for the taxation of these revenues. In some ways this is surprising since securing tax revenues is essential to meet sustainable development goals (SDGs) in developing countries. Unlike millennium development goals, SDGs are primarily based on international human rights standards, including socioeconomic/basic rights such as access to education and healthcare. In Africa, African Union and its Member States have taken up for themselves the implementation of the United Nations’ 2030 Agenda for sustainable development through a joint policy framework (“Agenda 2063”) designed to foster a locally adapted, human-rights based approach to development.
At the 2015 International Conference on Financing for Development held in Addis Ababa, United Nations member states undertook the commitment to “substantially reduce illicit financial flows by 2030”, including by reducing opportunities for tax evasion through the insertion of anti-abuse clauses in bilateral and multilateral tax treaties. The Congolese government’s decision not to tax could appear to be at odds with its commitments with respect to sustainable development and human rights.
However, not everything in the new Mining Code is detrimental to ensuring the protection of tax revenues with regard to the sales of mining assets by multinational companies. As the country lost billions of dollars from the mispricing of mining assets sold to offshore companies in the past, an innovative provision now obliges affiliated companies (e.g. a company and its subsidiary) to price their transactions at arm’s length, i.e. under normal market conditions. Moreover, under the Law on Tax procedure, companies established in DRC are required to provide the tax administration with general and specific information on transactions with foreign companies that are related to them.
Although this is a step forward, more perhaps needs to be done to ensure that the country’s tax base is effectively protected, especially if the government is intent on mobilising public resources necessary for the achievement of international sustainable development and human rights standards.
About the Author:
Eric Ntini Kasoko is a prospective Independent Tax Advisor (with the Institut des Experts-comptables et des Conseils-fiscaux) and an independent researcher. He holds a Master’s degree in Law and an Executive Master in Tax Management from the Université Libre de Bruxelles.