Resource nationalism update - EY

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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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.


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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.


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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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