Brazil is the world’s second-largest iron-ore exporter. It
currently allows mining companies to subtract some royalty calculation costs.
This will change and start charging the levy on companies’ gross revenue. Mining
comprises 4 percent of its GDP and
almost a quarter of total exports.
The lesson for the Philippines is that the new trend in
many countries now is the shift from a profit or net revenue to gross revenue
taxation. Almost all governments in the world now are so heavily indebted, they
want (a) as much tax revenues as possible particularly from the extractive
industries, and (b) money as early as possible. So that even if a mining
company has not recovered its previous big expenditures in exploration yet,
government wants to collect taxes as soon as the first revenues are earned.
I am posting four stories from Reuters, the Financial
Times, Econews and The Economist, from June 18 to 22, 2013. More details about this
change in mining taxation in Brazil are discussed there.
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(1) Tue Jun 18, 2013 5:44pm EDT, Reuters
* Bill to require rights to be developed or lost
* Introduces auction system for some mining prospects
* Vale CEO says would have "major impact" on companies
By Jeb Blount
RIO DE JANEIRO, June 18 (Reuters) - Brazil, a major
producer of iron ore, gold, copper and other metals, unveiled a long-awaited
bill to reform its 46-year-old mining code on Tuesday, proposing a doubling of
the current top royalty rate and stricter rules for opening new mines.
Murilo Ferreira, chief executive of Vale SA, the world's
largest iron ore exporter and Brazil's dominant mining company, said the bill
would hit the industry hard. He expects the government's revenues from
royalties to more than double to 4.2 billion reais ($1.93 billion) from 1.7
billion reais.
Even so, provisions of the bill are less onerous than the
industry feared when the discussion of reforms began nearly four years ago. The
top royalty rate under the proposal of 4 percent, is only one-third of typical
rates charged in some Australian states and about half of proposals in Mexico
and Ecuador.
Vale's preferred stock, the Rio de Janeiro-based
company's most-active shares, rose 2.4 percent in Sao Paulo late Tuesday.
"The government is showing itself to be more
responsive to industry concerns," said João Neves, an analyst with Eurasia
Group in Washington.
Brazil is pushing ahead with changes at a time when the mining
industry is experiencing a sharp slowdown. When the bill was first proposed in
2009, the industry was in one of its most prosperous periods ever.
"It's part of a global trend to increasingly tax the
mining industry," said Wiktor Bielski, base metals analyst at VTB Capital
in London. "Four percent is not punitive, but it doesn't help for a
country that's already facing growing internal political headwinds to
mining."
Brazil's top two mining states recently imposed their own
regulatory charges on output. Environmental rules and bureaucracy have slowed
licensing and construction of ports, railways and processing plants needed to
commercialize production.
TEST FOR BUSINESS
The bill is the latest test of the Brazilian government's
efforts to reduce tensions with investors, many of whom have criticized
President Dilma Rousseff's economic polices as erratic and her attitude toward
business as heavy handed.
In a surprise, the bill makes no provision for a windfall
profits.
Ecuador's proposed 3-to-5 percent royalty plus a 70
percent windfall tax prompted Canada's Kinross Gold Corp last week to cancel a
gold project in the Andean nation.
Kinross, which owns the Pracatú gold mine in Brazil, is monitoring
any changes in Brazil, spokesman Louie Diaz said. Rousseff said the government wanted miners
to have contractual stability and security and for concession renewals to be
contingent on them meeting investment and environmental goals.
The government will propose royalties of up to 4 percent calculated
on gross revenue, minus taxes, generated by mining projects. The government
could charge lower rates in some cases, the mines and energy ministry said.
(See factbox )
MORE UPFRONT CASH
In the Americas, the trend is shifting to gross revenue-based
taxes, which allow governments to collect money far sooner than with a
profit-based tax, said Liam Fitzgerald, a partner with PwC Canada's tax
practice.
"It's really about trying to increase the amount of
revenues they receive, and getting it a lot earlier," he said.
But mining companies prefer profit-based taxes, which
only kick in after the miner starts making money. Mexico's lower house of
Congress approved a 5 percent gross-revenue royalty, a
measure awaiting a Senate vote.
The new royalty could also reduce the competitiveness of Brazilian
companies such as Vale because the rules no longer allow transportation costs
to be deducted.
Vale's main iron ore competitors, including Australia's
BHP Billiton Ltd and Rio Tinto Ltd, are closer to China, the main global market for iron ore and other
metals. In addition to iron ore, Brazil is also a
major producer of copper, gold, bauxite, nickel and manganese.
The bill also proposes the creation of a new mine
regulatory agency and would require holders of mining rights to develop their
claims or lose them. Initially at
least, auctions would only be held in areas where the geology is well known and
the resources are significant enough to warrant a state interest, Telton
Correa, a mining ministry spokesman, told reporters in Brasilia.
New concessions for exploration and development will also
require rights holders to carry out a minimum program of investments over a
specific period of time or lose the rights. Congress is expected to vote on the bill by
the end of the year, Mines and Energy Minister Edison Lobão said. While no changes
will be made to existing rights, Lobão warned he will strictly enforce the
terms of existing licenses.
(2) June 19, 2013 12:43 am, Financial Times
By Joe Leahy in Rio de Janeiro
Brazil’s president Dilma Rousseff on Tuesday launched a
mining bill that proposes to potentially double royalties in a move that will
test strained relations with investors.
But the long-awaited proposal, which will now go before
Congress, was less onerous than some in the industry had feared when
negotiations on it began four years ago during the global commodities
supercycle.
“[Royalties] will
now comprise of quotas of up to 4 per cent of mining companies’ revenues,” Ms
Rousseff said in a ceremony to launch the bill. “This will give an important
increase to the budgets of states and municipalities that are host to mining
activities.”
Relations between Ms Rousseff’s government and investors
have become more strained as efforts by the government to cut taxes and protect
some industries have failed to revive Brazil’s former rapid growth rates.
There were also fears that Brazil might belatedly seek to
cash in on the mining boom through the bill even though the industry is slowing
in line with Chinese economic growth.
“We are a long way from the prices we had in 2011,”
Murilo Ferreira, the chief executive officer of Vale, the world’s largest iron
ore exporter and Brazil’s biggest miner, was quoted as saying in newspaper
Valor Economico.
He said the bill represented a significant increase in
royalties at a time when countries overseas were lowering such duties on iron
ore and nickel.
Even though Brazil had one of the largest reserves of
mineral resources in the world, between the four largest miners only Vale had
significant investments in the country. “There must be something wrong there,”
he said.
However, the top rate being proposed is only one-third of
the basic rate being charged by Australian states, Reuters reported.
The bill also does not include a windfall profits tax, a
proposal that drove Canada’s Kinross Gold last week to abandon a project in
Ecuador.
“For the past several months, the government has been
signalling a more moderate stance towards the sector,” said Eurasia Group in a
research note on the mining bill.
“This moderation is driven mainly by Brasilia’s unease
with weaker global market conditions, which have exacerbated Vale’s troubles
and deepened the economic team’s concern with Brazil’s deteriorating trade
balance.”
It warned, however, that the law could face turbulence in
Congress, where politicians representing mining and non mining states will seek
to gain a higher share of the industries royalties for their constituencies.
(4) JUNE 20, 2013 BY DAVID TWOMEY, Econews
Australia
Brazil’s President Dilma Rousseff has proposed a new
regulatory framework for mining in in the country, one of the world’s biggest
producers of iron, bauxite, gold, nickel, manganese and other minerals.
Ms Rousseff said her plan calls for a new government
agency that would regulate mining activity and create a new concessions regime.
The new concessions “will run for 40 years, extendable
for another 20,” and the concession holders must comply with “clear legal
obligations, with an emphasis on protecting the environment,” she said.
Mines and Energy Minister Edison Lobao, who joined
President Rousseff for the announcement, said minimum investment levels would
be established and the bidding process would be simplified.
The bill, which will be sent to Congress, also proposes
changes to the royalty regime so that 65 per cent of the total would go to
mineral-producing municipalities. According
to Ms Rousseff, these are “the ones that should benefit the most from their
wealth”.
Under the plan, Brazil’s states would receive 23 per cent
of the royalties and the remaining 12 per cent would go into the federal
government’s coffers, President Rousseff said.
“With this new framework, we’ll put in place the
necessary conditions so that the activities of researching, exploring, mining
and marketing mineral resources become more efficient, more profitable and more
competitive,” Ms Rousseff said.
The bill is aimed at modernising Brazil’s decades-old
mining legislation, which Ms Rousseff said was “out of touch”.
Murilo Ferreira, chief executive of Vale, the world’s
largest iron ore exporter and Brazil’s dominant mining company, said the bill
would hit the industry hard.
He expects the government’s revenues from royalties to
more than double to US$1.93 billion.
Even so, provisions of the bill are less onerous than the
industry feared when the discussion of reforms began nearly four years ago.
The top royalty rate under the proposal of four per cent,
is only one-third of typical rates charged in some Australian states and about
half of proposals in Mexico and Ecuador.
(4) June 22, 2013, The Economist
FOUR years after Brazil’s government said it was planning
a radical rewrite of mining laws, on June 18th the industry, which accounts for
4% of GDP and almost a quarter of exports, finally learned its fate. Maximum
royalties on mineral wealth are to rise from 2% to 4%, with iron ore and gold
probably attracting the top rate, and will be levied on turnover rather than
profit. Future licences will come with minimum-investment conditions and
licensing will be simplified.
The announcement was met with resignation by mining
firms, which had been braced for worse. The government had been keen to squeeze
the sector until it squealed, but falling commodity prices and a deteriorating
trade balance seem to have made it moderate its plans. A feared new federal
levy did not materialise. The only surprise was that the proposals came in the
form of a draft bill to be approved by Congress, rather than presidential
decree. Approval will probably take the rest of the year. But there was relief
that an end to the wait, which has played havoc with business plans, is in
sight.
The new rules will raise total royalties from 1.7 billion
reais ($0.8 billion) to 4.2 billion, estimates Murilo Ferreira of Vale,
Brazil’s largest mining company and the world’s biggest iron-ore producer.
Though that only brings the country’s light taxes on mineral wealth closer to
those levied in other resource-rich countries (Australia charges up to 12%),
mining firms complain that Brazil’s chaotic tax system subjects them to costs
and risks they do not bear elsewhere. Vale, for example, has spent more than a
decade disputing a tax bill for 30 billion reais on profits generated by
foreign subsidiaries.
Miners must now hope that the bill’s passage through
Congress does not burden them further. Local politicians in non-mining areas
may lobby for a share of royalties; under current plans they get nothing.
Mining states also want higher revenues: Minas Gerais (whose name means
“general mines”) has raised monitoring fees in recent years, though these are
supposed only to cover costs. The government may give permission for more state
taxes to smooth the bill’s passage.
The new bill is intended to increase investment, since
firms will lose licences unless they start to develop acquisitions straight
away. But firms complain that another provision could have the opposite effect.
Currently, the first company to apply for a licence for a particular patch is
either accepted or rejected; in future the government plans to auction some
licences to the highest bidder. The aim is to increase competition, but firms
say spending on exploration will fall if they risk losing the right to develop
deposits they have discovered. They will lobby for this provision to apply only
in areas already thought to be rich in minerals, not the two-thirds of Brazil’s
territory that is still a geological blank.
Dilma Rousseff has been haranguing bosses to increase
investment since she became president in 2011. One reason few have heeded her
call is that her government has made investing in many sectors far tougher.
Mining is one of those. In late 2011 the mining ministry, believing new laws
were imminent, stopped issuing licences. More than 5,000 projects and at least
20 billion reais in investment have been on hold ever since, according to the
Brazilian Mining Association, an industry body. About 20 junior mining
companies—firms which assess promising prospects and audit reserves—have had to
fire geologists or shut up shop. Though business should pick up now that the
new bill has been announced, rebuilding lost expertise will be costly and slow.
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See also:
Mining 21: Chile Policies, May 21, 2013
Mining 22: Philippines as EITI Candidate, June 05, 2013
Mining 23: On the Proposed 10 Percent Gross Revenue Tax, June 06, 2013
Mining 24: Casino-Hontiveros Mining Socialism is Off Tangent, June 25, 2013
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