Canberra, 18 April 1967
Confidential
Submission no. 187—Territory of Papua and New Guinea: proposed Agreement on mining copper on Bougainville Island1
The Cabinet noted, and except as indicated below, endorsed the arrangements put forward in the submission for an agreement between the Papua and New Guinea Administration and a subsidiary of C.R.A. Limited for copper mining development at Bougainville Island. It noted that appropriate validating legislation in the form of an ordinance by the Papua and New Guinea Legislature will be necessary.
2. The arrangements, as approved, are as follows. It is to be noted that variations from the original recommendations appear in items (a) (v); (b) (ii) and (b) (vi).
(a) Mining and Processing
(i) mining leases to be taken out by 31st December, 1971:
(ii) mining leases to be initially for 42 years and then two further terms of 21 years on the same terms and conditions except for royalty and rent: ancillary leases to be granted as reasonably required:
(iii) royalty to be fixed at 1¼. per cent of F.O.B.2 value and rents at the rates prescribed:
(iv) development to the stage of exporting copper concentrates to be completed within 5 years of the issue of a mining lease at a cost of not less than $25.3 (Including costs of exploration, etc.):
v. no undertakings are to be required of the company in relation to further processing, but it is nevertheless to be an understanding with the company that it will pursue objectively a feasibility study into the establishment of smelting and refining:4
(b) Taxation
(i) a three year tax holiday:
(ii) provisions as to write–off of capital expenditure should be such as to accord with the present interpretation of the income tax ordinance, but this matter will be open to re-examination after the Government considers the comparable Australian provision:5
(iii) a profit sharing scheme providing for:—
(a) an arrangement under which the company payments to the Administration will rise in stages over 4 years to 50 per cent of its adjusted taxable income (see paragraph 13(a) of the submission):6
(b) a minimum annual payment by the company to Territory revenues (see paragraph 13(b) of the submission):7
(c) a tax ceiling (i.e. an upper limit to the company’s tax liability) (see paragraph 13(c) of the submission):8
(d) royalty and municipal rates to be excluded from the tax ceiling (see paragraph 17 of the submission):9
(e) the tax ceiling to rise each year by a small percentage (no more than 1 per cent) after 25 years up to a level not exceeding 66 per cent of adjusted taxable income (see paragraph 18 of the submission): 10
(iv) binding of appropriate presently allowable deductions for tax purposes including deduction of 20 per cent of net income from copper mining:
(v) exemption from major stamp duties and limited bindings on some present rates of import duties during the initial period of the company’s operations:
(vi) the additional payments over and above normal tax rates should be imposed outside the general income tax and designated as ‘special additional tax’:11
(c) Territory participation
(i) an option over 20 per cent of the equity capital at par for the ultimate purpose of giving Territory residents the opportunity to hold shares in the project:
(ii) provided the Government is satisfied that the venture is sound and offers reasonable prospects of profitable operation the government will ensure that the 20 per cent option is taken up either on behalf of or by the people of the Territory—the Administration or an approved agency taking up initially the whole of the option or that part of it which is not taken up by eligible Territory residents:
(iii) provision to be made for Territory representation on the company’s board of directors if the option is exercised:
(iv) a statement to be made in the House of Assembly later this year foreshadowing arrangements on the above lines:
(v) the Minister for Territories to bring forward a further paper at a later stage on this matter for Cabinet’s consideration:
(vi) in lieu of Territory subscriptions of loan capital proportionate to the Territory’s equity option, the Commonwealth to undertake to use its best endeavours to assist the company in raising overseas loan capital if the option on equity participation is taken up by the Territory.
3. The Cabinet also decided:—
(1) That the attitude to other proposals be as follows—
(a) C.R.A’s request for a Government guarantee against expropriation be refused:
(b) no commitment be entered into on taxation of dividends beyond assurances to the company that it would not be subjected to discriminatory treatment in respect of such payments:
(c) the only assurance to the company of availability of foreign exchange from its foreign earnings should be a best endeavours provision in a letter of understanding:
(2) that satisfactory arrangements be made to ensure that the Commonwealth has no liability to the company upon ceasing to have authority over the executive and legislative acts of the Territory:
(3) that the Minister for Territories be authorised to conclude the agreement on the above basis and exercise his discretion on other outstanding matters including those at annexure ‘E’12 of the submission. 13
[NAA: A5842, 187]
1 Document 100.
2 Free on board.
3 Presumably, this should read ‘$25 million’.
4 Paragraph (a)(v) of submission no. 36 (see footnote I, Document 100) recommended that CRA be required to conduct a feasibility study on smelting and refining and that it undertake to submit to arbitration if the Administration disagreed with a decision not to process concentrates in the Territory. In these circumstances, the imposition of penalties was a possibility.
5 In submission no. 36, paragraph (b)(ii) recommended ‘broadened capital write-off provisions to cover all capital expenditure on the project’.
6 The payments were to be additional to royalty and municipal rates.
7 Paragraph 13(b) specified that the payment would be made ‘irrespective of whether or not a taxable income is earned by the company. In addition to royalty and municipal rates the company will be required to pay all non discriminatory import duties payable under the agreement … in any year in which these would return to the Administration revenues more that 50% of adjusted taxable income’.
8 The ceiling was set, in addition to royalties and municipal rates, at 50% of taxable income for the first 25 years of operations, after which the ceiling would rise by not more than 1% per annum. At the same time, the ‘actual proportion of adjusted taxable income payable will rise above 50% only as a result of any increases in generally applicable Territory imposts within the limits set by the tax ceiling’.
9 Paragraph 17 explained that CRA wanted royalties included under the tax ceiling, but that the Administration preferred it excluded because of an expected revenue yield of $0.5-1 million per annum. The Administration was also worried about political difficulties associated with taxing royalties, 5% of which were to go to landowners.
10 Paragraph 18 noted CRA’s proposition that after 25 years ‘if the minimum company tax rate should thereafter exceed 40% of taxable income, then the ceiling (otherwise 50%) would rise by ½,% for each 1% of the excess’. It was Barnes’ opinion that this ‘could lead to a situation where the company could eventually be permanently placed in a more favourable position than ordinary taxpayers’.
11 It was originally recommended that payments over and above the normal tax rates be a ‘supplementary income tax’.
12 It listed ‘less important outstanding matters’ that remained to be decided with CRA.
13 Barnes conveyed Cabinet’s decision to CRA in a letter to Mawby of 24 April (NAA: A452, 1967/1333). He also spoke to Mawby, noting that ‘I informed Sir Maurice that I would not be able to win Govt. approval for royalty payments inside the tax ceiling. That, apart from arguments put forward by Dept., I failed to see grounds for concern with 42 years guaranteed rate of royalty and that no realistic administration would be likely to eliminate less productive areas through increased per ton charges’. Mawby said that the CRA executive would discuss Bougainville on 3 May and that he would speak with Barnes in Canberra a day later (see marginal note of 1 May on submission, Gutman to Barnes, 1 May 1967, NAA: A452, 1967/3211 ).