For cross-border groups operating in the Natural Resources sector, the complex nature of cross-border taxation means that the consideration of financing, operating and profit repatriation from a taxation perspective is fundamental to ensure that risks are mitigated and efficiency maximised.
At commencement, and through the exploration and development phase, provision of services and funds flows are likely to be from the parent company to the often overseas based subsidiary and will be of significant value. How these are structured and priced is fundamental, as the provision of loans and services will have VAT consequences for all entities concerned, and potential Withholding Tax issues. Transfer Pricing principles will define the correct price for such transactions, be it service value or interest cost – whilst also protecting against a potential mismatch between taxable income, and lower allowable costs.
Once extraction operations commence, and income is generated, funds flow requirements will reverse. Loans may be repaid and profit distributed back to the parent – to fund dividends to investors, new operations, or maybe simply to house financial resources in a more stable environment. Again, a multitude of tax risks will need to be considered here.
