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

When a local asset (or a right relating to such asset) is sold, a country will generally have jurisdiction to levy a capital gains tax on the sale, both under domestic law and international treaty. This is called taxation of a “direct” transfer of a local asset. However, taxation becomes increasingly complicated when a company located offshore owns the local asset. Further difficulties arise when the local asset is held by a chain of corporations located in tax havens.  An “indirect” transfer occurs when 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, instead of the asset.

This guidance paper focuses on issues that  developing countries’ governments may wish to consider if they adopt a policy to taxation of indirect transfers on extractive industries’ assets.  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.