Taxes and rumours of taxes

Governments squeezed the golden mining goose a little tighter in two major mining countries over the week.

• In Tanzania, the national government passed its long-anticipated and hotly debated Mining Act 2010, which jacks up mining royalties to levels more common elsewhere in Africa.

The changes are a response to a broadly held view in Tanzania that not enough of the riches generated by the country’s booming minerals sector have flowed into the hands of native Tanzanians.

With the new law, gross revenue royalty rates will rise to 4% from 3% for gold and base metals, and to 6% from 5% for diamonds and other gemstones. The rates will be a flat 7% for uranium and 3% for any other minerals.

There are a few other big changes: the government may own a stake in any future new mining developments; the diamond and gemstone trade is to be reserved primarily for native Tanzanians, with new foreign investments needing a local, majority partner; foreign mining companies must list on the Dar Es Salaam Stock Exchange; a “Mining Advisory Board” of limited independence will be created that will replace what has been a toothless Mining Advisory Committee; and the government must now set aside land for artisanal miners beside new large projects.

Meanwhile Barrick Gold, the largest gold producer and miner in Tanzania, reported that its newly spun-off, 75%-owned, Africanfocused subsidiary African Barrick Gold (ABG) has turned a US$53-million net profit in the first quarter, up from US$12 million in the equivalent, year-ago quarter, thanks to higher gold prices and the start-up of its Buzwagi mine in Tanzania.

ABG expects its four gold mines, all in Tanzania — Bulyanhulu, Buzwagi, North Mara and Tulawaka — will produce a total of 800,000 to 850,000 oz. gold in 2010 at cash costs between US$450 to US$500 per oz. gold, up from about 716,000 oz. gold produced in 2009. This output helps make Tanzania Africa’s third-largest gold producing nation.

ABG says it is reviewing Tanzania’s new mining law, which has yet to be signed by the president, but believes the law will not affect its current mines in the country because its existing “mineral redevelopment agreements remain unchanged.”

According to a Reuters report, the Tanzanian government took in US$57 million from mining royalties in 2009, and is expecting to double that sum annually once the new law comes into full force.

On the face of it, it’s hard to believe Tanzanian legislators have spent the past year and a half putting together a mining tax reform law that leaves the country’s largest gold miner unscathed, so we’d say, “stay tuned.”

• The stakes are much higher in Australia, where tax-related lobbying has reached a fevered pitch in the lead-up to the May 2 release of a major tax review of all industrial sectors by federal treasury chief Ken Henry. The Henry Tax Review is expected to push for a new 40% national resource “rent tax” that would be levied on mining companies’ windfall profits.

Miners in Australia are now coming to grips with the possibility of paying upwards of A$5 billion in extra federal taxes annually should the rent-tax proposals become law.

The mining industry, which generates more than a third of Australia’s export earnings, already pays about A$21 billion in various taxes and royalties per year, and pays a higher tax rate than other industries. Some commentators have calculated that, had the proposed windfall taxes been in place over the last nine years, miners would have paid between A$20 billion and A$25 billion in extra federal taxes.

The proposed new federal mining tax grab has set off the usual political firestorms in Australia’s chief mining states, Western Australia and Queensland. The governments of the two sparsely populated western states are naturally resisting the politically disempowering but intellectually appealing case for moving from state-based royalties, which are often based on mined tonnages, to a streamlined, profit-and rent-based federal royalty.

There is much speculation that, as a sweetener for mining companies to accept the changes, regular corporate taxes would be cut at the state and federal levels, which might allow more mining companies to weather the low end of mining’s inevitable boom-and-bust cycles.

More broadly, the Rudd government says it wants to simplify Australia’s over-complex tax code and work with states to reduce payroll taxes, which inhibit hiring.

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