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Erschienen in:
Deep-Sea Mining: Historical Perspectives Kapitel lesen Erstes Kapitel lesen

2022 | OriginalPaper | Buchkapitel

18. An Evaluation of the Payment Regime for Deep Seabed Polymetallic Nodule Mining in the Area

verfasst von : Daniel Wilde

Erschienen in: Perspectives on Deep-Sea Mining

Verlag: Springer International Publishing

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Abstract

In view of the possibility of deep seabed mining commencing in the near future, the International Seabed Authority (ISA) is considering a payment regime for polymetallic nodule mining consisting of a 2% ad valorem royalty for the first 4 years of a mine’s commercial production, increasing to 6% for all subsequent years. As the ISA continues to dwell upon the draft regulations, this chapter evaluates, with the aid of a financial model, this proposed royalty only payment regime. The pros of the proposed regime include that it would be easy to administer, limit scope for tax avoidance and (under our central price and cost assumptions) is consistent with encouraging investment. However, the cons are that this royalty only payment regime is regressive (with the ISA’s share of profits decreasing as the miner’s pre-tax profits increase) and is only consistent with maximising ISA revenues under highly specific assumptions regarding metal prices, sponsoring state tax and costs. A payment regime including a royalty, profit share and excess profit share would be more progressive, but would also be more difficult to administer and prone to tax avoidance.

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Vorheriges Kapitel Risk Assessment for Deep-Seabed Mining
Nächstes Kapitel Sharing Financial Benefits from Deep Seabed Mining: The Case for a Seabed Sustainability Fund
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Fußnoten
1
This Chapter uses the term ‘tax’ to refer to any fiscal instrument that has the potential to result in a significant payment from the miner to the International Seabed Authority or to a Sponsoring State, or from the processor to the jurisdiction where it is domiciled. Under this definition, a royalty is a type of tax, even though this is technically a payment for a resource and is sometimes not classified as a tax.
 
2
Regulations on Prospecting and Exploration for Polymetallic Nodules in the Area, International Seabed Authority, 25th July 2013.
 
3
Draft Regulations on the Exploitation of Mineral Resources in the Area, Prepared by the Legal and Technical Commission, July 2019.
 
4
An ad valorem royalty is a royalty that is levied as a percentage of the value of production of a mine.
 
5
The Draft Regulations also outline various fees. However, compared to a royalty or a profit share these fees are unlikely to result in the ISA receiving significant revenues or significantly reduce a miner’s post-tax profits.
 
6
The Draft Regulations allow for different royalty rates to be levied on different relevant metals. This Chapter, however, assumes that a uniform royalty rate will be applied to all relevant metals as this has been the working assumptions during discussions at the ISA, and is also the assumption made in the MIT Report.
 
7
This Chapter uses the term ‘MIT Report’ to refer to Kirchain et al. (2019). We use the term ‘MIT Report’ as this is how the study has been referred to during discussions at the ISA.
 
8
More specifically, the executive summary of the MIT Report presents six payment regimes as ‘best options’ for the ISA. These payment regimes are: (1) 3%/8% royalty only, (2) 2%/6% royalty only, (3) 1%/3.5% royalty only, (4) 3% royalty and 20% profit share, (5) 2% royalty and 15% profit share and (6) 1% royalty and 10% profit share. A recent update to the MIT Report outlines two alternative payments systems, namely a 2%/6% royalty only payment regime, and a payment regime where the royalty is 2% initially and then increases to between 5% and 9% depending on metal prices.
 
9
UNCLOS article 136 Common Heritage of Mankind.
 
10
UNCLOS article 140 Benefit of Mankind.
 
11
The MIT Report appears to favour a 17.5% hurdle rate, but does consider hurdle rates above and below this.
 
12
UNCLOS Annex III, article 13 Financial Terms of Contracts.
 
13
1994 Implementing Agreement Section 8. Financial Terms of Contracts 1(b).
 
14
1994 Implementing Agreement Section 7. Economic Assistance.
 
16
Or some form of profit tax.
 
17
The 22 land-based mining tax regimes summarised by PWC (2012) are: Argentina, Australia, Brazil, Canada, Chile, China, Democratic Republic of Congo, Germany, Ghana, India, Indonesia, Kazakhstan, Mexico, Peru, Philippines, Russian Federation, Republic of Congo, South Africa, Tanzania, Ukraine, United Kingdom and the United States. These countries were selected as they have significant mining industries.
 
18
Miners can also engage in transfer mispricing of mine sales, leading to lower ad valorem royalty payments. However, the existence of benchmark prices in some extractive industries may limit the scope for transfer mispricing of mine sales and contributes to mine turnover being easier to audit than mine costs. This in turn contributes to ad valorem royalties being easier to audit than taxes that are levied on profits.
 
19
For example, company A in country A provides money to related company B in country B. The financial instrument providing this money is classified as a loan in country B and interest payments are an allowable deduction. In country A the financial instrument is classified as equity and dividend payments from B to A are not taxed. This reduces the tax burden of company B, but does not increase the tax burden of company A.
 
20
See data in Appendix 5.
 
21
The MIT Model has been updated on numerous occasions and the results presented through presentations, briefing notes and reports (most recently in October 2020). We use the assumptions outlined in the MIT Report of 2019 as this report contains the most detailed exposition of the model, and moreover, the results from this report have been the focus of discussions at the ISA. In addition, the published excel-based model uses assumptions that are consistent with those contained in the MIT Report of 2019. The model is available at: https://​isa.​org.​jm/​files/​files/​documents/​doclist_​0.​pdf
 
22
The main difference is that the MIT Report presents averages from a Monte Carlo Simulation.
 
23
All dollar figures in this report at in constant 2018 USD unless otherwise stated.
 
24
The 37-year period includes pre-feasibility and feasibility, production occurs over 26 years.
 
25
The payment regime’s structure consists of two periods of commercial production with the first period lasting 4 years and the royalty rate in the second period being double that of the first. The royalty rate varying between two periods allows for higher ISA revenues in discounted terms if it is assumed that the ISA has a lower discount rate than miners.
 
26
This is not, however, to imply that all 18 mine sites are likely to commence commercial production at the same time. Some contractors do not yet have the technology or finances to start commercial mining, and the downward pressure on metal prices from the first few mines may also limit the development of further mine sites in the short term and medium term.
 
27
This uncertainty is sometimes modelled through a Monte-Carlo simulation. However, we do not follow that approach as it requires assumptions regarding the probability distributions for miners’ costs and nodule prices, and there is little empirical evidence to support assumptions regarding a particular distribution.
 
28
The royalty rates for the first and second periods of commercial production were maximised subject to the constraints that: (a) there could only be two royalty rates; (b) that the first period of commercial production was 4 years; (c) that the royalty in the second period of commercial production must be treble that of the first period of commercial production; and (d) that the miner post-tax IRR should equal 17.5%.
 
29
The sponsorship agreement for UK Seabed Resources does not provide it with exemption from UK CIT.
 
30
The unsigned draft sponsorship agreement for NORI is available at: https://​www.​itlos.​org/​en/​main/​cases/​list-of-cases/​case-no-17/​ (as an annex to the written statement of the Republic of Nauru), and at: https://​www.​itlos.​org/​fileadmin/​itlos/​documents/​cases/​case_​no_​17/​Statement_​Nauru.​pdf
 
31
The unsigned draft sponsorship agreement for NORI includes provisions requiring that the State remedies the effects on NORI of a discriminatory change in Nauruan law. A discriminatory change in law is defined in the agreement to include any change in Nauruan law which ‘materially increases the quantum of benefits required to be given by NORI or UNI (whether economic or intangible) to the State in such a way as to materially change the intent contemplated under this Agreement (including without limitation changes to Nauruan Laws resulting in a materially adverse increase in NORI’s tax burden).’ Nauru did not have a CIT at the date of the draft sponsorship agreement. Nauru has since introduced CIT and the current rate for large companies is 20%. The effects of the provisions in the unsigned draft sponsorship agreement would, if included in the final signed sponsorship agreement, effectively have been to exempt NORI from the 20% CIT currently in force in Nauru.
 
32
Whether in actuality tax payments to the ISA would qualify as foreign tax payments and be creditable against sponsoring state CIT is dependent both on the detailed provisions of the sponsoring state’s tax laws and on the detailed structure of the ISA payment regime. It is, therefore, difficult to reach a firm conclusion on this matter for sponsoring states in general (as opposed to a particular sponsoring state) and prior to the details of the ISA’s payment regime being finalised. When drawing a conclusion regarding whether tax payments will be creditable under the worldwide tax system of a particular sponsoring state two issues are likely to be of particular importance. Firstly, under the sponsoring state’s tax law does income accruing from mining in the Area qualify as foreign income. And secondly, under the sponsoring state’s tax law do the ISA’s taxes qualify as being equivalent to CIT payments.
 
33
The term ‘mine’ is used in this section to refer to the area covered by a polymetallic nodule exploration or exploitation contract with the ISA.
 
34
This chapter uses the World Bank definitions of low-income countries and lower middle-income countries. See: https://​datahelpdesk.​worldbank.​org/​knowledgebase/​articles/​906519-world-bank-country-and-lending-groups
 
36
Neither the World Bank nor the United Nations includes the Cook Islands in their country classification indexes.
 
37
1994 Implementing Agreement, Section 8 1(b).
 
38
The payment regime in the Area levies the royalty on CMV. In contrast, many land-based mining regimes level the royalty on invoiced sales value. In our model’s central scenario, the invoiced sales value of nodules is 46% of their CMV.
 
39
More formally the term ‘profits’ in this sentence refers to net cash flows.
 
40
For ease of calculation immediate expensing and unlimited loss carry forward are assumed for all tax regimes. The effective tax rates calculated do not include VAT (as this mainly affects cash flows), area fees (due to the difficulty equating a deep-seabed mine to a certain sized land-based mine) or discretionary tax holidays. For some jurisdictions the tax rates shown in Table 18.2 are averages of tax rates that vary with profits or net operating income; in such cases, the varying rates were modelled when calculating the effective tax rate for that jurisdiction.
 
41
All data taken from: US Geological Survey. (2020). Mineral commodity summaries 2020.
 
42
Countries shown are those low-income countries with Extractive Industry Transparency Initiative Reports in 2016 or 2017. Data is from the relevant EITI report available at: https://​eiti.​org/​explore-data-portal
 
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Metadaten
Titel
An Evaluation of the Payment Regime for Deep Seabed Polymetallic Nodule Mining in the Area
verfasst von
Daniel Wilde
Copyright-Jahr
2022
Buch
Perspectives on Deep-Sea Mining

Print ISBN: 978-3-030-87981-5

Electronic ISBN: 978-3-030-87982-2

Copyright-Jahr: 2022

DOI
https://doi.org/10.1007/978-3-030-87982-2_18