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Mongolia Seeks More Tax From Rio Tinto Mega Project

by Mary Swire, Tax-News.com, Hong Kong

17 October 2012


Turquoise Hill Resources, majority owned by Rio Tinto, has rebuffed a second request from the Mongolian government to renegotiate the terms of an investment agreement, which provides generous tax concessions for the company's flagship Oyu Tologi copper mining project that is due to begin operations in 2013.

In an agreement signed in October 2009, the Mongolian government agreed to provide corporate income tax concessions and significantly reduced mining royalties for the life of the mine.

The terms of the agreement were subject to a failed challenge by the previous government in 2011, and the new government, which took over the reins in August 2012, has sought to revisit the issue in a budgetary proposal tabled recently before the nation's parliament.

The proposal would add an average USD300m to the mine's annual tax liability, by revoking income tax allowances, and by introducing a sliding mining royalty scale of up to 20%, dependent on copper prices - considerably higher than the fixed 5% rate guaranteed under the agreement.

Since securing the agreement in 2009, Turquoise Hill and Rio Tinto have poured billions of dollars into the development of the mine, situated 1,300 meters below the Gobi Desert. Deposits comprise 24.7 million tonnes of copper and 1,000 tonnes of gold, and are expected to take almost 70 years to fully deplete. Once operational, the mine's output will account for a massive 30% of the nation's gross domestic product.

Confirming that the companies would legally challenge the proposals if necessary, Kay Priestly, CEO of Turquoise Hill, said: "The investment agreement is mutually beneficial for the Mongolian government and investors. We have invested nearly USD6bn, created thousands of jobs for Mongolians and are on the verge of production based on the investment agreement, which provides a stable legal framework and is a legally-binding document. The investment agreement has been fundamental in building Mongolia's reputation as an increasingly reliable and secure destination for foreign investment."

"As recently as October 2011, the Mongolian government reaffirmed that the investment agreement was signed in full compliance with all laws and regulations of Mongolia," the company said.

A legal dispute between the Mongolian government and Rio Tinto could ultimately be self-defeating for the government, however. Mongolia would damage its reputation as a stable place to invest, and operations at the mine would have to be deferred until the dispute is settled.

Rio Tinto and Turquoise Hill Resources (previously Ivanhoe Mines) own a stake of 66% in the project, while the Mongolian government owns the remainder.

TAGS: tax | mining | royalties | law | budget | Mongolia | agreements

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