Apr 2017 Financial News

Bauxite sector undertaxed — IMF (Jamaica)

Apr 26, 2017

An estimated US$18 million ($ 2.3 billion) in revenues annually has been lost with the government's decision to put in place new taxation arrangements for bauxite, the International Monetary Fund (IMF) indicates.

In its First Review under the Standby Arrangement for Jamaica, the IMF says the decision to abandon the levy for profit-sharing arrangements is regressive.

“The recent decision to provide discretionary waivers by further widening leftover exemptions on the bauxite levy created a revenue loss of over 0.1 per cent of GDP per year, leaving the bauxite sector undertaxed, and potentially undermining the hard-earned gains from the elimination of a range of tax incentives in 2014,” the Fund states in its review.

It noted that local authorities explained that the recent changes are part of a tax regime overhaul for extractive industries where the sector will shift towards profit taxation in the medium term.

The IMF stressed that Jamaica should continue “striving for a broad-based tax system with transparent and equal rules, while avoiding discretionary waivers for particular sectors or industries”.

Previously, in 1974, the levy was set at seven per cent of the selling price of aluminum ingot, instead of the previous method of computing the tax based on profit negotiated between the government and the bauxite companies.

As a result, the tax rate increased 480 per cent between 1973 and 1975, from $2.50 to $14.51 per ton. Consequently, taxes on the sector increased to 37 per cent of government revenue.

The rate has been adjusted downwards since then. But it was also agreed in the 1974 agreement that the mining sector would become part of a special fiscal regime including exemption from transfer tax, stamp duties, and registration fees. It was also agreed that the companies would calculate and pay their income tax in the normal way, but be allowed to reduce their levy by such income tax so paid.

Especially since the economic recession which started in December 2008, the Jamaican government has made concessions giving mining companies a break from payment in full.

Notably, production ceased at several local plants in 2009 when depressed market conditions caused operations to become unviable.

In 2014, as part of its commitment to the IMF to reduce incentives and waivers which drained tax revenue, the People's National Party administration reinstituted the bauxite levy — suspended after the 2008 financial year.

Subsequently, it sued venture partner in St Ann Bauxite Limited, Noranda, over unpaid levies.

The levy is set at a minimum US$5 per dry metric tonne and is adjusted upwards at the same rate as the London Metal Exchange (LME) price for alumina. In 2016, globally the LME aluminum three-month price rose 16.4 per cent.

In the 2015 arbitration award made to the Government of Jamaica against Noranda, the panel determined that the levy to be paid was the weighted average US$5.67 per dry metric tonne (DMT) production levy.

Shortly afterwards, sources from Nornada told the Jamaica Observer that they were aware that other bauxite operators had arrangements which did not include this cost.

Industry sources explained on Thursday that Jamalco, the UC Rusal-owned operation, does not pay the levy as it has been engaged in expanding capacity at its plants.

Meanwhile, the new administration decided to tread softly as it seeks to welcome new investment in the sector.

The Alpart refinery, sold by Rusal to the Chinese firm Jiuquan Iron and Steel Company Limited (JISCO) in 2016, is slated to restart in the second half of 2017.

After the arbitration loss, Noranda declared bankruptcy and subsequently sold assets to a number of companies, including Jamaican leases at the St Ann Bauxite plant, to New Day (Jamaica) Ltd also in 2016.

On April 12, Minister of Transport and Mining Mike Henry said in Parliament that negotiations with New Day are in the final stages, and “the Government is intent on securing an agreement that is beneficial to both Jamaica and the company.”

In the final quarter 2016, Henry had outlined a new profit share scheme and said the Government would be recouping US$12.6 million in taxes owed for 2014 and 2015.

He outlined that the Government expected profit share being an annual payment based on the consolidated profitability of New Day LLC.

The GOJ, he said, expected profit share of 17.33 per cent of earnings before interest, taxes, depreciation and amortisation for any period. Additionally, he said, the Government expected payment of US$1.50 per shipped dry metric tonne.

“Our calculations indicate that from the first year Jamaica stands to earn US$1.8 million more than if it had employed the bauxite levy (alone),” Henry said then, adding that by year five the GOJ would have earned US$7.7 million more than if it had depended only on the levy.

At the time, Opposition Spokesman on Mining and Energy, Phillip Paulwell, said the new arrangements were a reversal of previous gains, commenting by way of release that the levy should be fully applied, as the “bauxite levy is an efficient tax, and conditions in the industry are at their best in 10 years. Oil prices are low and alumina prices are improving”.

He warned that there is “a real possibility that the Government will not collect any revenues from the profit share scheme, as this is dependent on the company reporting a profit. Bauxite is a depleting resource and it is important that the country gets maximum value for this asset,” he added.

Local bauxite production, currently at about three million tonnes annually, is yet to return to the heyday of 17 million tonnes produced in the 1970s when Jamaica was second only to Australia in supplying world markets.

 

Source:
BY AVIA COLLINDER
Business Observer writer
Jamaica Observer
Wednesday April 26, 2017

http://www.jamaicaobserver.com/business-observer/bauxite-sector-undertaxed-8212-imf_96402?profile=1056