Durable extractive contracts are consistent with applicable laws, applicable international and regional treaties, and anticipate that host governments may introduce bona fide, non-arbitrary, and non-discriminatory changes in law and applicable regulations, covering non-fiscal regulatory areas to pursue legitimate public interest objectives. The costs attributable to compliance with such changes in law and regulations, and wholly, necessarily and exclusively related to project specific operations, should be treated as any other project costs for purposes of tax deductibility, and cost recovery in production sharing contracts.
If such changes in law and/or applicable regulations result in the investor’s inability to perform its material obligations under the contract or if they lead to a material adverse change that undermines the economic viability of the project, durable extractive contracts require the parties to engage in good faith discussions which might eventually lead the parties to agree to renegotiate the terms of the contract.
34. Contracts need to be respected and they must be implemented and interpreted in accordance with applicable laws.
35. Extractive contracts that recognise that regulatory regimes evolve over time, and so do the expectations and requirements that extractive projects must meet for the protection of public health, safety, security, the environment and communities, are more likely to be durable. In line with the OECD Guidelines for Multinational Enterprises, investors “should refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to human rights, environmental, health, safety, labour, taxation, financial incentives, or other issues”. Mitigation of regulatory risk related to changes in fiscal laws to cope with fluctuations in market and project performance conditions is addressed in Principle VIII.
36. Transparency and stakeholder consultations are best practice when policy and regulatory reforms are considered.
37. Negotiating in good faith implies that non-arbitrary implementation of existing laws that have been passed but are not yet in force or that provide for subsidiary or implementing regulations to be put in place should be anticipated.
38. A proper assessment of the legal and regulatory framework and socio-political context will help investors to anticipate the foreseeable development of laws and regulations to meet evolving practices in respect of health, safety, social, labour, human rights and environmental protections.
39. Without prejudice to other measures designed to pursue legitimate public interest objectives, it is presumed that bona fide non-fiscal changes in law that are consistent with relevant internationally recognised standards and best practices should not be regarded as arbitrary or discriminatory.
40. Investors take into account regulatory risk when deciding whether to invest in a project or in a country: the higher the perceived risk, the higher the investor’s risk premium or the less likely an investor is willing to invest, and the lower the assessed viability of the project and its profit potential.
41. Changes in law or regulations that are expropriatory, whether direct or indirect, are subject to the following rules. Foreign property cannot be expropriated unless the following conditions are met: (i) for public purposes, (ii) on a non-discriminatory basis, (iii) in accordance with due process of law, and (iv) against compensation.
42. The costs of compliance with changes in non-fiscal laws wholly and necessarily incurred in the pursuit of a specific project should be considered as any other project costs for purposes of tax deductibility. In oil and gas production sharing agreements, these additional costs would be recoverable from the allocation of “cost oil” or “cost gas”. In mining contracts, these additional costs would be treated as deductible expenses in both income taxes and rent taxes.
43. When introducing changes in non-fiscal laws, governments should consider that such changes may increase the project costs and make the project less profitable. A responsive fiscal regime, as recommended in Guiding Principle VIII, incorporates project costs, including any additional costs resulting from non-fiscal changes in law and helps to achieve an equitable sharing of financial benefits between the parties.
44. Extractive contracts should provide for procedures to facilitate the efficient and effective resolution of issues as they arise when changes in non-fiscal law and/or applicable regulations result in the investor’s inability to perform its material obligations under the contract or if they lead to a material adverse change that undermines economic viability.
45. In such circumstances, contractual provisions that require the parties to engage in good faith discussions to achieve an agreed solution and which might eventually lead to renegotiate the terms of the contract, where agreed between the parties, can help maintain mutual trust and support a continuous beneficial, long-term relationships.