Closing Loopholes in Resource Taxation Through UN and OECD Treaty Reforms

For many resource-rich developing economies, ensuring fair taxation of extractive industries remains a persistent challenge. Mining, oil, gas, and renewable energy sectors drive public revenue and sustainable growth, yet international tax rules have failed to keep pace with modern, cross-border operations.

Under most tax treaties, foreign companies are taxable in the source country only if they maintain a permanent establishment (PE)—typically defined as a fixed place of business or a project lasting more than six or twelve months. These thresholds are easily bypassed through contract-splitting or subcontracting strategies, allowing high-value, short-term activities to escape source taxation. Multinational groups often fragment operations among related entities, each staying below the PE threshold, further eroding domestic tax bases.

Meanwhile, mobile resource-related services, such as seismic surveys, engineering, and decommissioning, are frequently excluded from PE status because they lack a fixed place of business or are deemed auxiliary. This disconnect between where resources are extracted and where profits are taxed undermines fiscal sovereignty and limits developing countries’ ability to mobilize domestic revenues.

Some governments have responded by negotiating bespoke treaty clauses to capture resource-related activities, but this piecemeal approach has produced fragmented treaty practices and administrative complexity.

Recognizing the need for modern, coherent standards, both the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN) have advanced major reforms to their Model Tax Conventions to strengthen source-country taxing rights over natural resource activities.

In October 2024, the UN Committee of Experts on International Cooperation in Tax Matters approved the inclusion of a new Article 5A in the 2025 update to the UN Model Tax Convention. The article deems a permanent establishment to exist when an enterprise (or closely related entities) conducts exploration or exploitation of natural resources in a source country for more than 30 days within a 12-month period. Profits attributable to these activities may therefore be taxed by the source jurisdiction.

This reform marks an important shift from earlier treaty standards, which typically required six or twelve months of activity before taxation could apply. The new rule applies broadly to both renewable and non-renewable resources—including hydrocarbons, minerals, fisheries, and renewable energy sources such as wind, solar, hydropower, and geothermal energy. It covers the entire value chain—from exploration to decommissioning—and extends to support services such as catering or equipment transport directly connected to extractive operations.

Article 5A also introduces several innovations that strengthen source-country taxing rights. It includes an anti-fragmentation rule to prevent related parties from splitting contracts to avoid PE status, and an employment income clause that allows source taxation of wages and salaries earned from extractive work once the 30-day threshold is exceeded. Importantly, the article provides a clear definition of “natural resources,” aligned with the global shift toward low-carbon and renewable energy development.

By embedding Article 5A directly into the UN Model text (rather than presenting it as an optional commentary, as in the OECD approach), the UN establishes a legally robust and administratively clear standard. This gives developing and resource-rich economies a stronger foundation to safeguard domestic revenues and ensure that income from natural resources supports sustainable development.

The OECD has advanced parallel reforms through an alternative provision included in paragraph 177 of the Commentary to Article 5 of the 2025 Update to the OECD Model Tax Convention. Released on 19 November 2025, the OECD provision allows countries to adopt an optional rule deeming a permanent establishment (PE) to exist when an enterprise carries out “relevant activities” connected with offshore—and, where agreed, onshore—exploration or exploitation of extractible non-renewable natural resources for a period (typically between 30 and 183 days) within a twelve-month timeframe.

The alternative provision also introduces an optional anti-fragmentation rule, enabling source countries to aggregate the duration of activities conducted by closely related entities to determine whether the PE threshold has been met.

Key Differences Between OECD and UN Provisions

While the OECD provision mirrors several key elements of the UN’s approach (particularly the 30-day threshold and anti-fragmentation safeguard), it diverges in scope and design. The OECD framework focuses primarily on offshore operations and applies exclusively to non-renewable resources, covering specialized activities such as drilling, seismic surveys, and extraction infrastructure maintenance. Unlike the UN’s approach, generic or auxiliary services are excluded unless they are integral to core operations.

Moreover, the OECD standard is optional and contained within the Commentary, making its adoption contingent on bilateral negotiation. In contrast, the UN standard is embedded directly in the Model text, providing greater legal clarity. Although the OECD text offers greater technical nuance and flexibility (advantageous for countries with complex offshore sectors), it may heighten negotiation asymmetries for developing economies with limited treaty capacity.

Recent updates to the UN and OECD Model Tax Conventions signal a major shift toward ensuring tax treaties reflect where value is created in natural resource sectors. For developing countries, these reforms provide essential tools to strengthen source-based taxation, protect revenues, and align tax policy with global sustainability goals.

Next Steps for Policymakers

The UN Model’s new Article 5A is particularly impactful, setting a clear, low-threshold rule: taxing rights arise after just 30 days of resource activity within a year. Its broad scope ( including both renewable and non-renewable resources) offers revenue certainty, administrative simplicity, and helps future-proof tax systems as economies transition to clean energy.

For landlocked and resource-dependent countries, Article 5A delivers a straightforward basis for taxing onshore operations and renewable energy activities. The OECD’s alternative provision, meanwhile, offers flexibility for countries with complex offshore sectors, allowing adaptation to local fiscal regimes.

Together, these reforms enable developing economies to modernize tax treaties, reinforce fiscal sovereignty, and ensure natural resource income supports sustainable, inclusive growth. Policymakers should act now: review and update treaties, coordinate across agencies, build negotiation capacity, and monitor international developments to maximize these benefits.

Organisation for Economic Co-operation and Development. 2025. The 2025 Update to the OECD Model Tax Convention. Paris.

United Nations Committee of Experts on International Cooperation in Tax Matters. 2024. Report on the Twenty-Ninth Session, E/2025/45-E/C.18/2024/4. New York.

United Nations Committee of Experts on International Cooperation in Tax Matters. 2024. Issues related to the United Nations Model Double Taxation Convention between Developed and Developing Countries - The Treatment of Income Arising from Extractives and Other Natural Resources, E/C.18/2024/CRP.14. New York.