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Western Australia warns Kazakhstan on mining tax regime challenges

As Kazakhstan prepares to implement more measures this year to attract mining investment, Western Australia, on whose regime its new mining code is based, has warned about resources companies' methods of reducing tax payments, S&P Global Market Intelligence has learned.

The Central Asian country's tax code was amended on Jan. 1, 2018 to remove the profit tax for miners and allow exploration deductions, and S&P Global Market Intelligence has learned that more amendments are on the way later this year to increase its attractiveness as a mining jurisdiction.

However, it also introduced an "alternative" subsoil tax for deep and continental shelf deposits and new subsoil rental payments for miners ranging from 15 to 60 monthly calculation indices, which equated to a range of about US$110 to US$430 in January, according to law firm Baker McKenzie

The changes are the latest from large-scale reform initiated in 2013 as significant progress had been made since the outdated and somewhat prescriptive Law on Subsoil Use of 2010, which was heavily based on 1996 laws focused on development of mineral deposits that were explored during the Soviet era and the early 1990s.

While the country seeks to increase its mining investment attractiveness, Western Australia's Department of Mines, Industry, Regulation and Safety, or DMIRS, revealed this month details of its participation in a Jan. 21-23 workshop as part of its involvement in the Kazakhstan Mining Competitiveness Project, invited there by the Organisation for Economic Co-operation and Development.

The Australian Trade and Investment Commission, or Austrade, said Kazakhstan's new mining code was developed in 2015 based on the Western Australian model to remove the administrative burden for juniors, and DMIRS’ systems and analysis manager Vince D’Angelo said the Kazakhstan government had expressed interest in using the state's mining legislation as its template.

A more recent draft code included the granting of open access to geological data, but not temporarily confidential data or that related to state secrets.

While Kazakhstan also joined the Committee for Mineral Reserves International Reporting Standards in June 2016, Austrade recently warned that some local ores there were "less competitive" on the world market due to low concentrations that need more complicated extraction methods and consequently drive up production costs, while technology and business processes could be "quite antiquated".

However, foreign miners have already been operating in-country for some time, including Rio Tinto, Glencore Plc, Iluka Resources Ltd., Orano, ArcelorMittal, Russian Copper Co., United Co. Rusal Plc and Central Asia Metals Plc.

While Kazakhstan seeks to make itself more attractive for mining investment, D'Angelo briefed local authorities about Australia's experiences with resources-focused multinationals and how even a country with perceived low sovereign risk faced vexing tax issues for foreign entities.

D'Angelo said in an interview that he explained in his presentation that Australia's government had conducted a review of multinationals operating Down Under and their level of tax payments made.

"When trying to determine a mineral royalty value or a profit from a mining operation, there are issues of trying to determine the correct value or profit to apply a royalty rate and or taxation measures," he told S&P Global Market Intelligence.

"With the use of overseas sales offices, use of intercompany loans and the transfer of sales to low taxing jurisdictions, tax payments can be effectively reduced.

"I also mentioned that the Australian government has now amended its tax laws to impose large penalties for such tax avoidance.

"Citing our experience in Western Australia, I explained the Mining Act 1978 and Regulations 1981 allow the Minister for Mines to determine a royalty value if it does not represent a fair market value in situations of non-arm’s length transactions [like transfer pricing]."

The OECD also updated its transfer pricing guidelines for multinationals on July 10, 2017, including new guidance on applying the "arm's length" principle and provided opportunities for countries to relieve some compliance burdens and to give greater certainty for cases involving smaller taxpayers or less complex transactions.