Canberra, 17 April 1967
Confidential
Proposed agreement on mining of Copper on Bougainville Island
The Submissions follow on lengthy negotiations between the Department of Territories, the Territory Administration and C.R.A. Limited, and in the later stages Treasury.
The proposed Bougainville project could be of tremendous importance to the Territory and if proceeded with in the form presently envisaged would involve a capital investment of some $135 million dollars. The Company is, of course, aware of the project’s significance to the Territory and is attempting to drive a hard bargain.
The central issue is the extent to which concessions need to be made to C.R.A. Limited in order to ensure that the Company will carry out the development of the copper deposits on Bougainville.
From the Company’s point of view, the problem is that the Bougainville deposits are very low grade. In the context of existing tax provisions, the deposits have been described as marginal by the Commonwealth Bureau of Mineral Resources. To work them under existing tax provisions may, in fact, be uneconomic. It is a matter of judgment, then, as to how far it is necessary to go in granting concessions in order to make a presently marginal proposition a viable development.
The project would provide considerable employment for indigenes and there would be an early boost to revenue through individual income tax, tariffs on increased imports and so on. There would also be longer-term benefits to the Territory through taxation of Company income, through the Company’s proposal to allocate a 20 per cent share of the equity to Territory interests and from the Company’s training of indigenous labour. But the core of the matter is the suggestion that the Company should be given a three-year tax holiday and the right to write-off all capital expenditure in the early years of operation.
A three-year ‘tax holiday’ for mineral development projects is not uncommon in other countries, including under-developed countries. One important advantage which the Company sees in it and the broadened provisions for capital write-off, is the possibility it would create for increased early cash flows; which in turn are seen as being of great assistance in raising the large amount of non-equity capital. A large early cash flow would also, of course, permit the early repayment of loans and hence raise profitability to equity holders.
The extent of the cash flow likely to arise if the tax and capital write-off concessions are agreed to may be gauged from an estimate that the ‘tax holiday’ would retain for the Company, in the first three years, an amount of some $9 million which would otherwise be paid in taxation. The capital ‘write-off’ concessions are estimated to provide the company with a further taxation saving, and hence cash resources, of some $6 million in the first three years.
As we see the proposition, there will be a $45 million equity investment in a development which will require capital of $135 million—$90 million will be borrowed. The Company expects, if the major concessions are agreed to, to have written-off capital expenditure and repaid its borrowings after about eight years. It would then have a business worth $135 million for an equity investment of $45 million. On our calculations, based on the Company’s information, this represents a capital gain of between 14-15 per cent per annum over the period, on the Company’s own figuring. Higher prices for copper or lower costs would, of course, result in a higher rate of capital gain.
As a quid pro quo for the benefits sought, the Company has offered to pay higher than existing tax rates, and offers to pay tax at a rate, rising, in stages over four years from the time the Company commences to pay tax, to a ceiling of 50 per cent of adjusted taxable income. However, it is also proposed by the company that the rate of 50 per cent would not be exceeded during the first 25 years of operation, irrespective of movements in general Territory tax rates. After that period it is proposed the rate would rise by ½ per cent for each 1 per cent by which the general company rate exceeded 40 per cent. The Company’s figuring indicates that once the full 50 per cent rate becomes applicable the total contribution to revenue will be about $10 million per year.
At present, a five-year tax holiday is available to manufacturing industries in the Territory which have been accorded pioneer status , but this has not been extended to mining companies because it has been felt that the existing taxation legislation is already sufficiently generous to them. There is, of course, no similar provision available in Australia. Moreover, the proposed allowance of write-off of all capital expenditure is a much more generous provision than is enjoyed by mining companies at present, either in the Territory or in Australia. This subject is, however, presently being examined by an inter-departmental committee in relation to companies in Australia.
Treasury suggest that the concessions sought are too liberal and that should they be granted to the Company in this case, it would be difficult to resist pressure for similar concessions in Australia, and even more difficult to resist their extension to other companies in the Territory. The Department of Territories thinks that the Territory is sufficiently isolated from Australia to overcome this particular aspect of the problem and we are inclined to accept their view on this aspect. Furthermore, argument for the introduction of similar concessions in Australia could be countered by reference to the total tax situation here, which is already quite favourable to mining companies.
We suggest that potential capital gains of the order indicated above justify pressing for a review of the 50 per cent tax ceiling much earlier than 25 years, or alternatively for a faster escalation of the permissible tax rates after the first 25 years. Further, we think that there is a case for deferring a decision on the Company’s depreciation proposal. Given the major concessions sought by the Company the project looks potentially very profitable and we think there may be scope for paring down the Company’s position on the depreciation aspect.
Concern has been expressed by the Department of External Affairs that development of the deposits on the terms recommended by the Minister will attract international criticism as involving exploitation of the Territory when it is not self-governing. But, on the other hand, should the project fail to proceed as a result of Commonwealth policy, this could also lead to criticism both locally in the Territory and internationally. We suggest that fear of possible local or international criticism ought not to be a decisive factor in considering the proposed agreement.
It might, however, be useful in refuting possible criticism if the agreement were more definite in requiring the Company to train and subsequently employ indigenous people. In any case, some more definite arrangements in this respect than those proposed by the Minister (paragraph 9(e) of Submission 187) are desirable on general grounds.
We suggest that approval should be given to continuing negotiations with C.R.A., on the following major terms:—
1. That the Company be granted a three-year tax-holiday for the Bougainville project.
2. That a decision on the early write-off of all capital expenditure be deferred for the time being pending a report by the inter-departmental committee presently examining the Australian law.
3. That the 50 per cent tax rate be reviewed earlier than 25 years or the agreed rate of escalation be higher.
4. That the agreement provide firmer proposals for training and employment of indigenous people.
[NAA: A4940, C4491]
1 Initials and position unidentified, PMD. The note was endorsed by Munro.
2 Document 86.
3 Document 100.