Saturday, January 11, 2014

Mining 39: Taxes, SDMP and Small Scale Mines

After I posted my previous article, Canada's $7.8 B a year tax revenues vs PH's $0.3 B  last month in my fb wall, several friends commented on it. Some lively exchanges here.

December 17-18, 2013.

Andrew. Yep, pretty sad. I note that Indophil/Xstrata's project is being delayed until 2019 thanks to an OC mining prohibition. Mind you, with that large-scale project, in this economy, it was always probably going to be delayed until then anyway. In fairness though, mining doesn't proceed so easily in populated areas like East Coast Aust. i.e. Coal mining conflicts with wineries and farming. Most mines in Australia are so far from cities...even 200km from a significant urban centre of say 20,000 people.

Jayant. Nonoy: I don't think why the national government should be ashamed. Filipinos are very muddleheaded about this matter. They don't understand mining but want to tax it to death. They get what they deserve--a muddleheaded, bad government.

What the Philippines has ended up with? The companies that are there are run by crooks, for the legal problems make it extremely difficult to make money there. So you have TVI Pacific in Mindanao, who have their own armed forces. And recently a bunch of crooked people--B2Gold--have bought a gold mine. This is what you get for making life difficult for good businessmen. 

Andrew. Mining is highly taxed in Australia. In fact, taxes are 50% (oil, gas, iron ore & coal) compared to 3-5% for Google. Its really the landowner conflicts and legal uncertainty...more than taxes. Lower taxes for other minerals. And of course wage rates are very high.

Stephen. Well it’s what the CBCP and China want. China would prefer to keep small scale miners.

Andrew. Not sure that is true Stephen, I often hear about China forcing the closure of small scale mines. I think its a regulatory nightmare, but they get away with it by paying kickbacks. Maybe you are talking of Philippines?

Nonoy Oplas Thanks Andrew, Jayant, Steve. Yes, it is anti-big business, anti-capitalism, anti-globalization, even anti-geological science sentiments, that dominate public opposition to mining. Some guys are not that anti-big business but they are socialist-leaning that they want the government and the communities to get 60%, or 80%, of the total revenues of mining firms to "fight poverty" or "fight climate change" and so on. One result is adverse selection problem in the sector. The players that people do not want to see doing mining -- those who just mine and mine with zero environmental rehabilitation afterwards, those who pay little or zero mining taxes -- are the ones who escape the various government regulations and prohibitions.

Stephen. Andrew...China is forcing the closure of small scale mines in the Philippines? How can they do that? Yes, I thought Nonoy's posting was focused on the Philippines. Sorry. In the Philippine context however, the small scale mines are reputed to sell all sorts of ore to buyers who represent China. Most sales are "off the books. "Since the LGU's are responsible for, but have not much capacity for, regulation of the small scale mines, they are essentially unregulated. Unlike the big mines.

Andrew. Stephen, I was just trying to make sense of what you said, based on the crackdowns on small, under-capitalised miners in China, who cause a lot of damage. The Philippines has them too, often with kickbacks to local mayors. I can conceive of Chinese titleholders in the Philippines, whether local Chinese or mainland/Singaporean entrepreneurs paying similar kickbacks to get mining done. But it was your assertion, and I must say your counterpoint clarifies. Thanks.

Stephen. Thanks, Andrew. One doesn't see much in the way of crackdowns and enforcement on small scale miners in the Philippines. Well...mother nature "spanks" them from time to time with landslides, but not so much from the local government people who are their "regulators." I've heard of the payments made "off the books" to those regulators. Most of the gold and other ore that is mined in the "small scale" system doesn't make it into the regulated market, so I'm told, but rather goes to a variety of buyers who represent China. Or so I'm told. But the large scale and centrally regulated mines are the focus of the "anti-mining" groups.

Andrew. Yeah, I think about 8mths I heard reported of a gun shoot-out as gold was reputedly run from Camarines Sur to Manila...the gold disappeared...if my memory serves me. It probably doesn't'. lol

Nonoy Oplas Now see this news report -- a 10% on gross revenues of mining firms, wow. 

Disadantage: this is big, whether the company makes a profit or not, govt share is already assured of its own share. 

Advantage: Govt will hopefully become less prohibitionist, less bureaucratic, in allowing more players or in allowing expansion by existing firms as govt will get sure money from them.

Andrew. I don't so much mind that Nonoy...because miners are using 'public resource'. I just don't want govts custodians of said funds. Always private with counterparties. Its when the amounts are excessive and imposed after, arbitrarily, or because there is a mining boom, and they want to 'opportunistically' grab a cut. Socialist extortion.

Stephen. Nonoy, I can't find the law right now, but my recollection is that the mining firms are also required to fund social programs in their surrounding areas from gross revenues, not net. Not sure and need to find out, if the social programs are on top of this 10%, or in the mix somehow. It would seem to me that the Philippines would be well served by studying what other nations, even outside of ASEAN, are doing in the mining tax realm, and then adapting our system to at least be competitive. Maybe they ARE doing such, and I'd appreciate the education and correction if that's the case.

Nonoy Oplas Andrew, I think anywhere around the world, the Regalian doctrine, "all lands belong to the state" applies and hence, revenues from the use of such public lands also belong to the state, it's a global curse that we have to live with. It is also in the Philippine constitution. This doctrine is faulty because it assumes that use of the Earth's resources is one way, only the extractive firms (oil, natural gas, mining, quarrying) benefit. But the public benefit too, when those iron ores become steel and big buildings, when silver, copper, nickel, other mineral products become tv, cars, cell phones, watches, utensils, etc.

Steve, yes, the social development management program (SDMP), it's in the Mining Act of 1995. This is an imposition and is not considered as a tax. So I think the SDMP requirement will remain, only the corporate income tax, excise tax, royalties, will be consolidated into the gross revenue tax. Not sure if VAT is also consolidated here.

So overall, mining firms will pay: 10% gross revenue tax + SDMP spending + real property tax (RPT) + various local fees (occupation fee, business permit fee, wharfage fee,...) to LGUs. Plus VAT?

Andrew. I think the problem with the Philippines is less about tax, and more about 'attitudes to mining' undermining the rule of law. i.e. Obstructions to mining not seen elsewhere - anywhere. Unprecedented

In fairness to Filipinos miners do seem to have a poor track record 'environmentally' in tropical environs, and these people are living off the land, so some hostility is understandable.

Nonoy Oplas The high or multiple taxes & fees embody the anti-mining sentiment of the public, NGOs, media, government and politicians in general. Discourage or kill mining by taxing it to death whenever possible. Earlier, I argued that if such public opposition and misinformation is minimized and the mining potential of the Philippines, estimated at $1 trillion, is tapped, the mining tax alone, even from existing tax policies, can wipe out the entire PH public debt.

Andrew. Well, I don't think those taxes are excessive. The worst I've seen is Egypt, where they assume 50% of project revenues, but there is concessions on fuel costs. Case in point being GIP.ASX.
I realise I'm being a moral relativist there. 

Stephen. I'm actually not that upset about taxes, but I am dismayed by the inequitable treatment of mines. Small scale mines are essentially unaccountable to anyone and unregulated. In theory, the local governments are supposed to control these folks. But the LGUs have no training, no equipment and no resources even if they did care. ALL mines ought to be managed by the same entity.

Andrew. True, but the track record of even large companies seems pretty bad. I think it goes with developing world lack of technical expertise that this happens. i.e. Red's poorly designed tailings dam. Costing $30mil to repair. Massive writedown for shareholders.

 I'd need a pretty compelling reason to invest in the Phils mining industry.

Nonoy Oplas Yes, small scale mines can be considered as the "black market" mining. When things are so difficult, so complicated, so costly to do legal mining, go illegal via small scale mining. The "legal small scale mining" allows only shovels, piko, other small tools. Illegal small scale mining includes the use of backhoes, bulldozers, graders, 10-wheeler trucks, and they carry the "small scale" permit.

Andrew. It seems a common problem. Noted cases in Congo (tantalum/diamonds), Indonesia (tin), PNG/Brazil (gold).

Stephen.  Rio Tuba in southern Palawan is an excellent example of a responsible mine. But I agree that not all large mines are as careful. No doubt there are horror stories everywhere. But the small scale mines are the "ants" that cumulatively destroy vast areas. THEY are the ones who have caused landslides with many deaths, and many more millions of dollars of damage than even the single tragic and ugly incident you cited, Andrew. And they are, as a practical matter, unregulated.

Nonoy Oplas Even the DENR and EITI guys do not know how big is small scale mining. The latest estimate I read is that this sub-sector employs about 300,000 people nationwide, from the Cordilleras to Mindanao. Would you believe that S. Cotabato, a huge mining province that includes portion of Mt. Diwalwal/Diwata, the provincial government collected only P6,560 in 2010 and P9,755 in 2011 from small scale mining? Full year collection from so many small scale mines cannot even pay for one month salary of a staff in the provincial capitol,

See also: 

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