Worldwide: Global Tax Update

Last Updated: 27 February 2012
Article by Timothy Sumner

The last quarter has been relatively quiet in terms of developments in mining tax policy; at least compared to the two preceding quarters. However, while the volume has been low, there have been two significant developments in Australia as well as further developments in Africa and South America.

These developments have obvious implications for the economics of investing in the relevant jurisdictions and provide some lessons concerning engagement with government.

1. Australia – MRRT

In the early hours of the morning on 24 November 2011, the Australian Labor government succeeded in passing a revised version of its Mineral Resource Rent Tax (MRRT) through the lower house of the Australian parliament. The tax was passed with the support of minorities and it appears the government has the numbers to pass the tax through the upper house early this year, with the tax expected to apply from 1 July 2012.

The tax, which began life as the Resource Super Profits Tax (RSPT) under former Labor Prime Minister Kevin Rudd, has a substantially lesser application than the original RSPT and was diluted further as a result of an eleventh hour compromise made with an independent MP to ensure the tax passed the lower house.

In summary, the key features of the MRRT, as passed by the lower house, are as follows:

  • Commencement: 1 July 2012;
  • Applicable to coal, iron ore and magnetite only;
  • Applicable only to miners with an annual profit of A$75m or greater;
  • Headline rate of 30% of profits, reduced for all miners to an effective rate of 22.5% (as a result of an available extraction allowance) and further reduced on a sliding scale for miners with annual profits of between A$75m and A$125m; and
  • It will enable the government to cut the general company tax rate from 30% to 29% from 1 July 2013.

2. Australia – Carbon Price

After many years of debate, an Australian carbon price was passed into law on 18 November 2011. The key features of the new legislation are as follows:

  • The scheme will apply only to carbon dioxide, methane, nitrous oxide and perfluorocarbons. It will not cover hydrofluorocarbons or sulphur hexafluoride; the other two greenhouse gases referred to in the Kyoto Protocol
  • The scheme will operate in two phases: a fixed price carbon tax from 1 July 2012 to 30 June 2015, followed by a floating price / cap and trade scheme thereafter;
  • The scheme will apply to entities controlling facilities that emit greater than 25,000 tonnes of carbon dioxide equivalent per annum;
  • During the fixed price phase there will be no limit on emissions and the carbon tax will be set at A$23 tonne in 2012-2013, A$24.15 in 2013-2014 and A$25.40 in 2014-2015;
  • During the floating price phase, the government will set annual caps on the number of tonnes of carbon than can be emitted and permits representing the right to make such emissions will then need to be acquired and surrendered by industry, with the level of demand driving price, subject to a price collar for the first three years;
  • The scheme will apply principally to four sectors: stationary energy (including electricity generation), industrial processing (including aluminium procession), fugitive emissions (including from coal and gas extraction) and waste treatment;
  • The scheme will also apply to suppliers of natural gas through pipelines, who will be responsible for the emissions represented by that gas. However, the legislation contains mechanics to enable this liability to be passed on downstream;
  • The scheme (and associated government policy) contains a number of concessions that are particularly relevant to the ENR sector, including:

1. EITE - relief for emissions intensive trade exposed (EITE) activities. The most emissionsintensive activities, such as aluminium smelting, will receive 94.5% of their permits at no cost in 2012-2013, with this figure decreasing annually by 1.3%. Less intensive activities (e.g. some LNG production) will receive 66% of their permits at no cost in 2012-2013, again decreasing annually by 1.3%;

2. LNG – in addition to any EITE assistance, LNG producers will be entitled to a 'top up' of permits to ensure they receive at no cost at least 50% of the permits they require to cover the production process (including extraction,

3. Coal-Fired Power – A$5.5B will be provided to emissions-intensive coalfired electricity generators. This assistance will be delivered over 5 years from 1 July 2012 and will comprise cash and free permits. The government has also indicated it intends to negotiate the closure of 2,000MW of the most emissions-intensive coal-fired generation capacity in the country; and

4. Gassy Coal Mines – it is proposed that A$1.3B be provided to gassy coal mines over a six year period to compensate them for 80% of their emissions over a defined threshold. It is also proposed to offer A$70m worth of matching grants to promote the introduction of emissions abatement technology.

3. Ghana – Mining Tax

In its November 2011 budget, the Ghanaian government announced that from 1 January 2012:

  • Corporate mining tax will increase from 25% to 35%;
  • A 10% windfall profits tax will apply to all mining companies, details of which are still to be finalised; and
  • The capital allowance rate would be cut from 80% to 20% for five years.

The government has indicated the changes to corporate mining tax and the capital allowances regime bring the mining industry in line with the oil & gas industry, while it also sighted the nation's lack of benefit from high gold prices experienced during the global financial crisis in justifying the changes generally.

Industry response to the changes has been understandably negative, with some companies claiming the changes may make their projects uneconomic, at least in their current form. Companies have also indicated that some of their competitors are obtaining concessions outside the general regime and that accordingly there is not a completely level playing field for miners in the country.

4. Mali – State Participation

On 23 January 2012, Reuters reported that the government of Mail is considering changes to its mining law that would increase the level of state participation in projects from 20% to 25% and cut income tax on mining from 35% to 25%.

The changes under consideration would not be mandatory for existing projects, but project proponents would be at liberty to opt-in to take advantage of the lower income tax rate.

5. Ecuador – State Participation

On 5 December 2011, gold miner Kincross Gold Corporation (Kincross) announced the principal terms of agreement with the Ecuadorean government for the development of its Fruta del Norte deposit in the South American country.

While not binding at this stage, the agreement sets the foundations for a definitive exploitation and investment protection agreement (Investment Agreement), which, in accordance with local law, will need to deliver at least 50% of economic benefits from the project to the government.

The agreement requires Kincross to ensure the government receives at least 52% of the economic benefits of the project, which is to be made up of royalties, corporations tax, a profit share and VAT. Further, $65m worth of royalties are to be paid in advance.

Clearly the financial obligations on Kincross are substantial. However, these obligations should be considered in the context of the minimum 50% government benefit requirement referred to above and the ability of Kincross to successfully negotiate a number of inclusions in the broader project development package which protect its interests. These include:

  • Fixing of the corporate income tax and profit share percentages under the Investment Agreement;
  • A change in law / change in tax provision, providing for Kincross to obtain amendments to the Investment Agreement or other remedies should changes in law or tax affect the economics of the project;
  • Agreed tax and royalty calculation mechanics, which ensure these amounts are calculated after appropriate deductions;
  • A customs duty exemption for items required for project construction;
  • A right to take power from the national grid at the industrial customer rate; and
  • A right to have most disputes settled by binding arbitration under the UNICTRAL Rules outside of Ecuador.

Ultimately, this is an interesting example of how companies can negotiate with government to obtain meaningful concessions in return for their contributions to state revenue. .

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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