“While some tax practices may be technically legal, it may be argued they are ethically questionable,” says the report.
The report says multinational enterprises (MNEs) often undercharge for mineral products they export and overpay for routine corporate services and specialised goods and services, such as insurance and logistics. By doing this, they reduce the profit of the mining subsidiary and the tax collected in the host country.
MNEs have tended to structure their businesses by consolidating high-value functions and related intangible assets in hubs that provide goods and services to their global operations. They locate them in low-tax jurisdictions or in jurisdictions allowing the establishment of preferentially taxed special purpose entities.
The way MNEs organise their global corporate structures often leads to the eroding of the tax base of the host country as profit is shifted abroad. The functions of the mining subsidiaries are often stripped down to mostly routine activities using primarily less skilled employees and tangible assets, the report reveals.
The report says few mining companies are fully vertically integrated, while, increasingly, mining companies are entering into cross-border transactions which provide for high-value, specialised services and assets and financing.
The report says the “extreme complexity and artificiality” of some multilayered structures shows evidence that some conduit companies are effectively just “mailboxes” with no clear business purpose, adding little or no value. There are indications that they are primarily designed to cut the tax paid by multinational companies at the consolidated level.