Pwc_mining Tax Policy

PwC’s 16th Americas School of Mines Mining tax policy Steve Ralbovsky & Hallie Caywood May 21-24, 2013 Los Cabos, Mexico

www.pwc.com

PwC

Circular 230 language To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

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Agenda

Mining Tax Policy

Tax Morality

Resource Nationalism

History of Disclosure Policy

Mining Tax Disclosure

Best Practices

Q&A

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PwC

Mining Tax Policy

PwC’s 16th Americas School of Mines May 21-24, 2013 Los Cabos, Mexico

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Mining Tax Policy

Countries try to levy as much in taxes and royalties as they can for their citizens.

Companies try to maximize profits while maintaining their social license to operate.

Both are as they should be…

Nothing is this simple…

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“Resource Curse”

Publish What you Pay

EITI (Extractive Industries Transparency Initiative)

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Mining Tax Policy How did we get here?

PwC

Standards of living not increasing enough?

Not enough new jobs for local citizens?

Corruption?

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Mining Tax Policy Are resources a curse?

PwC

So far, the question is always,

“Does the industry pay its fair share?”

And the answer is typically,

‘No.”

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Mining Tax Policy

PwC

Will the debate shift at some point to:

“How is the money spent?”

It seems like the debate must shift.

Mining companies should have a voice.

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Mining Tax Policy In the future…

PwC

Tax Morality


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Starbucks – UK Press

BBC UK News: December 6, 2012:

• Starbucks has paid just £8.6m in corporation tax in its 14 years of trading in the UK, and nothing in the last three years, despite UK sales of nearly £400m in 2011.

• Reported a taxable profit only once in its 15 years of operating in the UK, often reporting losses.

• "It is extraordinary," Stephen Williams, Treasury spokesman for the Liberal Democrats, told the BBC. "People have been joking that some of these multinationals seem to think that paying tax is voluntary. Well Starbucks have just confirmed the joke really.

• "Tax is something that is a legal obligation that you should pay according to the tax rules of a particular country. It's not a charitable donation in order to gain sort of brand value. But that seems to be what Starbucks are doing."

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Technology Companies

The New York Times: April 28, 2012:

• Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year.

• As it has in Nevada, Apple has created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox or an anonymous office — that help cut the taxes it pays around the world.

• Some profits at companies like Apple, Google, Amazon, Hewlett-Packard and Microsoft derive not from physical goods but from royalties on intellectual property, like the patents on software that makes devices work. Other times, the products themselves are digital, like downloaded songs.

• It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers.

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How Does This Apply to Mining?

Strategies employed by companies in other industries have some similarities to those used for mining:

• Sales of commodities through a trading company or a regional marketing unit.

• Centralized financing and treasury functions, including hedging.

• Centralized procurement and business development.

• Captive insurance strategies.

• Use of alternative financing strategies: resource royalties and streaming transactions.

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What Can You Do?

• Continue to pay taxes based on your legal obligation;

• Make sure you publicly disclose all the taxes you pay:

• Total tax contribution is important.

• Focus beyond income taxes.

• Consider “near-tax” payments such as community donations.

• Benchmark effective tax rate with peer group: consider an “all-in” ETR as a non-GAAP measure.

• Explain global tax strategy to analysts, including explanation of effective tax rate.

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Resource Nationalism


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Resource Nationalism: What is it?

Basic definition:

• Tendency of people and governments to assert control over natural resources located in their territory.

3 common ways to effect resource nationalism:

• Mining taxes and royalties

• Mandated beneficiation of minerals in-country and/or export levies

• Retaining whole or partial state ownership of resources

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http://en.wikipedia.org/wiki/Natural_resources

http://en.wikipedia.org/wiki/Natural_resources

PwC

Royalties & Mining Tax

The Australian Approach:

• Tax on non-renewable resources first recommended in December 2009 by a report called Australia’s Future Tax System.

• Federal government announced its proposal for a new Resources Super Profits Tax (RSPT) in May 2010. Headline tax rate of 40% applicable to ALL mining projects.

• Massive outcry: Julia Gillard replaced Kevin Rudd as Prime Minister in June 2010.

• Replaced RSPT with Minerals Resource Rent Tax (MRRT), reduced headline tax rate of 30% (effective rate of 22.5%), narrower scope of taxable minerals (coal and iron ore), carve-out for small miners, greater allowances for existing projects.

• MRRT estimated to raise $3B this financial year, now revised down to $800M.

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The Chilean Approach:

• Mining royalty came into effect January 1, 2006 (rate: 5%)

• Profit based calculation, including a deduction for depreciation.

• Foreign investors may bring capital into the country under DL600 by executing a Foreign Investment Contract with the Chilean State., which includes tax stability for 10 years.

• Mining companies were given incentives to waive protection and pay the royalty:

• Accelerated depreciation, fixed royalty rate of 4%.

• 2010 earthquake:

• Govt. introduced a higher rate of 5 to 9%

• Companies protected by a DL600 could “volunteer” to pay.

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Which countries are next:

• South Africa:

• South Africa’s ruling African National Congress (ANC) party is now looking to Australia’s MRRT as a template for a South African resource tax.

• A mining company would be liable for tax at a rate of 50% of an amount over and above what is perceived to be a “normal return” on investments.

• Mexico:

• There is an unofficial consensus in Mexico that eventually some type of royalty will be imposed.

• Mexico’s Congress has mulled various proposals for mining royalties: payments of between 1.5% and 5% of production.

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Mandated Beneficiation & Export Levies

Many governments (e.g., Zimbabwe, Indonesia, Brazil, Vietnam) seeking to have minerals beneficiated in-country prior to export. Some concerns:

• The high cost of establishing refineries or smelters in-country

• Availability of power and infrastructure

• Lack of skilled labor

• Concentration of investment risk

In order to better ensure in-country beneficiation, governments are also imposing new steep export levies on unrefined ores

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Mandated Beneficiation & Export Levies

Examples of export levies:

• Namibia: September 14, 2012: “The Ministry of Finance will soon publish proposals for the hotly contested export levies”

• South Africa may look to impose a coal export levy to ensure the country has adequate supplies of thermal coal for power generation, in a bid to stave off a repeat of the electricity crisis of 2008 which resulted in mass blackouts.

• Congo: provincial authorities introduced a levy of $60 per metric ton on unprocessed copper and cobalt in a bid to discourage companies from processing in other countries.

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State or National Ownership

• Governments simply seeking to retain direct ownership of resources.

− Creates change in risk/reward miners expect to receive….AFTER spending significant money to build a mine

− Rio Tinto/Mongolia - Oyu Tolgoi

− Rio Tinto/Mozambique Coal - $3B write down

• Contrast with governments being strict on granting permission to mine

− Canadian government blocked BHP Billiton’s hostile takeover bid for Potash Corporation (2010)

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Indonesia:

• Foreign capital controlling shareholders must divest part of mining concession by 5th year of production.

• Divestment of 51% of concession must be achieved by 10th year of production.

• Price is paid, but mechanism for determining price is not published.

South Africa:

• Black Economic Empowerment (BEE) initiative 26% carried interest held by “Historically Disadvantaged South Africans” by 2014.

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Mongolia:

• Oyu Tolgoi project owned 66% by Rio Tinto Group and 34% by the Government of Mongolia – agreed to in March 2010

• Chalco’s US$938 million offer for a 60% stake in SouthGobi in April 2012 produced an unfriendly response: a new investment law limiting foreign companies to 49% ownership of mines

Zimbabwe:

• In 2008, the government introduced the Indigenization Act, which requires that "indigenous Zimbabweans" own at least 51% of all enterprises.

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Indigenous Activities

Peru:

• Newmont suspended activities, at the request of Peruvian government, on its $4.8B Conga project in November 2011 after local outcries regarding potential water contamination and supply issues

Honduras:

• January 2013 – Mining law passed that lifts moratorium on new mining concessions – had been in place since 2006

• Law describes consultation process that theoretically allows communities to say no to mining -- after the exploration concession has already been granted and after there is a contract established with mining companies

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What Can You Do?

• Foster good government relations: invest in a relationship with all levels of government early.

• Make sure improvements to infrastructure are well known.

• Corporate and social responsibility: invest in social and community development programs, and publish achievements.

• Seek Bilateral Investment Treaty or NAFTA protection: ensures jurisdiction with courts of arbitration.

• Align with multi-lateral agencies such as the World Bank to plan for defense against nationalism.

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History of Disclosure Policy


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• Focused on

• “Pay your fair share”

• Information for citizens so they can ‘hold their governments accountable’

• Information for sustainable investors

• Sought to be part of audited financial statements

• No materiality

• By project

• In cash

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History of Disclosure Policy Publish What you Pay (PWYP)

PwC

• Not adopted by any standard setters

• “Fair” is a relative term

• Seems to presume payments are inadequate

• What can you tell from these limited snapshots?

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PWYP

PwC

• Focused on avoiding corruption

• Developing countries asked to adopt the protocol

• 21 countries are in compliance; 16 candidate countries

• 32 countries have produced EITI reports

• US has announced it will implement EITI

• Companies were asked to cooperate and most large companies are cooperating

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Extractive Industries Transparency Initiative (EITI)

PwC

Process of reporting

• Companies report payments to government

• Governments report payments received

• The two lists are matched

• Reports are issued two years after the applicable year end

• Consider need for audit of report

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Extractive Industries Transparency Initiative (EITI)

PwC

• The industry generally supports EITI

• The industry generally does not support PWYP

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History of Disclosure Policy PWYP & EITI

PwC



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• Dodd-Frank Wall Street Reform Act including government payment disclosure for extractives – enacted July 2010

• EU Parliament and Council of Ministers reached political agreement on new rules requirement government payment disclosure for the extractive and logging industries – April 2013

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Dodd-Frank Wall Street Reform Act – July 2010

Proposed Rules – December 2010

Final Rules – August 2012

Lawsuits filed against the SEC – October 2012

*Reporting begins for fiscal years

ending after September 30, 2013*

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Dodd Frank Section 1504

PwC

• Resource Extraction Issuer

• Exploration, extraction, processing and export (or the acquisition of a license to do any of these activities)

• Only certain processing is included

• Includes processing gas to extract liquid hydrocarbons, the removal of impurities from natural gas after extraction and before the pipeline, and upgrading bitumen and heavy oil

• Includes crushing and processing of raw ore prior to smelting, but does not include smelting, refining and beyond

• Transportation is not included (solely in country – not for export)

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Dodd-Frank - The Rules

PwC

Specifics of what to report:

Any “payment”

• Made to a foreign government, or instrumentality or a company at least majority owned by a foreign government, or the U.S. Federal government

• Made to further the commercial development of oil, natural gas, or minerals

• Is not de minimis (a payment or series of payments that equal or exceed US $100,000/year) and

Includes taxes, royalties, fees, production entitlements, bonuses, dividends and other material benefits including payments for infrastructure improvements

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Specifics of how to report:

• Total amount of payments, by category

• Currency used to make payments

• Financial period in which the payments were made

• Business segment of the resource extraction issuer

• Government that received the payments and the country

• By project

In one exhibit to new Form SD, filed no later than 150 days after year end.

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Partial year effective date

• Start from earlier in the year to engage the system?

What is the definition of a project?

• Rules specifically do not define

• Make a decision and document

• Err on side of smaller projects?

• Beware excluding because it appears de minimis

Actual payments during the year or payments related to the year?

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Dodd-Frank - The Nuances

PwC

• No exemption for smaller filers

• No confidentiality excuse

• No exemption for foreign issuers

• No exemption for government-owned issuers

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Dodd-Frank - No Exceptions From Filing

PwC

• Exactly how to cut off payments

• What is a project?

• What activities are excluded from processing?

• Ex: What about SX/EW processing?

• What is an entity “under a filers' control?”

• Do “other material benefits” include production in kind?

• Are contract miners and contract drillers included?

• What about contributions to JVs where the government is the JV partner?

• What about contributions in kind?

• Include all dividends, including dividends that are paid to all shareholders?

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Dodd-Frank - Things That Aren’t Defined

PwC

• Applies to companies registered in the EU or EEA or whose securities are listed on regulated markets in EEA

• Formal approval of proposal due in June/July 2013

• Assuming no further delay, effective for financial statements for years beginning on or after January 1, 2016

• Public reporting by country, by project

• EUR 100k de minimis limit for single payment or series of related payments within a financial year

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EU Transparency Proposal

PwC

• EU rules define “project” (unlike Dodd-Frank rules)

"Project" is equivalent to a specific operational reporting unit at the lowest level within the undertaking at which regular internal management reports are prepared for the board of directors to monitor its business.“

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EU Transparency Proposal

PwC

Challenges and lessons learned from the FCPA and Physicians Sunshine Act

• Policies and procedures – developing controls to ensure that payments are recorded accurately and transparently

• Training – identifying the appropriate training population and the necessary level of detail

• Data definitions – standardizing payment details to aggregate activity across entities and territories

• Disparate entities and financial systems – incorporating reporting requirements into the overall IT strategy

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Challenges and lessons learned from the FCPA and Physicians Sunshine Act

• Disparate data sets – leveraging details from multiple data points (e.g., A/P, expenses, petty cash, bank accounts)

• Different character sets / languages – cleansing data of errant or foreign characters and translating transaction details

• Data privacy / state secrets – addressing local data privacy and state secret concerns

• False positive matches – utilizing scoring and advanced factor analysis to reduce percentage of false positives

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Data aggregation and reporting lifecycle

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Data Gathering

Tracking/Reporting

Manual Review Match Score/Prioritization

Matching

Data Standardization 1 2

3

4 5

6

Master

----- ------ ------- ----- - ----- --

------- ------- ---------

PwC

What to do now?

• Identify cross-functional working group

• Establish definitions and frameworks

• Identify and categorize existing entities

• Develop (or enhance) policy for entity on-boarding

• Define international data transfer strategies

• Understand current project accounting / reporting capabilities

• Identify in-house or third party tools to enable data capture and reporting

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The Extractive Industries are focused on emerging markets With increased policy, governance, risks and controls associated with spend on license to operate

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What companies are saying Many companies are asked to spend on community investment (CI), particularly in emerging markets

“We spend lots of money on CI, but relations with communities don’t improve (and sometimes even deteriorate)”

“Our CI program has become a source of conflict among communities”

“Local stakeholders have become dependent on us”

“There are endless requests from communities— how do we say no?”

“We get pulled in a hundred different directions”

“We’ve ended up having to take over the government’s role”

“We are doing all these good things for the community, but no one gives us any credit”

“In the end, we have little to show for all the resources we’ve spent”

From: IFC, Community Investment – A Good Practice Guide for Companies doing Business in Emerging Markets

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How are companies managing overall CI costs?

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Exploration Development Production / Operation

Closure /Abandonment

• Social Baseline

• Assessing the expected impacts and risks

• Mitigation measures CI plan

•Monitoring

• Ongoing stakeholder engagement

• Re-focusing CI efforts

•Monitoring


•New social baseline for programmes

• Re-focusing CI efforts

•Monitoring


•Sustainability of communities after closure

PwC

More context on this trend The number of companies issuing corporate responsibility or sustainability reports has increased significantly over the last decade

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5,833

823

2011

2000

Source: CoporateRegister.com

“The voluntary is now expected” – CDP, UN Principles for Responsible Investment, rating, certifications, etc.

SustainAbility reports that of the 108 ratings initiatives in 2010, only 21 existed in 2000.

PwC

What is driving the move to integrated reporting?

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Communication Stakeholder expectations

Opportunities

Integrated Reporting brings together material information about an organization’s strategy, governance, performance and prospects

in a way that reflects the commercial, social and environmental context within which it operates.

Source: Towards Integrated Reporting: Communicating Value in the 21st Century, International Integrated Reporting Council, September 2011

Risk mitigation

• Population growth • Rising middle class • Shifting global power

• GHG emissions • Environmental degradation • Resource scarcity

• Long-term strategy • Material risks and

opportunities

• Regulators • Standards boards

• International organizations

• Cost savings • Innovation • New markets

and customers

PwC

Best Practices


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• You did not choose this issue…this issue was chosen for your industry

• The people pushing this agenda are not friends of mining

• Ignoring the issue will not make it go away

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Mining Tax Disclosure Policy In general...

PwC

• Part of the extension of sustainability aspect of “pay your fair share”

• “Don’t you want to know everything I pay?”

• PwC’s total Tax Contribution studies showed that mining companies paid <50% of their taxes in income taxes

• Non-income taxes don’t show – they are above the line

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Mining Tax Disclosure Policy In general...

PwC

Obviously…….follow the law

BUT

• Tell your own story

• Tell your complete story

• Add context

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Mining Tax Disclosure Policy Best practice…

PwC

Peru

Tax sharing locally

• Not without dispute

Local governments not always well equipped to handle this additional money

Peru has a law whereby companies can spend their tax requirement on a local government project and turn over the keys to the government

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Mining Tax Disclosure Policy

What some are doing…

PwC

Think about where you own a significant mine in a rural area and you are a significant taxpayer-

• What impacts do you have directly?

• Is this a model for others going forward?

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Mining Tax Disclosure Policy What this might mean to you...

PwC

One suggestion as to how to spend mineral tax revenues:

• Provide appropriate services to citizens

• Distribute funds to the population and let them decide how to spend (i.e. a natural economy, not government spending)

• Invest the rest in an economy that will survive the mineral deposit

• Obvious issues: Who would own? What industries? Etc.

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Mining Tax Policy

A possible overall approach…

Two recent PwC publications

Corporate income taxes, mining royalties and other mining taxes: A summary of rates and rules in selected countries

Tax transparency and country-by-country reporting

pwc.com/mining

Steve Ralbovsky PwC’s US Mining Leader/Global Mining Tax Leader

[email protected] 602-364-8193

Hallie Caywood PwC US Mining Tax Partner

[email protected] 720-931-7310

mailto:[email protected]



Thank you

This content is for general information purposes only, and should not be used as a substitute

for consultation with professional advisors.

© 2013 PricewaterhouseCoopers, S.C. All rights reserved. PwC refers to the Mexico member

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Pwc_mining Tax Policy