Taxes take a toll on global mining companies

With many countries around the world facing rising budget deficits as a result of the recession, government stimulus packages and NGOs demanding additional levies on the mining sector, already heavily-taxed mining companies are fearful further government levies will dig into their profits.

While many mining companies have recently been highly profitable, there is little understanding of the extensive taxes that are applied to their business because not all companies report their total tax contributions. Greater tax transparency, however, is the first step mining companies should take to help avoid more taxes being added to their already extensive contributions.

Additional taxes have the ability to cripple a mining company’s financial well-being, which could have negative reverberations in the areas where they operate, as they are often large sources of employment and valuable revenue for the government.

Mining companies as tax targets

Mining companies in various regions have seen an influx of new taxes take hold as governments around the world look for new tax revenue streams.

Indeed, mining royalty hikes have already been imposed in jurisdictions such as Quebec and the proposed mining tax increases in Australia and Chile have gathered much media attention. The costs associated with these taxes are significant, especially when considering the full gamut of taxes mining companies already pay. For example, the Australian government’s recently announced “Minerals Resources Rent Tax” has a staggering 30% headline rate that will apply to all iron ore and coal projects starting July 1, 2012.

Economic footprint of mining companies

PricewaterhouseCoopers’ (PwC) second annual Total Tax Contribution study shows that mining companies are subjected to a range of taxes that represent significant economic contributions to public finances.

Based on the study’s data from 22 global mining companies over a one-year period to December 31, 2008, the participating mining companies reported turnover of US$62.9 billion, wages and salaries paid to employees of US$6.0 billion and a total contributions to governments of US$10.1 billion.

Mining companies pay many other contributions in addition to corporate income tax. On average, corporate income tax accounts for only 40% of the total taxes and contributions they pay. For every $1 of corporate income tax, mining companies pay another $1.50 in other taxes and contributions borne, and collect $0.52 in taxes. These include other taxes on profit, people, purchases or supplies and property taxes -which collectively account for 33% of the average total taxes.

The remaining 27% are taxes specific to the mining sector related to the extraction of natural resources. Governments in different countries choose to levy these amounts in various ways, such as an additional tax on profits (mining tax), or as a turnover-based royalty or license fee. Mining companies in the study also reported numerous other mandatory and voluntary contributions to government finances, including contributing to the cost of public infrastructure such as roads, schools and housing.

Tax transparency is key

Mining companies are well aware of the significant contributions to public finances they make, but the same doesn’t always hold true for their stakeholders. This lack of understanding, unfortunately, makes mining companies easy targets for additional taxes as governments with growing deficits look for new revenue streams.

The mining industry is coming under increased pressure by the Publish What You Pay coalition, a group campaigning for greater revenue transparency, to fully disclose their tax affairs to their stakeholders. Tax transparency shouldn’t be seen as only a stakeholder benefit, but most importantly, as a powerful platform for mining companies to educate government on their heavy tax burdens. Through tax reporting, mining companies can best avoid further government-driven taxes by giving an accurate picture of the contributions they make and how additional taxes could negatively impact their business.

To download the Total Tax Contribution report, visit www.pwc.com/tax. For more information about PwC’s services for the mining industry, visit www.pwc.com/ca/mining.