November 2014
Mining & Metals
EY key contact
Resource nationalism update
Mineral-rich countries are ensuring they are extracting sufficient economic rent for the rights of
mining companies to exploit their resources. Each month, countries announce increases, or intended
increases, to resource revenues via taxes, royalties, beneficiation or state ownership. Yet at the same
time, we are now increasingly seeing countries change their laws to encourage mining investment.
EY’s mining and metals-focused monthly update summarizes these legislative and taxation changes by
country, to help you better manage the implications of resource nationalism for your business.
Andy Miller
Global Mining & Metals
Tax Leader
Recent developments by type of resource nationalism
+ 1 314 290 1205
Increases in taxes and royalties
[email protected]
Chile
China
Kenya
Zambia
Government ownership
South Africa
Restriction of imports and exports
Indonesia
Retreating resource nationalism — return focus to investment attraction
Australia
South Korea
Mining reform
Chile
Indonesia
Commodities impacted
Coal — China, Indonesia, South
Korea
Tin — Indonesia
Kazakhstan
Resource nationalism by country
Australia
Australia has released exposure draft legislation for the
amendment of the income tax law to include an exploration
development incentive (EDI). The proposed EDI would be
available to Australian resident investors in small mineral
exploration companies. Under the incentive, investors may be
entitled to the EDI tax offset or additional franking credits where
the company in which they hold shares issues them an
exploration credit. Companies may issue exploration credits to
their shareholders up to a capped amount in a given income
year. The cap for a company would be based on its exploration
expenditure and tax loss for the relevant income year, adjusted
by a modulation factor to ensure that the total value of credits
provided in respect of an income year does not exceed A$25m
for 2014–15, A$35m for 2015–16 and A$40m for 2016–17.1
Chile
After extensive negotiations, the National Congress approved a
significant tax reform, which will become effective in stages,
starting October 2014, until it is fully in force in 2018. Changes
include an increase in the corporate tax rate from 20% to 25% or
27%, depending on which of the following taxation regimes is
ultimately chosen for a company.
1) System A: “attributed income” regime whereby
business income is subject to corporate taxes with a
rate of 25% and is also attributed to its shareholders,
enabling, in practice, dividend taxation on an accrued,
fully integrated basis (i.e., 100% of corporate taxes are
creditable as payment of dividend taxation)
2) System B: “semi-integrated” regime, a taxation regime
tailored for taxpayers interested in keeping the tax
deferral historically applicable to undistributed
business profits, in exchange for a higher corporate tax
rate of 27% and higher taxation on distributed
dividends (achieved by reducing to 65% the corporate
tax credit effectively available to offset dividend
taxation; notwithstanding, residents in a treaty country
may still claim 100% credit for corporate taxes).
System B could ultimately mean a 44.45% effective
rate on business profits if the shareholder is not a
resident in a treaty country
The Government is also working to streamline the current mine
permit process in order to provide greater support for the
industry. The Government recently called for a 60-day review of
ministerial permitting processes, with a view to improving
efficiency while still protecting the environment. Aurora
Williams, Chile's Minister of Mines, has said, "The ongoing
(permit) revision is going to highlight some aspects that need to
be improved. A deeper revision will [also] take place. The end of
the revision is expected in Q1 2015.” It is a vital time for Chile
to streamline its permit processes as recent tax reforms will
gradually increase corporate taxes from 20% up to 27%.3
China
From 15 October, China has been applying import duties to coal
to support its domestic coal industry. The import duties are 3%
on anthracite and coking coal, 5% on briquettes and 6% on other
coals. These duties were removed in 2007 when coal demand
and prices were at a high. This is a double blow for some
importers, after the announcement of a ban on selling or
transporting low-grade coal last month. The tariffs do not affect
shipments from Indonesia, China’s largest coal supplier, as it
has a free-trade agreement with China through the Association
of Southeast Asian Nations (ASEAN).4
The Chinese Government has also announced an ad valorem
coal resource tax, effective from 1 December. The tax will
replace the existing taxation scheme, which is on a fixed-rateper-tonne basis. The reform is targeted at supporting the
struggling domestic mining industry and thus will not increase
the overall tax burden. For this reason, local governments have
been ordered to cancel previously imposed surcharges on coal.
China’s current coal resource tax is based on production
tonnages and stands at RMB8–RMB20/t (US$1.30–US$3.30/t)
for coking coal, while for thermal and other types of coal, the
rate is RMB0.3–RMB5/t (US$0.05–US$0.80/t). Local
governments are allowed to set specific tax rates between 2%
and 10% for their region, and it is expected that the average tax
level across the country could be about 5%.5
Chile is separately looking to make more land available to
smaller explorers in order to expand the copper mining industry.
The Government needs to negotiate with larger miners who
currently control two-thirds of the land with potential for
discoveries. The Government will seek talks with the industry
before reaching a conclusion next year. One proposal is the
creation of a tax for land concessions that are not being
explored.2
1
"Inserts for Tax and Superannuation Laws Amendment (2014 Measures No. 7)
Bill 5 2014: Exploration development incentive," Australian Treasury,
http://www.treasury.gov.au/, 10 October 2014.
2
"Chile Seeking to Loosen Major Miners’ Grip on Idle Land," Bloomberg.com, 7
October 2014.
3 "Chile to streamline mine permit process," Reuters News, 23 October 2014.
4
"China to impose coal import duties," Financial Times, 9 October 2014; "RPTCOLUMN-China coal tariff sends message to cut supply: Russell," Reuters News, 9
October 2014.
5 “China to launch ad valorem coal resource tax,” IHS Energy McCloskey Coal
Report, 3 October 2014.
Resource nationalism update November 2014
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2
Indonesia
Vale is the first major foreign company to complete a contract
renegotiation with the Indonesian Government. Over the past
three years, the Government has been seeking to renegotiate
old, specifically tailored contracts to bring these more in line
with the 2009 Mining Law. The contract renegotiations covered
six themes: divestment of shares to domestic entities, higher
royalties, reduction in concession sizes, processing of domestic
minerals and use of local goods and services. Vale has signed a
revised nickel-mining contract with Indonesia, which will
increase maximum royalties, cut landholdings and require its
Indonesian unit to sell another 20% of its shares to local
investors. Royalties were increased from 0.6%–0.7% to 2%–3%.
Vale must also sell a further 20% of Vale Indonesia to local
investors in addition to the 20% that has already been sold. The
company has plans to invest US$4b in Indonesian smelters and
possibly a further $2b to increase smelting capacity on
Sulawesi. In addition, the new agreement cuts the area of Vale's
mineral rights by 38%.6,
In the coal sector, the Indonesian Government is planning to
develop its downstream coal industry in order to enhance the
potential value-adds for coal. The Government is revising the
regulation (PP) No. 23 of 2010 on the downstream coal industry
with a change to be issued soon. Under the draft regulation of
the PP No. 23/2010, there will be four forms of downstream
coal products: coal products with higher calorific value, coal
gas, liquid coal and coal in the form of slurry used for small
power plants. The objective is to incentivize greater investment
in the downstream coal industry.7
Local Kenyan authorities on the coast plan to introduce new
taxes on mining and oil exploration to support development of
social and economic infrastructure. These coastal counties want
more revenue from the exploitation of resources in their regions
for service improvements and job creation. The central
government is concerned about the proposal, saying it will scare
away investors. Mining Minister Najib Balala has already
presented a new mining bill to Parliament, seeking to increase
royalties to give the state a greater share in profits from the
sector.10
South Africa
South Africa's mines minister, Ngoako Ramatlhodi, said the
country is considering declaring certain minerals, such as coal
and iron ore, as "strategic" for the country. This action is
provided for under the mineral bill now before the president. If
the bill is signed into law, it will give the minister the ability to
declare certain minerals to be strategic for the purpose of
industrialization in South Africa.11
South African mining magnate Bridgette Radebe has asked
President Jacob Zuma not to sign the Minerals and Petroleum
Resources Development Act Amendment Bill into law. Among
other issues, Radebe believes there were loopholes in the bill
that needed to be closed. Additionally, the mining charter had
not yet been aligned with the trade and industry department's
black economic empowerment (BEE) codes of good practice.
Zuma has said he is awaiting a reply from National Assembly
Speaker Baleka Mbete before deciding whether to sign the bill
into law.12
South Korea
The Indonesian Government is considering tin output limits and
export quotas to provide support to prices at 14-year lows. Coal
and minerals Director General Sukhyar has highlighted a study
that showed capping output at 35,000t–45,000t this year would
help raise prices.8
In South Korea, there is talk of a possible cut in the country’s
coal import tax. Generators are seeking an improved rate for
3,800kc NAR (net as received) product, which has been
disadvantaged by the two-tier flat-rate tax system adopted on 1
July.
Kazakhstan
The tax is US$16.20/t for product below 5,000kc NAR and
US$18.20/t for product above. This pushes generators to opt
for higher values within each bracket to extract the best value
and, as such, demand is concentrated into 4,800kc–5,000kc
NAR and 5,800kc–6,100kc NAR. A rate reduction of US$2/t for
3,800kc NAR would be enough to get the Korean generators to
buy such material again.13
Kazakhstan is in the process of developing new rules to make
mining investment easier. The country is looking to drive growth
by drawing in overseas investors and selling assets. A draft
“subsoil law,” to be submitted to the Government by the end of
the year, may be adopted by Parliament in the first half of
2015. Kazakhstan plans to award 50 to 100 mining-exploration
licenses starting next year, after it brings in the new law.9
Kenya
6
"Vale's new deal with Indonesia underlines government commitment to obtain
better terms from foreign firms," IHS Global Insight Daily Analysis, 6 October
2014; "Indonesia raises Vale nickel royalty, forces share sale," Reuters News, 17
October 2014.
7
"Indonesia to develop downstream coal industry," Antara News, 7 October 2014.
8
"Indonesia mulls tin output limits, export quotas: govt official," Reuters News, 14
October 2014.
9
"Kazakhs to Award Up to 100 Mine Licenses as Industry Rules Eased,"
Bloomberg.com, 17 October 2014.
10
"Plans for new local mining taxes angers Kenya central government," Reuters
News, 15 October 2014.
11
"S Africa considers declaring certain minerals as 'strategic'," Reuters News, 14
October 2014.
12
"Zuma must not sign mining Bill – Bridgette Radebe," Mining Weekly, 16 October
2014.
13
"Korean eyes on lower c.v. tax cut," IHS Energy McCloskey Coal Report, 3
October 2014.
Resource nationalism update November 2014
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3
Zambia
Zambia is looking to simplify its fiscal regime for mining
companies by scrapping corporate tax for the sector next year.
The move follows ongoing disputes over value added tax (VAT).
Instead of corporate tax, regarded as hard to administer,
companies would face a higher mineral royalty rate, which is
currently 6%.
The VAT dispute has seen a total of US$600m in VAT refunds
owed to mining firms withheld that will only be repaid when
companies produce import certificates from destination
countries. This has resulted in Glencore’s suspending some of its
planned Zambian copper mining projects over the withholding of
US$200m in its tax refunds. In August, the Zambian Finance
Minister Alexander Chikwanda said it planned to waive the
requirement because it is impractical. The Zambia Revenue
Authority says it is still consulting with exporters before
implementation.14
Zambia has announced sweeping changes to its mining tax
system in order to collect revenue from the industry at different
stages of the production pipeline. The royalties on underground
mining will increase from 6% to 8%, and open-cast mining will be
subject to a 20% royalty. Additionally, a 30% corporate
processing and smelting tax has been introduced, along with a
30% tax to be applied to tolling income.15
However, the country may back away from the 20% royalty rate
on open-pit mining. Barrick Gold believes that “the Government
realizes that the numbers they have imposed will be very
challenging for the industry."16
14
"Zambia considers simpler tax for miners as VAT row simmers — source,"
Reuters News, 6 October 2014; "Glencore unit suspends Zambia copper projects
over tax row," Reuters News, 1 October 2014.
15
"Zambia to change mining tax, lift underground royalty to 8%," Reuters News,
10 October 2014.
16
“Zambia may be backing off steeper mine royalty rates — Barrick,” Reuters
News, 30 October 2014.
Resource nationalism update November 2014
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4
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
value-based 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, effective execution of capital
projects and elevated 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, transaction 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: + 61 2 9248 4588
[email protected]
United States
Andy Miller
Tel: + 1 314 290 1205
[email protected]
Oceania
Scott Grimley
Tel: + 61 3 9655 2509
[email protected]
Canada
Bruce Sprague
Tel: + 1 604 891 8415
[email protected]
China and Mongolia
Peter Markey
Tel: + 86 21 2228 2616
[email protected]
Brazil
Carlos Assis
Tel: + 55 21 3263 7212
[email protected]
Japan
Andrew Cowell
Tel: + 81 3 3503 3435
[email protected]
Chile
Lachlan Haynes
Tel: + 56 2 2676 1886
[email protected]
Africa
Wickus Botha
Tel: + 27 11 772 3386
[email protected]
Service line contacts
Commonwealth of Independent States
Evgeni Khrustalev
Tel: + 7 495 648 9624
[email protected]
France and Luxembourg
Christian Mion
Tel: + 33 1 46 93 65 47
[email protected]
India
Anjani Agrawal
Tel: + 91 982 061 4141
[email protected]
United Kingdom and Ireland
Lee Downham
Tel: + 44 20 7951 2178
[email protected]
Global Advisory Leader
Paul Mitchell
Tel: + 61 2 9248 5110
[email protected]
Global Assurance Leader
Alexei Ivanov
Tel: + 495 228 3661
[email protected]
Global IFRS Leader
Tracey Waring
Tel: + 61 3 9288 8638
[email protected]
Global Tax Leader
Andy Miller
Tel: + 1 314 290 1205
[email protected]
Global Transactions Leader
Lee Downham
Tel: + 44 20 7951 2178
[email protected]
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