November 2014

Mining & Metals Resource nationalism update

EY key contact 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.
EYs 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 Recent developments by type of resource nationalism
Tax Leader
+ 1 314 290 1205 Increases in taxes and royalties
andy.miller@ey.com 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 Kazakhstan

Commodities impacted

Coal China, Indonesia, South

Tin Indonesia
Korea
Resource nationalism by 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
Australia
ministerial permitting processes, with a view to improving
efficiency while still protecting the environment. Aurora
Australia has released exposure draft legislation for the
Williams, Chile's Minister of Mines, has said, "The ongoing
amendment of the income tax law to include an exploration
(permit) revision is going to highlight some aspects that need to
development incentive (EDI). The proposed EDI would be
be improved. A deeper revision will [also] take place. The end of
available to Australian resident investors in small mineral
the revision is expected in Q1 2015. It is a vital time for Chile
exploration companies. Under the incentive, investors may be
to streamline its permit processes as recent tax reforms will
entitled to the EDI tax offset or additional franking credits where
gradually increase corporate taxes from 20% up to 27%.3
the company in which they hold shares issues them an
exploration credit. Companies may issue exploration credits to
China
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 From 15 October, China has been applying import duties to coal
by a modulation factor to ensure that the total value of credits to support its domestic coal industry. The import duties are 3%
provided in respect of an income year does not exceed A$25m on anthracite and coking coal, 5% on briquettes and 6% on other
for 201415, A$35m for 201516 and A$40m for 201617.1 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
Chile
transporting low-grade coal last month. The tariffs do not affect
shipments from Indonesia, Chinas largest coal supplier, as it
After extensive negotiations, the National Congress approved a
has a free-trade agreement with China through the Association
significant tax reform, which will become effective in stages,
of Southeast Asian Nations (ASEAN).4
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 The Chinese Government has also announced an ad valorem
27%, depending on which of the following taxation regimes is coal resource tax, effective from 1 December. The tax will
ultimately chosen for a company. replace the existing taxation scheme, which is on a fixed-rate-
per-tonne basis. The reform is targeted at supporting the
1) System A: attributed income regime whereby
struggling domestic mining industry and thus will not increase
business income is subject to corporate taxes with a
rate of 25% and is also attributed to its shareholders, the overall tax burden. For this reason, local governments have
enabling, in practice, dividend taxation on an accrued, been ordered to cancel previously imposed surcharges on coal.
fully integrated basis (i.e., 100% of corporate taxes are Chinas current coal resource tax is based on production
creditable as payment of dividend taxation) tonnages and stands at RMB8RMB20/t (US$1.30US$3.30/t)
for coking coal, while for thermal and other types of coal, the
2) System B: semi-integrated regime, a taxation regime
rate is RMB0.3RMB5/t (US$0.05US$0.80/t). Local
tailored for taxpayers interested in keeping the tax
deferral historically applicable to undistributed governments are allowed to set specific tax rates between 2%
business profits, in exchange for a higher corporate tax and 10% for their region, and it is expected that the average tax
rate of 27% and higher taxation on distributed level across the country could be about 5%.5
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

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

3 "Chile to streamline mine permit process," Reuters News, 23 October 2014.

1 4
"Inserts for Tax and Superannuation Laws Amendment (2014 Measures No. 7) "China to impose coal import duties," Financial Times, 9 October 2014; "RPT-
Bill 5 2014: Exploration development incentive," Australian Treasury, COLUMN-China coal tariff sends message to cut supply: Russell," Reuters News, 9
http://www.treasury.gov.au/, 10 October 2014. October 2014.
2
"Chile Seeking to Loosen Major Miners Grip on Idle Land," Bloomberg.com, 7 5 China to launch ad valorem coal resource tax, IHS Energy McCloskey Coal
October 2014. Report, 3 October 2014.

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Resource nationalism update November 2014 2
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
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 35,000t45,000t this year would
help raise prices.8
Kazakhstan
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 12
"Indonesia mulls tin output limits, export quotas: govt official," Reuters News, 14
October 2014.
9 13
"Kazakhs to Award Up to 100 Mine Licenses as Industry Rules Eased,"
Bloomberg.com, 17 October 2014.
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Resource nationalism update November 2014
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
In South Korea, there is talk of a possible cut in the countrys
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.
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 4,800kc5,000kc
NAR and 5,800kc6,100kc 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
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.
"Zuma must not sign mining Bill Bridgette Radebe," Mining Weekly, 16 October
2014.
"Korean eyes on lower c.v. tax cut," IHS Energy McCloskey Coal Report, 3
October 2014.
3
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 Glencores 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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Resource nationalism update November 2014 4
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Area contacts
2014 EYGM Limited.
Global Mining & Metals Leader United States All Rights Reserved.
Mike Elliott Andy Miller
Tel: + 1 314 290 1205 EYG no. ERO202
Tel: + 61 2 9248 4588 CSG/GSC2014/1434398
michael.elliott@au.ey.com andy.miller@ey.com
ED None
Oceania Canada This material has been prepared for general informational purposes only

Scott Grimley Bruce Sprague and is not intended to be relied upon as accounting, tax, or other
professional advice. Please refer to your advisors for specific advice.
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