Resource nationalism update

Transcription

1 February 2014 Mining & Metals Resource nationalism update EY Key Contact Recent developments by type of resource nationalism Government ownership Andy Miller Global Mining & Metals Tax Leader This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY organization accepts any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, you should seek appropriate advice. Kazakhstan Mozambique South Africa Increases in taxes and royalties China Democratic Republic of the Congo Ghana Honduras Mexico Niger Zimbabwe Restriction of imports and exports India Indonesia South Korea Retreating resource nationalism return focus to investment attraction Australia Russia Mongolia Vietnam Kyrgyzstan Mining reform Brazil Chile Democratic Republic of the Congo Mozambique Senegal Political risk Zambia

2 Resource nationalism by country Australia The new Coalition Government is dealing with a backlog of 96 tax measures announced but not yet legislated. Of those measures relevant to mining companies, the Government will proceed with the following: Restriction on immediate deduction for mining rights Removal of the R&D tax incentive to companies with revenue of more than US$20b Inclusion of mining information and related intangibles in land for capital gains tax purposes Tightening of thin capitalization rules (with amendments) Look-through treatment for earn-outs The Government has decided not to grant quarterly R&D credits for companies with revenue less than US$20b. 1 The Government is also considering the introduction of an exploration development incentive that will allow investors to deduct the expense of mining exploration against their taxable income. The scheme will target small exploration companies by limiting eligibility to companies with no taxable income and will be capped at US$100m over the forward estimates. The MRRT and Other Measures Bill 2013, which will repeal the Minerals Resource Rent Tax (MRRT), passed the Lower House of Federal Parliament on 21 November The Government says abolishing the MRRT will save the budget US$13b by axing other measures it was meant to fund. The MRRT came into effect in July 2012, collecting 22.5% on the profits of iron ore and coal producers, and has so far totaled billions of dollars less than first estimated. The Senate Economics Legislation Committee recommended passing the bill, and it now goes before the Senate. 2 Brazil A special commission of the Brazilian Congress debated the country s proposed mining code on 6 November 2013 and has since released a substitutive project for the code. The mining code has significant improvements but still needs some adjustments before final approval by the special commission. 3 In the 2014 Congress opening session, the President of the Congress mentioned that the Mining Code is one of Congress priorities for this year. Local mining companies and market players have spoken out about the lack of clarity in the new regulations, with some complaining that it will bring legal uncertainty to the sector. The main changes being proposed are an increase in mining royalties from 0.2% 3% to 0.5% 4% and the replacement of state concessions with tender processes for granting mining permits. 4 Chile Michelle Bachelet, former Chilean President and leader of the New Majority coalition, took power in December 2013 as the country s new President. Bachelet has proposed to increase Chile s total tax revenue by around 3% of GDP. The prospective tax changes include: Abolishing the special tax regime for foreign investors under Decree Law 600 (DL 600), which enables certain foreign investors to fix their tax rate for a period of up to 10 to 20 years Increasing the corporate tax rate from 20% to 25% by 2018 Requiring company owners to pay tax on total corporate profits rather than distributed profits from 2018, and removing the Fondo de Utilidades Tributables (FUT, taxable profits fund), which enables some businesses to defer the payment of tax on retained earnings Introducing an annual tax on diesel cars and cars with large engines Removing industry diesel tax refunds for large companies While Bachelet s Government program is silent on increasing mining royalties, previously she indicated that the coalition is likely to alter mining royalties. Other initiatives include promoting exploration, restoring Chile s competitive advantage by improving the system for mining concessions, and increasing judicial certainty for the mining sector. Bachelet also plans to increase the state s control over the mining sector by strengthening Government institutions that monitor and evaluate mining investments and giving the Chilean Copper Commission greater authority to safeguard the state s interests. The Government will also continue to fund its stateowned copper mining company Codelco. 5 China China will impose an import tax on non-alloyed nickel of 1% in 2014 to reduce oversupply in the domestic market due to an increase in production of nickel pig iron, a low-grade ferronickel in China. China imported 143,380 metric tons of refined nickel and alloys in the first 10 months of China also plans to cut the export tax on indium to 2% in 2014 from 5% in China is the world s top indium producer. 6 Democratic Republic of Congo (DRC) In November 2013, the process of mining code reform in the DRC continued with consultations between the Government, mining companies and community organizations. A draft bill was circulated in late 2012 with the aim of increasing state revenues from the extractive sectors, especially copper and cobalt mining and refining. The new law is also likely to affect mining of tin, gold, silver, diamonds and uranium, and it could be extended to oil and gas production. Mining companies have already agreed to proposals to increase the revenue tax to 35%. Binding rules regarding the transfer of concessions, as well as environmental and employment regulations, are also due to be published. 7 1 Integrity restored to Australia s taxation system, The Assistant Treasurer s Website, accessed 19 December Senate committee recommends passing MRRT Bill, CCH News, 4 December The upcoming Brazilian Mining Code: preliminary thoughts on the new draft released this week, Lexology, 15 November Finance, Mining Journal, 8 November Chile s presidential elections- potential impact on mining, Herbert Smith Freehills, 2 December UPDATE 1-China to raise import tax on nickel, cut export tax on indium in 2014, Reuters News, 16 December DRC s revised mining code due in 2014, raising revenue taxes to 35% but mitigating contract risks, IHS Global Insight, 27 November Resource nationalism update February

3 A new report as result of an ongoing Government investigation has also found that the DRC is owed an estimated US$3.7b in unpaid customs duties and fines by companies operating in its copper-rich Katanga Province between 2008 and The report accuses companies of under-declaring the value of imports and exports, and sometimes avoiding tax altogether, often with the collusion of customs officials. Some companies named in the report questioned the accuracy of its findings. The head of the customs agency in Katanga also said that proper consultation had not been held with the companies and that the report s findings were exaggerated. 8 Ghana Ghana plans to present a new bill to implement a mining windfall tax to Parliament once it has consulted with all stakeholders. In addition, a committee is reviewing all stability agreements and incentives. Mine executives have urged the Government to reduce corporate taxes from 35% to 30% and assess royalties on a sliding scale related to profitability. 9 Honduras Honduras President-elect Juan Orlando Hernández has stated that, if elected, he would introduce an increase in mining royalties. Honduras has one of the most favorable fiscal regimes for mining firms in Latin America. The mineral royalty tax is 2% of net income for mining firms and is only levied after five years of operation. 10 India India has imposed a 5% duty on exports of iron ore pellets in order to conserve raw material for domestic steelmakers. This is in addition to the 30% tax on exports of iron ore fines and lumps. Along with mining and export curbs in key producing states Karnataka and Goa aimed at addressing illegal mining, the tariffs have helped cut India s iron ore exports by around 85%, or 100 million metric tons, over the past two years. Iron ore pellets were previously exempted from any duty, given negligible exports out of India. With a sharp increase in exports of pellets in April to November 2013, there was an increasing apprehension about a shortage of iron ore in the country, and therefore steel producers sought a tariff on exports of iron ore pellets to safeguard domestic supplies. 11 Separately, the Indian Government has been asked to review tough import restrictions on gold, which include a record 10% import duty. Current rules have impacted businesses in the bullion industry and brought a surge in smuggling, but the finance minister said the curbs would not be rolled back anytime soon. The jewelry industry has been calling for a reduction in the duty and a relaxation of a Reserve Bank of India (RBI) rule that calls for 20% of imports to be turned around as jewelry exports Disputed Congo report says miners owe $3.7 bln in tax, fines, Reuters (Inside Metals), 31 January Ghana plans to introduce mining windfall tax bill, Reuters, 20 November Future president Hernández is likely to encourage mining sector FDI but increase Honduras mineral royalty tax, IHS Global Insight, 27 November UPDATE 1-India imposes 5 pct export duty on iron ore pellets, Reuters News, 27 January Sonia Gandhi seeks easing of gold curbs - reports, Reuters News, 23 January Indonesia Indonesia s mining ministry will mitigate the effect of its unprocessed mineral export ban by introducing new domestic processing requirements that effectively allow some miners to continue exporting minerals until Below is a table of the proposed and current minimum percentage requirements to export. The proposal must still be approved by President Susilo Bambang Yudhoyono. 13 Mineral/metal Proposed regulation Current regulation Copper 15% 98% Bauxite 45%/98%* 98% Lateritic iron 51% 75% Primary iron 62% 75% Manganese 40% 60% Zirconium 65.5% 99% Zirconium silica 64% 65.5% Nickel 4% 6% *Indonesia Mining Association says minimum requirements will be 45% for bauxite, while Indonesian Chamber of Commerce says it will be unchanged at 98%. The Indonesian Government has also issued a decree that exempt mineral mining companies from the export ban for three years if they meet certain requirements, e.g., if they have carried out ore purification to a certain level, specific to each mineral, or provided evidence of plans to build smelters. Companies that have been exempted from the restrictions include the Indonesian subsidiaries of Freeport McMoRan and Newmont, which together mine 97% of copper in the country. While nickel ore exports are now banned, the country's largest exporter, Vale, will be unaffected as it already processes its nickel domestically. 14 Separately, the Indonesian Government plans to impose a surety bond under which, miners with smelter plans will be required to pay 5% of the total smelter construction cost as a financial guarantee to build domestic smelters in the future. 15 The deposit will be held in local banks for up to three years. Kazakhstan Kazakhstan s Minister of Industry and New Technologies, Asset Issekeshev, had said that by the end of 2013, the Ministry would annul at least 40 mining licenses, affecting deposits that have been left undeveloped by the license holders. This announcement followed President Nursultan Nazarbayev s directive to carry out a comprehensive review of issued licenses, with the goal of increasing investment or obligations for deposits that have been left idle. The Kazakh Government is addressing inadequate investor obligations in subsoil licenses issued 7 or 10 years ago. By the end of the year, Issekeshev s Ministry plans to ensure that legal clauses are included in revised contracts across the sector so that license holders develop their assets. This could 13 FACTBOX-Indonesia s new processing proposal for mineral exports, Reuters News, 8 January Exemption to Indonesia's raw minerals export ban likely to reduce regulatory risk for the next three years, IHS Global Insight, 13 January More pain for miners as govt demands surety bonds, The Jakarta Post, 7 February Resource nationalism update February

4 see potential investment of US$27b in Kazakhstan s mining sector. 16 Kyrgyzstan The Kyrgyz Government has reaffirmed its desire to attract foreign investment into the mining sector, which it aims to do with the support of a mining strategy underpinned by technical and consultative support from the U.S. Agency for International Development. However, changes in the country will be challenged by investor-community relations, weak protection of investor rights and political interference in the administration of the mining sector. The strategy assigns a critical role to the mining sector as the primary engine for economic growth in the country. The was drafted by a group of economists and mining experts following eight roundtables during 2013 on themes ranging from taxation and licensing policy to environmental issues. While recognizing multiple challenges currently inhibiting its realization, particularly in gold mining, the strategy sets out a four-phase development of the sector. 17 Mexico Juniors will be spared from Mexico s mining tax under an amendment to the Government s tax reforms approved by the Senate. The clause will allow companies with annual gross mineral revenues of less than MXN50m (US$3.8m) to claim income tax credits on the 7.5% mining tax. 18 Mongolia Mongolia s Parliament has approved a legislative amendment to lower the royalty payment on gold from 10% to 2.5% for miners that sell their product to the central bank or accredited commercial banks. The amendments also remove the royalty rate for gold mining operations. One of the Government s justifications for the change is that it will reduce the impetus for smuggling gold out of the country. 19 Mozambique Resource nationalism is likely to increase in Mozambique next year ahead of a general election, according to Maplecroft: A current draft law suggests a greater focus on project-linked development and local content requirements, and tax increases are possible although they are not expected to be onerous. The nearing of the election will put the Government under pressure to get more money from resources companies. 20 In line with this prediction, the Mozambican Cabinet has approved a new mining policy to promote central government and local participation in new mining projects to ensure its citizens benefit from the country s mineral endowment. Certain production and marketing licenses will be given exclusively to Mozambicans, and participation of state-owned companies will 16 Kazakh decision to annul 40 mining licences reflects increasing expectations of investor obligations, Global Insight, 7 November New national mining strategy programme seeks to allay risks for mining companies in Kyrgyzstan, IHS Global Insight, 23 December Production & Markets, Mining Journal, 8 November Reduction in Mongolian gold royalty unlikely to boost exploration before resolution of Oyu Tolgoi dispute, IHS Global Insight Daily Analysis, 28 January Warning on Mozambique resource nationalism, Mining Journal, 22 November increase from 5% to 25% in any new deals. The new policy will have to be passed in Parliament. 21 Niger Niger may abandon attempts to impose a tougher royalty tax regime on French company Areva due to low uranium prices as a result of the slump in uranium demand after the Fukushima nuclear disaster. The contract for Areva s two uranium mines in the West Africa nation expired in December, and the Government has been pushing for a new deal to be based on a 2006 mining law, which raised royalty taxes from 5.5% to as high as 12%, depending on profits. Areva has said its aging Cominak and Somair mines in Niger would be unprofitable if taxes were increased. It is not in Niger s for the mines close as it is a big source of its mining revenue. Areva s previous 10-year contracts set royalty taxes at 5.5% of sales. 22 Russia The Russian Government may eliminate the current 10% export duty on copper as a way of providing state support to copper companies. Under obligations Russia assumed when it joined the World Trade Organization, the duty is supposed to be removed on 1 September Russia s biggest copper producer, Ural Mining and Metallurgical Company, noted that the 10% export duty on copper cathodes limits the flexibility of their exports and that its removal would stabilize the domestic copper market. 23 Senegal The Senegal Administration is still working on revising the mining code to attract foreign investment while maximizing revenue. To date, the Government has not adequately benefited from mining profits over the past 10 years, receiving only 2% from a total of US$294m. The review of the mining code was meant to be finalized in 2013 but was delayed by the Government s decision to hold extensive consultations. Some mining concessions are likely to be renegotiated as part of the revised mining code, including the multimillion-dollar Sabadola mines operated by Teranga Gold Corporation, a Canadian-based gold firm. Certain exemptions will be reviewed, and tax breaks will be shortened to end in South Africa The South African Government has declared thermal coal a strategic asset, making it subject to prioritization for domestic use. The Government has blocked the sale of the Khutala colliery by BHP Billiton to a black economic empowerment (BEE) consortium as the mine is strategic for Eskom. The Government is likely to seek to acquire minority stakes in coal assets, possibly through a state minerals corporation, to protect domestic coal supply. However, plans for such strategic nationalization have not yet been developed. Both the Government and state-owned entities are invested in energy assets, such as the Central Energy Fund (CEF) or the Industrial Development Corporation (IDC) and therefore currently lack sufficient capital to compensate. Mining firms and heavy power 21 Mozambique seeks bigger stakes in new mining projects, Reuters News, 18 December Niger says may scrap efforts to raise royalty tax for France s Areva, Reuters News, 6 January Lifting export duties on copper could save Norilsk Nickel $190 mln, Interfax: Russia & CIS Business and Financial Newswire, 4 December Senegal s revised mining code likely to result in contract reviews and renegotiations in by end-2014, IHS Global Insight, 28 January Resource nationalism update February

5 users have warned that the Government's declaration of coal as a strategic asset would hinder supplies to Eskom. 25 South Korea South Korea announced a tax on coal imports to be introduced on 1 July 2014, with a flat rate of 21 South Korean won (KRW) per kg (US$20/t) across all grades. However the country's generators have called for coal with calorific value (CV) below 5,000kc NAR to be taxed at a rate of around US$16.20/t, and coal with CV above 5,000kc NAR at around US$18.10/t. Traders see the tax making demand more concentrated for 4,800-5,000kc NAR and 5,800-6,100kc NAR. This new tax may cut South Korea s coal imports annually by 3% to 5%, much of which comes from Indonesia. 26 Vietnam Vietnam has reduced its coal export tax from 13% to 10% due to a steep decline in exports at the request of the Vietnam National Coal Mineral Industries Group. This was a reversal of the increase instituted in July Vietnam s coal exports in July declined 91% from June levels. 27 Zambia The growing divisions in Zambia s governing Patriotic Front leadership are likely to stall ongoing policy initiatives in the mining sector such as an audit of large mining companies to curtail tax avoidance. Populist statements, for example calling for the introduction of either exchange controls or capital controls and the reintroduction of a copper windfall tax, are increasingly likely though are unlikely to be implemented. 28 Zimbabwe A new bill that will introduce a 25% royalty tax on gold, diamond, coal, coal-bed methane gas, nickel, chromium and platinum mines is to be the primary financing source of the Zimbabwean Government s planned sovereign wealth fund in the future. The Reserve Bank of Zimbabwe will be the custodian of the fund, while proceeds will support fiscal or macroeconomic stabilization of the government, including its long-term economic and social development objectives. The new bill has not yet received the approval of Parliament Unclear and underfunded plans for strategic nationalisation frustrate transactions on coal assets in South Africa, Global Insight, 30 January South Korean gencos call for import tax split, McCloskey Coal Report, 24 January Report: Vietnam lowers tax rate on coal exports, SNL Daily Coal Report, 9 September Succession wrangles over the Zambian presidency likely to stall government policy such as copper mining audit, IHS Global Insight, 24 December Zimbabwe earmarks mining royalty taxes for sovereign wealth fund, IHS Global Insight, 15 January Resource nationalism update February

6 EY s Global Mining & Metals Center With a volatile outlook for mining and metals, the global sector is focused on cost optimization and productivity improvement, while poised for valuebased growth opportunities as they arise. The sector also faces the increased challenges of changing expectations in the maintenance of its social license to operate, skills shortages, effectively executing capital projects and meeting government revenue expectations. EY s Global Mining & Metals Center brings together a worldwide team of professionals to help you succeed a team with deep technical experience in providing assurance, tax, transactions and advisory services to the mining and metals sector. The Center is where people and ideas come together to help mining and metals companies meet the issues of today and anticipate those of tomorrow. Ultimately, it enables us to help you meet your goals and compete more effectively. Area contacts Global Mining & Metals Leader Mike Elliott Tel: michael.elliott@au.ey.com Oceania Scott Grimley Tel: scott.grimley@au.ey.com China and Mongolia Peter Markey Tel: peter.markey@cn.ey.com Japan Andrew Cowell Tel: cowell-ndrw@shinnihon.or.jp United Kingdom & Ireland Lee Downham Tel: ldownham@uk.ey.com Americas and United States Leader Andy Miller Tel: andy.miller@ey.com Canada Bruce Sprague Tel: bruce.f.sprague@ca.ey.com South America and Brazil Leader Carlos Assis Tel: carlos.assis@br.ey.com EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com EYGM Limited. All Rights Reserved. EYG no. ER0143 CSG/GSC2014/ ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/miningmetals Europe, Middle East, India and Africa Leader Mick Bardella Tel: mbardella@uk.ey.com Africa Wickus Botha Tel: wickus.botha@za.ey.com Commonwealth of Independent States Evgeni Khrustalev Tel: evgeni.khrustalev@ru.ey.com France and Luxemburg Christian Mion Tel: christian.mion@fr.ey.com Service line contacts Global Advisory Leader Paul Mitchell Tel: paul.mitchell@cn.ey.com Global IFRS Leader Tracey Waring Tel: tracey.waring@au.ey.com Global Tax Leader Andy Miller Tel: andy.miller@ey.com Global Transactions Leader Lee Downham Tel: ldownham@uk.ey.com India Anjani Agrawal Tel: anjani.agrawal@in.ey.com