4.2 The Contribution of TCL to a ‘ Balanced ’ Commodity Sector
4.2.1 TCL Is Largely Indirect
4.2.1.3 Fiscal Framework
The degree to which a commodity-endowed state benefits from extraction depends substantially on its fiscal law framework. This relates not only to its interest of economic gain, but also the one of development—as an objective ideally shared between state and population. International instruments and standards provide some guidance on how to design thefiscal conditions under which commodity operations
128Hey (2011), para. 5 defines the CBDR principle as‘a means of translating the concept of intra-generational equity to the inter-State level, and the South-North context in particular, with a view to attaining sustainable development.’
129Oehl (2019), p. 34.
130Cf. Hey (2011), para. 5; ILA (2002) para. 3.1.
131Accordingly,‘[s]tates shall co-operate in a spirit of global partnership to conserve, protect and restore the health and integrity of the Earth’s ecosystem[]’, cf. Wolfrum (2010), para. 28.
132Cf. Wolfrum (2010), paras. 29–30 moreover pointing i.a. to Article 1 of the 1993 North American Agreement on Environmental Co-operation as well as the 1985 Vienna Convention for the Protection of the Ozone Layer (cf. e.g. Article 2(2)(a)). Cf. also ITLOS (2001)MOX Plant, Order of 3 December 2011, para. 26, according to which the UK‘breached its obligations under Articles 123 and 197 of UNCLOS in relation to the authorisation of the MOX plant, and has failed to cooperate with Ireland in the protection of the marine environment of the Irish Sea inter alia by refusing to share information with Ireland and/or refusing to carry out a proper environmental assessment of the impacts on the marine environment of the MOX plant and associated activities and/or proceeding to authorise the operation of the MOX plant whilst proceedings relating to the settlement of a dispute on access to information were still pending[.]’
133Beyerlin and Grote Stoutenberg (2013), para. 82.
134Beyerlin and Grote Stoutenberg (2013), para. 82.
4.2 The Contribution of TCL to a‘Balanced’Commodity Sector 91
are taking place, such as double taxation agreements (DTAs). The general challenge for the host state of commodity activity consists offinding the right balance between capturing sufficient resource rents while maintaining an attractive business and investment environment.135 Again, most guidance provided in international stan-dards and instruments does not consciously consider commodity policy trade-offs.
The Model United Nations Double Taxation Convention between Developed and Developing Nations (UNDTC) and the OECD Model Tax Convention (OECDMTC) on Income and on Capital constitute two central instruments of transnational fiscal law.136 Both conventions are primarily concerned with preventing double taxation (DT).137They have found wide acceptance today, with many states having effectively translated particularly the OECDMTC into their national tax laws.138In addition, both conventions have inspired the conclusion of more than 3000 bilateral DTAs.139
In the context of commodity operations, both conventions are relevant particu-larly with regard to corporate income taxation. According to Article 7 of the OECDMTC, corporate profits shall generally only be taxable in the state of corporate residency.140However, where the company maintains business through a so-called permanent establishment (PE) in another contracting state, the profits that are attributable to the PE may be taxed in that state—the state of source. Article 5 (1) OECDMTC generally defines a PE as‘afixed place of business through which the business of an enterprise is wholly or partly carried on.’According to Article 5(2) (f) OECDMTC, the term PE includes especially‘a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.’The UNDTC contains identical provisions. Consequently, the host state to a multinational commodity enterprise, which is headquartered elsewhere, may generally tax those profits of the corporation that have been generated through a commodity extraction site on its territory.
However, Article 5(2)(f) OECDMTC is only indicative of the existence of a PE. As the commentary to the UNDTC with regard to the identical provision contained in the latter states, ‘it does not provide that [a PE] necessarily does exist.’141
Despite this explicit reference to commodity activity in Article 5(2) (f) OECDMTC, some authors have highlighted that the PE clauses provided by
135Cf. UN (2017a), pp. 3–4.
136See also the US Model Income Tax Convention, available at US Treasury,https://www.treasury.
gov/resource-center/tax-policy/treaties/Documents/Treaty-US%20Model-2016.pdf (last accessed 14 May 2021).
137Margalioth (2011b)—comparing it to the OECDMTC—describes the UNDTC as being‘bent in favour of developing countries, imposing fewer restrictions on the tax jurisdiction of the source country’, para. 88.
138Margalioth (2011b), para. 5.
139Margalioth (2011a), para. 6.
140On the corresponding formal and substantive tests that states are typically carrying out in order to determine corporate residency, Margalioth (2011b), paras. 18–28.
141UN (2017b), p. 153; Almeida and Toledano (2018), p. 16.
the model conventions do not sufficiently cover the specificities of extractive industries.142Apart from the physical presence of the corporation, DTAs typically require business operations to be carried out for a certain period of time and to be of a particular character, especially not to be merely auxiliary activities.143In this respect, what can cause difficulties for source states is the intricate net of contracts, joint ventures, subcontractors, and consortia frequently surrounding commodity opera-tions—particularly given that they may each be considered separately for tax purposes.144Especially operations carried out by subcontractors may be structured in a way so as to avoid the thresholds regarding time and type of activity under the applicable DTA.145As a result, the state concerned may be unable to tax the commodity activity.146In order to counter such trends and therefore increase the tax revenue of the respective source states, Almeida and Toledano i.a. propose a specific PE clause for resource-rich countries.147
Apart from the issue of what constitutes a PE—i.e. under what conditions the state in which the commodity activity occurs may levy a respective source tax–, both model conventions also set forth rules onhowprofits, which are attributable to a PE, shall be calculated. According to Article 7(2) OECDMTC, profits attributable to a PE
. . .are the profits it might be expected to make, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions. . .
This provision, which is contained with similar wording also in Article 7 (2) UNDTC, is being generally referred to as the arm’s length principle.148The main objective of this principle is to prevent the practice of so-called transfer pricing, which has been deemed to be ‘one of the most important issues’ in international taxation.149 The arm’s length principle counters this practice by allowing tax administrations to adjust the prices of intra-group transactions to
142Almeida and Toledano (2018), p. 1; cf. especially the corresponding‘Proposed Guidance on Permanent Establishment in the Extractive Industries’presented by the Committee of Experts on International Cooperation in Tax Matters, UN Doc. E/C.18/2016/CRP.22,https://www.un.org/esa/
ffd/wp-content/uploads/2016/12/13STM_CRP22_Extractives_PEs.pdf (last accessed 14 May 2021) that the authors have built their deliberations on.
143Almeida and Toledano (2018), p. 13.
144Almeida and Toledano (2018), p. 13.
145Almeida and Toledano (2018), p. 14. The OECDMTC is less favourable for source states in this respect, for instance requiring a minimum period of 12 months for a construction activity to qualify as a PE according to its Article 5(3), whereas the UNDTC sets a respective threshold of only 6 months according to its Article 5(3)(a).
146Cf. Almeida and Toledano (2018), p. 14.
147Almeida and Toledano (2018), pp. 41–44.
148These provisions apply to intra-group transactions between different branches of the same corporation. Article 9(1) OECDMTC and Article 9(1) UNDTC constitute the respective provisions forsubsidiariesorassociated enterprises; Margalioth (2011b), para. 69.
149Tian (2018), p. 36.
4.2 The Contribution of TCL to a‘Balanced’Commodity Sector 93
usual market prices. Corresponding methods to approximate the‘arm’s length price’ are the Comparable Uncontrolled Price Method, the Cost Plus Method, the Resale Price Method, the Transactional Net Margin Method, as well as the Profit Split Method.150Not least given that a large share of commodity transactions is being conducted by TNCs,151transfer pricing constitutes a major issue also in our sector under investigation.152
Fiscal transparency and exchange of information between tax authorities are playing a key role infinancial regulation. When it comes to cross-border collabora-tion of tax administracollabora-tions and respective exchange of informacollabora-tion, particularly the OECD Model Agreement on Exchange of Information on Tax Matters is providing important guidance. Pivotal international standards are so-called exchange of infor-mation requests (EOIR) as well as the automatic exchange of financial account information (AEOI), which feature in Articles 5 and 6 of the authoritative Conven-tion on Mutual Administrative Assistance in Tax Matters respectively.153