Rio Tinto says investor protections drove Mongolian mine funding arrangements

Rio Tinto says it used a Dutch subsidiary to own and fund development of Mongolia’s Oyu Tolgoi mine because of the protections afforded by an investment treaty between the Dutch and Mongolian governments, not because it wanted to avoid hundreds of millions of dollars in tax.

The defence of the Oyu Tolgoi ownership and financing structure came after a Dutch not-for-profit agency, SOMO, used a 46-page manifesto to accuse Rio and its subsidiaries of benefiting from an “abusive” investment agreement with the Mongolian government and of creating a structure that reduced tax obligations in the developing nation and Canada.

Rio has rejected both assertions and accused SOMO of numerous factual errors.

The Oyu Tolgoi copper, gold and silver mine is held by a Mongolian company called Oyu Tolgoi LLC (OTLLC), which is 66 per cent owned by Canadian company Turquoise Hill Resources (THR) and 34 per cent by the Mongolian government.

 SOMO’s central accusation is that Rio and THR have sought to avoid tax in Mongolia and Canada by ensuring that shareholder loans for the project were sourced from THR subsidiaries in the Netherlands and Luxembourg, where the miner can access discounts on withholding tax rates and lower income tax rates respectively.

Sourcing loans through a Dutch subsidiary allowed OTLLC to pay 10 per cent, and later 6.6 per cent withholding tax on interest payments, rather than the typical Mongolian rate of 20 per cent.

But THR said investor protections, rather than discounts on withholding tax, were the reason it sourced loans and held its stake in Oyu Tolgoi through a Dutch subsidiary with zero employees.

“We confirm that one of the factors in selecting a Netherlands-based investor was the bilateral investor protection treaty between Netherlands and Mongolia noting no such treaty existed with Canada at the time.

“We disagree that the utilisation of the bilateral investor protection should be discarded as ‘illegitimate’ where it is legally obtained to protect the project from significant non-tax risks,” said THR in its response.

“We have also addressed that the company has sufficient local substance in the Netherlands to conduct its business there.”

Much of the Dutch subsidiary’s funding came from another wholly-owned THR subsidiary in Luxembourg.

Known as Movele, the Luxembourg subsidiary continues to play an intermediate financing role for the Mongolian mine by lending to the Netherlands subsidiary which, in turn, lends money to OTLLC.

A Rio spokesman said the use of the Luxembourg financing vehicle had been approved by the Mongolian government in agreements that set the fiscal terms for Oyu Tolgoi.

“Oyu Tolgoi’s shareholding and funding structure was agreed in advance with the governments of Canada and Mongolia and the tax outcomes are in line with those in Australia, Canada, Chile and the US,” he said.

THR rejected SOMO’s suggestion that interest payments on the loans had been used to reduce OTLLC’s taxable income in Mongolia, saying the mine was not currently delivering taxable profits given the huge investment under way in an underground expansion.

“Revenues from the open pit operation have been used to fund the underground development … No dividends have been paid to date to any shareholders.

Presently, we anticipate sustainable underground production to begin in 2021 after which Oyu Tolgoi will operate for several years before it recovers its investment and generates taxable profits,” said THR.

“In this context, we are concerned that the report creates a misleading impression that the project already generates great value for the benefit of investors. This is simply not the case.

“Although neither the investors nor government of Mongolia are receiving dividends, and won’t for some time, the government of Mongolia is receiving and will continue to receive significant tax and royalty income.”

Australia’s Export Finance and Insurance Corporation is among a syndicate of institutions funding the Oyu Tolgoi expansion, with ANZ and NAB also involved.

SOMO’s allegations come after a turbulent period for Rio in Mongolia; the nation recently made a fresh grab for $US155 million in tax from THR and copper exports from the mine have been interrupted at the Chinese border in recent weeks.

Source: http://www.afr.com/business/mining/rio-tinto-says-investor-protections-drove-mongolian-mine-funding-arrangements-20180201-h0roy4

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