Designing a Legal Regime to Capture Capital Gains Tax on Indirect Transfers of Mineral and Petroleum Rights: A Practical Guide

Building on the momentum created by the Platform for Collaboration on Tax’s draft paper regarding taxing indirect transfers of source country assets, CCSI and the International Senior Lawyers Project (ISLP) wrote a paper providing practical guidance to developing country governments on the taxation of indirect transfers of extractive industries’ assets.  Indirect transfers occur when—instead of selling the asset—the shares of the domestic subsidiary, the shares of the foreign company with a branch in the country, or the shares of the holding company are sold.  In these cases, the right to capital gain attributable to the underlying situation in the host country is more likely to escape taxation by the host country on the transfer, unless the domestic law has special provisions to capture the gains made through such an Indirect Transfer.  

A recent illustration comes from DRC:

“In early May 2016, the miner Freeport McMoRan sold its 56% controlling stake in the Tenke Fungurume copper mine—one of the biggest mining projects in the Democratic Republic of Congo (DRC)—to China Molybdenum Inc. (CMOC) for $2.65 billion. The DRC received nothing from this deal.  Indeed, the DRC did not even know it was happening, despite owning a 20% equity stake in the project. This is because Freeport did not directly sell the Tenke Fungurume copper mine. Freeport sold its 70 % interest in TF Holdings Limited, a Bermuda holding company that owned an 80 % interest in Tenke Fungurume Mining SA, the company owning the mine. As a result, Freeport only owned its 56 % interest in Tenke Fungurume Mining SA and in the copper mine “indirectly”. It is the indirect stake that CMOC acquired. Thus, the acquisition of DRC mining rights was done in a jurisdiction outside of the DRC.” (CCSI, ISLP, 2017)

This guidance paper focuses on issues that the governments of developing countries may wish to consider if they adopt a policy to tax such transfers.  In doing so, it examines and provides the language of the legislative and regulatory provisions employed by countries that have adopted such a policy to tax, and comments on the pros and cons of these provisions. It also considers the impact of bilateral tax treaties on this issue.