americas school of mines - pwc brasil · 14thamericas school of mines agenda • tax and royalty...

14th Americas School of MinesInvesting in LatinAmerica

Mining TaxesJohn GravelleSteve RalbovskyRoberto Carlos Rivas

14th Americas School of Mines

Agenda

• Tax and Royalty Payments as Part of Sustainability

−Panel Discussion/Questions/Comments:

• Should ‘paying your fair share of taxes” be part ofsustainability?

• Impact of Higher Taxes and Royalties on the Mining Industry

−Panel Discussion/Questions/Comments:

• Impact of tax and royalty policies on the mining industry


Pricew aterhouseCoopers

• “Fair” is obviously a relative term

• Taxes, royalties and all payments to government should beconsidered

Tax and Royalty Payments as Part of Sustainability‘Paying your fair share’ has become more and morepart of the debate around sustainability

September 2010Slide 3

Investing in LatinAmerica



• Encourage investment in the country

• Yield a fair return to the citizens of the host country

• Send a message to potential future investors that “this is areasonable place to do business

Tax and Royalty Payments as Part of SustainabilityMining tax and royalty systems should be designed toserve multiple purposes





No two countries or ore bodies are alike

• There will have to be adjustments for realities

• Countries might negotiate to attract jobs

• Companies might pay more for a rich mineral reserve

Tax and Royalty Payments as Part of Sustainability





Disclosure is important information in framing the debate

• Many mining companies support this effort through voluntarydisclosure

• ICMM (International Council on Mining & Metals) supportseconomic development of host communities as a core value

• 50 corporate supporters of the Extractive IndustriesTransparency Initiative (EITI)






Mining companies often publish their own statistics

• To demonstrate support for this type of disclosure, in general

• To increase public awareness of all of the funds a companypays into a local economy






PwC’s Total Tax Contribution (TTC) studies of the Global MiningIndustry show that income taxes are less than half the storywhen considering what mining companies pay to government

• TTC is a methodology whereby all thetaxes and government payments madeby a company are collected

Total Tax Contribution





PwC has performed two (2) TTC studies for the GlobalMining Industry

• Our most recent study (2008 data) showed that income taxesare only 40% of the total amount paid to the government by thecompanies participating in the study

• The other 60% was comprised of royalties, non-income taxesand other payments to the government that appear ‘above theline’ in the companies’ financial statements






The debate has been expanded to include requireddisclosure of tax and royalty payments






Publish what you pay (PWYP)

• Global civil society coalition seeking to hold governments ofresource rich countries accountable

• PWYP calls for disclosure of ALL taxes and royalties paid toany government on a project-by-project basis

• Potential for PWYP to be added to IFRS

−Proposal in the Draft Discussion Paper regarding extractiveindustries






Extractive Industries Transparency Initiative (EITI)

• Disclosure from a country perspective

• More developed countries support

• Disclosure sought from less developed countries






Hong Kong stock exchange disclosure requirements

• Hong Kong stock exchange requires information “...in respectof tax, royalties and other significant payments on a country-by-country basis.” for new applicants if “…relevant andmaterial…”

• Some are claiming this is essentially requiring PWYP typedisclosure






US Dodd-Frank Financial Reform Bill requirements ofdisclosure

• Requires extractive industry SEC registrants to disclosepayments of federal income taxes and royalties paid togovernments

• Regulations will be written over the next several months

• Many practicalities to be addressed






Panel Discussion/Questions/Comments:

What role should ‘paying your fair share of taxes’

play with regard to sustainability?






Framing the debate

Impact of Higher Taxes on the Mining Industry



Countries Want Companies Want

Maximum revenuefor citizens

Maximum profits forshareholders

Encourage futureinvestment

Social license to continueoperating



Income taxes are typically the primary way a governmentcollects revenue

• Mining royalties are another way governments collect revenue

• Mining and other non-income taxes are also a way to collectrevenues






The financial crisis of the past couple of years has strainedgovernmental budgets

• Increasing taxes and levies on mining companies is oftenviewed as a way for financially struggling governments tocollect more revenue






Other crisis, such as the earthquake in Chile, also putfinancial strains on governments

• Increasing taxes and levies on mining companies is sometimesviewed as a way of increasing government take for this as well






There are business consequences to raising taxes andlevies on mining companies

• Singling out one or two industries can often be controversial, and sometimesthe industries react.

− Mongolia – 68% windfall profits tax enacted in 2006, repealed in 2009

• Halted further development of deposits (Centerra, Ivanhoe, Rio Tinto)

• In 2006, exploration spending dropped 50% from $120m in 2005

− Compared to 46% increase in Canada

• Fell from #33 to #62 out of 65 regions for attractiveness to miners(Fraser Institute)

− Zambia – 25% windfall profits tax proposed in 2008, but not enacted dueto the global financial crisis and weak metals prices






Companies want certainty

• South Africa – Black Economic Empowerment (BEE) initiative

− 26% carried interest held by “Historically Disadvantaged South Africans”by 2014

• In 2009, only 8.9% BEE ownership compared to target of 15%

− New mining charter announced on Sept. 14, 2010

• 6 month moratorium on applications for new mining licenses

− Fraser Institute ranking from 37 out of 64 in 2005, to 61 out of 72 in 2010

− In 2000, SA was global leader in gold production

• overtaken by China in 2006

• by 2009, SA is fourth (behind China, Australia and US)






Australia is a real life example of trying to raise taxes on alimited segment of taxpayers

Here is PwC Australia tax partner Wayne Huf to update

us all with respect to Australia






Chile has also proposed raising its levieson the mining industry (not exclusively)

This time, within the context of national emergency






Chile is a mining country

• Big mining in Chile is mature, efficient and profitable

• Industry contribution to collected taxes is huge

• Key taxes: income taxes (two tiers), specific mining tax,collection of third parties taxes (employment tax), etc.

• Economic contributions to local communities are relevant

• As well, highest employment income at national level






• May 2010: Pro-reconstruction bill was approved (without theoriginally proposed mining royalty changes)

• Temporary increase of CIT: 20%, 18.5% and back to 17% rate

• New bill just sent to Congress on Mining Royalty tax









Mining Royalty Modification

Sales* Current Situation Government Project

12.000 to50.000

-Rate: Progressive based onthe sales (0.5% to 4.5%)

-Tax Base: TaxableOperational Mining Income

-Rate: Progressive based onthe sales (0.5% to 4.5%)


Over50.000

-Rate: Fix of 5%


-Rate: Progressive, based onthe Operational MiningMargin (5% to 9%)


*The unit used to measure the sales volume of every mineral is itsequivalent in metric tones of cooper



• Most Big Mining enterprises have fiscal stability agreements inforce regarding mining royalty regime

• Government is “inviting” them to apply, voluntarily and for a 3year period, proposed new rules

• Extension of stability regimes for further 8 years

• Opposition coalition:

−duplicate the proposed tax increase

−no extension of fiscal stability regimes; to repeal them

− reform of the Foreign Investment Statute






• Mining understood the original collection needs.

• But, a collection race on mining has already started

• Politics is now at stage; problem

• Important mining investments might be re-evaluated (advance,postpone or cancelled)






South Africa recently put in force the mining royaltyincrease it enacted in 2008

• The effective date was delayed until March 2010 in reaction tothe global financial crisis






• Mining is very important to the South African economy

−Approximately 8% of gross domestic product currently

− Industry is the largest employer in South Africa

−Precious metals contributed 65% of South Africa’s mineralexport earnings and 21% of total exports of goods (2006data)






• New royalty scheme was scheduled for implementation on May1, 2009

−Delayed until March 1, 2010 in reaction to the globaleconomic crisis

• Royalty capped at

• 5% of gross sales for refined minerals

• 7% of gross sales for unrefined minerals

Application of the Act





• Actual impact still being assessed

• One survey – impact will increase total government revenue by 0.1%

• Industry estimates: 2004’s 14% profits would have been reduced by2 - 2.6% by the Royalty Act

• Royalty increases as profits increase

−When profits are above 30% (which they were in 2008), impact issignificant (approaching 5%)

• The industry is more sensitive to royalties on gross income

−Costs often do not drop commensurate with drops in commodityprices






Many countries are contemplating, or have enacted,increased mining royalties or taxes

• Look for the uncertainty alone to discourage investment






Panel Discussion/Questions/Comments:

What is the impact of changing tax and royalty

policies on the mining industry?




Thank you.

Steve Ralbovsky+1 (602) [email protected]

Roberto Carlos Rivas+(56) 2 [email protected]

John Gravelle+1 (416) [email protected]

Thank you.

Jaime Andrade+55 21 3232 [email protected]

Wayne Huf+61 (8) 9238 [email protected]

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americas school of mines - pwc brasil · 14thamericas school of mines agenda • tax and royalty...

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