Mining Giant Rio Tinto’s Tax Haven Scheme Costs Canada and Mongolia Nearly $700 Million in Lost Tax Revenue
by MiningWatch Canada
January 31, 2018
(Ulanbaataar/Amsterdam/Ottawa) The Dutch Centre for Research on Multinational Corporations (SOMO) and Oyu Tolgoi Watch (Mongolia) published a report today showing how tax planning by Australian mining giant Rio Tinto has led to nearly US$700 million in tax losses for the Canadian and Mongolian governments, related to one of the world’s largest copper and gold mines, the Oyu Tolgoi mine, located in southern Mongolia.
On the 15th of January 2018, Oyu Tolgoi’s owners received a US$155 million tax claim from the Mongolian government. It is just the latest effort by the Mongolian government to claim greater benefits from the project.
This report explains how the Australian mining giant Rio Tinto, and its Canadian subsidiary Turquoise Hill Resources, avoided nearly $470 million in Canadian taxes by using mailbox companies in two tax havens, Luxembourg and the Netherlands. The publication also shows how an abusive investment agreement covering the Oyu Tolgoi copper and gold mine has resulted in a $230 million tax revenue loss for Mongolia.
“Instead of providing finance for the Oyu Tolgoi mine from Canada, where its owner is registered, they have chosen to shift the mine’s profits to a subsidiary in Luxembourg called Movele, which manages billion dollar loans but has zero employees – a textbook case of treaty shopping, setting up subsidiaries solely to take advantage of international tax or investment agreements,” said SOMO researcher Vincent Kiezebrink.
This mailbox subsidiary has enjoyed a very low average effective tax rate of 4.19 per cent, likely due to a beneficial tax ruling with Luxembourg’s tax authorities. As a result of this tax scheme, Rio Tinto’s subsidiary Movele has paid US$89 million in taxes in Luxembourg, which is US$470 million less than what would have been paid in Canada if no tax avoidance scheme had been employed. The company reports that this arrangement was approved by Canadian authorities.
“This is an astonishing subsidy from Canadian taxpayers,” said Jamie Kneen, Communications and Outreach Coordinator for MiningWatch Canada.
“The public needs to know how and why this approval was granted.”
Canada has signed a range of tax treaties and investment agreements, including as part of free trade agreements that provide legal protection for what can be unfair and exploitative actions.
“The Canadian government is an enthusiastic supporter of international tax, trade, and investment agreements, but it needs to review its international agreements and introduce legal requirements to prevent abusive practices,” said Dennis Howlett, Executive Director of Canadians for Tax Fairness.
Canadian development aid to Mongolia is about $1 million annually, and is focused partly on supporting extractive sector development. Commented David Bruer, spokesperson for Inter Pares,
“Mongolia is a poor country that deserves development assistance, but it makes little sense for Canada to be sending aid at the same time as we are facilitating the hemorrhaging of huge amounts of money from the mining sector, which could be helping build badly-needed basic services.”
In addition, Rio Tinto and the other corporate investors behind Oyu Tolgoi achieved far-reaching concessions from the Mongolian government which severely limit the tax revenues Mongolia can hope to receive from the mine. Under pressure, the government of Mongolia facilitated Rio Tinto’s use of benefits enshrined in tax treaties with Luxembourg and the Netherlands — tax treaties which Mongolia unilaterally rescinded in 2013 due to concerns that they facilitated tax avoidance. Rio Tinto was able to negotiate an even lower tax rate in 2015, after a dispute over the distribution of Oyu Tolgoi’s revenues. As a result, the Mongolian government has missed out on approximately US$230 million in taxes over a five-year period.
“By agreeing to this arrangement, the government of Mongolia has failed to protect the interests of its people,” stated Sukhgerel Dugersuren, director of OT Watch.
“Given current austerity reforms in Mongolia, this tax revenue is much needed and could have allowed the government to nearly double its spending on education or healthcare in recent years.”
SOMO and OT Watch are joined by ActionAid Australia, MiningWatch Canada, Inter Pares, and Canadians for Tax Fairness in urging the governments of Mongolia, Luxembourg, Canada, the Netherlands, and Australia, as well as Rio Tinto and other stakeholders involved with Oyu Tolgoi, to work towards reviewing and revising the mine’s investment arrangement and the tax avoidance scheme. Action must be taken to ensure that mining in Mongolia serves the interests of the Mongolian people, not just corporate profits.
The report, "Mining taxes" is available here, along with Rio Tinto's rebuttal.
Recommendations The Government of Canada should:
- Review the tax ruling provided to Turquoise Hill Resources for the financing of Oyu Tolgoi and provide transparency on the content of the ruling. If this or any other Canadian ruling allows for double non-taxation of corporate income, the Government should revise its practice.
- Review and amend its corporate tax and fiscal policies (including dual taxation agreements, free trade agreements and bilateral investment treaties) to ensure that they do not allow multinational corporations to enjoy double non-taxation, and legal protection for abusive fiscal arrangements. Canada should refrain from negotiating a reduction of withholding tax rates for royalty and interest payments in any future dual taxation agreements. Canada should also introduce substance requirements for Canadian corporations and their subsidiaries, to ensure that legal entities in Canada, or that are using Canadian legal protection, have real economic substance.
- Ensure that its overseas development assistance and official support for extractive sector development, including EDC support, is oriented and delivered according to principles of providing the greatest benefit to host countries and affected communities, and meets all applicable environmental and social impact standards. In particular Canada should assist Southern countries to strengthen their capacity to negotiate equitable tax agreements and to collect taxes from resource extraction projects for domestic revenue generation.
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