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Freeport Reaches Mineral Export Tax Deal With Indonesia

by Mary Swire,, Hong Kong

31 July 2014

Freeport-McMoRan has announced that, following a revision by the Indonesian Government of the January 2014 regulations regarding export duties, its Indonesian subsidiary has reached an agreement whereby it will resume full operations immediately, and recommence exports of copper concentrates, expected from August 2014.

Within its new mining structure, the Government prohibited the export of raw mineral ores, but minerals that were exported in concentrate form were subjected to specific export tax rates, targeting copper in particular. Under the new law, these rates were to be gradually increased each year until January 12, 2017, when exports of concentrates would also be banned.

In a move that particularly affected Newmont Mining and Freeport McMoRan, which together accounted for 97 percent of the market, an immediate 25 percent export tax was imposed on Indonesian copper concentrates. It was stipulated that this rate would increase to 35 percent on January 1, 2015, and then up to a maximum of 60 percent by July 31, 2016.

The two companies expressed their direct opposition to the new tax immediately, and stopped their copper concentrate exports. Both companies confirmed that the new Indonesian regulations were in conflict with the production contracts they had signed, which include the level of taxation to which they should be subject and exempt them from any new taxes and duties.

However, the Government, on its part, stressed that the objective of the new tax regime was to enhance the amount of domestic value added and economic activity attached to the mineral sector in Indonesia. It had already indicated that it was finalizing new regulations that would provide a reduction in the export tax on mineral concentrates for mining companies that commit to building a smelter in the country.

In the event, Freeport Indonesia has entered into a memorandum of understanding (MOU) with the Indonesian Government under which both sides have agreed to negotiate an amended Contract of Work (COW), to be completed over the next six months, "to address provisions related to the size of concession area, royalties and taxes, domestic processing and refining, divestment, local content and the continuation of operations post-2021."

Effective with the signing of the MOU, the company has agreed to pay export duties set forth in a new regulation issued, to provide a USD115m assurance bond to support its commitment for smelter development and to increase royalties to 4 percent for copper and 3.75 percent for gold from the current rates of 3.5 percent for copper and 1 percent for gold.

Freeport also disclosed that, on July 25, 2014, the Government revised its January 2014 regulations, providing for duties on copper concentrate exports during smelter development initially at 7.5 percent, declining to 5 percent when development progress exceeds 7.5 percent and a zero tax rate when development progress exceeds 30 percent.

It was also confirmed that, with regard to smelter development, the MOU addressed, within the negotiation of the amended COW, the development of the new copper smelting and refining capacity in Indonesia "which will take into consideration an equitable sharing of costs between Freeport (and any partners in the project) and the Government through fiscal incentives, and Freeport's need for assurance of legal and fiscal terms post-2021 for the company to continue with its large scale investment program for the development of its reserves."

However, while Freeport were able to welcome "the resumption of normal operations and the completion of an MOU," Newmont Mining have taken an opposite view in how they have reacted to the imposition of the Indonesian mineral tax structure, possibly because Indonesian operations form a much smaller part of their global operations, in comparison to Freeport.

In fact, Newmont halted their Indonesian production in June this year and announced the filing of international arbitration for injunctive relief against the Government. In a statement, it said that "the Government's imposition on [its Indonesian subsidiary] of new export conditions, a new export duty, and a new January 2017 ban on the export of copper concentrate violates the COW and the bilateral investment treaty between Indonesia and the Netherlands."

"Despite our best efforts over the last six months to resolve the export issues through good faith commitments to support the Government's policy," Martiono Hadianto, President Director of Newmont's Indonesian subsidiary, added, "[we have] been unable to convince the Government that our COW should guide resolution of our differences."

While he still confirmed that said Newmont "want continued dialogue with the Government to lead to a resolution outside of arbitration," he also emphasized that "we have an obligation to protect the value of [its Indonesian operations] and the thousands of jobs it provides, as we are still unable to export copper concentrate due to the regulations."

TAGS: compliance | tax | business | tax compliance | mining | export duty | royalties | law | tax rates | Indonesia | regulation

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