The just ended USIAD sponsored workshop on "The Development of a National Mining Cadastre System and a Proposed Mineral Development Agreement" as been appriased by many Liberians as one of the best workshops in recent times given details information about the Liberian mineral sector.
One of those who presented his paper was the Chairman of the National Investment Commission (NIC), Dr. Richard V. Tolbert. His presentation highlighted on tough times the Liberian government went through during the 2006 renegotiation of the Mittal Steel Mineral Development Agreement.
This splendid presentation by the NIC boss at the workshop drew the attentive listening of both the participants and stakeholders who appriased it as one of the best during the 3-day workshop.
Below we bring you a full text of the NIC Chairman's paper delivered at the workshop:
LESSONS LEARNED FROM THE 2006 RENEGOTIATION OF THE MITTAL STEEL MINERAL DEVELOPMENT AGREEMENT BY GOL
1. INFRASTRUCTURE:
Explicitly clarified that GOL retains ownership rights to Buchanan Port and Yekepa to Buchanan railroad while concessionaire has first operational rights to those facilities. Furthermore, GOL has the right to grant access to those facilities to third party, provided such access does not nterfere
One of those who presented his paper was the Chairman of the National Investment Commission (NIC), Dr. Richard V. Tolbert. His presentation highlighted on tough times the Liberian government went through during the 2006 renegotiation of the Mittal Steel Mineral Development Agreement.
This splendid presentation by the NIC boss at the workshop drew the attentive listening of both the participants and stakeholders who appriased it as one of the best during the 3-day workshop.
Below we bring you a full text of the NIC Chairman's paper delivered at the workshop:
LESSONS LEARNED FROM THE 2006 RENEGOTIATION OF THE MITTAL STEEL MINERAL DEVELOPMENT AGREEMENT BY GOL
1. INFRASTRUCTURE:
Explicitly clarified that GOL retains ownership rights to Buchanan Port and Yekepa to Buchanan railroad while concessionaire has first operational rights to those facilities. Furthermore, GOL has the right to grant access to those facilities to third party, provided such access does not nterfere
with concessionaire’s basic right of first access, and may request a third party to upgrade and operate facilities if GOL not satisfied with Mittal’s development of infrastructure for third party or alternate co-use. A new joint committee is also established under revised agreement to review decisions regarding third party access or upgrading of the infrastructure.
2. LIBERIANIZATION
Under the revised agreement Mittal is required to Liberianize top management according to a fixed schedule versus the vague obligation in the 2005 MDA: 25% top management must be Liberian within 5 years and 50% within 10 years. Top management is defined.
3. SCHOLARSHIPS:
Mittal is to provide $200,000 to fund overseas scholarships in addition to $50,000 to University of Liberian Geology Institute, versus only $50,000 in overseas scholarships and $50,000 to LU in the old agreement.
4. GOVERNING LAW:
The new agreement is to be governed by Liberian law as opposed to the old agreement which was governed by UK law. Important for the interpretation of desputes under international arbitration rules.
5. ENVIRONMENTAL PROTECTION
The Concessionaire must conduct an annual environmental audit and meet up with all Liberian environmental laws, including obligation to remedy and mitigate environmental damage.
6. “SIGNATURE BONUS”
Concessionaire agreed to pay a one time signing bonus of $15 million to GOL. Nothing to this effect was in old agreement every other concession agreement.7. LAND RENTAL:
The land rental of $200,000 for the first 2 years and $300,000 thereafter is indexed for inflation. In the new agreement as opposed to being fixed at $300,000 for the remaining 23 years of the agreement. This means that in 10 years, Mittal could be paying $500,000 - $600,000 a year in land rental versus just $300,000 at an inflation rate of 10% a year or $1.2 million in 15-20 years.8. ROYALTIES:
Mittal is to pay 4.5% royalties based on FOB price of iron ore at Buchanan under the revised agreement versus ex–mine head at Yekepa under the old MDA. This is huge for Government. For example if the price of iron ex Buchanan is just $23 per ton versus $20 per ton ex mine head in Yekepa, Mittal will now pay GOL $2 million a year more in royalties than under the previous agreement ($3 per ton transportation cost from Yekepa to Buchanan x 15 million tons per year x 4.5% = $2,025,000!!)
9. TRANSFER PRICING:
Another huge win for GOL. The price of iron ore upon which royalty will be based is now “fair market value … under international standards …. At arm’s length”…. Versus the vague subjective language of “invoiced sales price” in the old 2005 agreement.
In practical terms this could translate again into millions of dollars additional for GOL as “transfer pricing or under – invoicing especially in the case of a “captive mine” such as this for Mittal, is one of the classic ways in which multinational companies under-pay developing countries for natural resources and “transfer profits” out to their tax-haven parent holding company.
For example if by this new arm’s length pricing formula GOL will now get just $5 per ton FOB more in the calculation of iron ore selling price for royalty purposes, this translates into an additional $3 - $4 million per year in royalties for GOL (15 million tons x $5 = $75 million x 4.5% = $3,375,000).
10. TAX HOLIDAY:
Under the 2005 MDA, Mittal enjoyed a 5 year tax holiday on corporate taxes. Under the revised MDA, Mittal enjoys no tax holiday. Thus if Mittal starts making profits even from year 4 and 5 of operations, it will pay the full 30% in corporate taxes. So if Mittal Liberia makes only $10 million in profits in year 4 and 5, this will translate into another $3 million in corporate tax for GOL in each year.
11. WITHHOLDING TAXES:
The elimination of the general tax holiday in the revised MDA has tremendous implications in a number of fiscal areas. This is especially true in the area of withholding taxes on interest payments, dividends and payments to contractors. Under the old MDA, Mittal was exempted from withholding taxes in all of these areas. Under the revised MDA Mittal pays GOL a withholding tax of 9% on interest payments, and 6% on all payments to contractors.
The withholding tax on interest payments is once again a big win for Liberia. For assuming Mittal Liberia finances just $600 million of its $900 million capital expenditure program over the next 5 years and makes interest payments to its creditors of $48 million at 8%, GOL gets to withhold 9% of that or about $5 million.
This was one of the biggest achievements for GOL in the revised MDA. For assuming Mittal makes $700 million in payments to contractors over the next 5 years, Liberia will now realize withholding taxes of at least $42 million or 6% on these payments versus taxes being paid to some foreign jurisdiction.
12. CUSTOMS DUTIES:
Under the new agreement, Mittal pays 40% of normal customs duties on imports for years 6 – 10 of the agreement and 100% thereafter versus the 2005 agreement where Mittal merely pays a flat $400,000 a year in lieu of all customs duties for the life of the agreement.Furthermore, Mittal now pays 50% of the regular customs duty on diesel as well as gasoline versus the 2005 MDA where they were 100% exempt on diesel. And the exemption on fuel is now limited to 7 years versus 25 years in the old MDA, hereafter they pay 100% if the customs duties on all fuel.
13. ECOWAS TAX:
Mittal must pay the statutory 1% ECOWAS Tax for which it was exempted in the 2005 MDA.
14. GENERAL TAX LAWS:
Very significantly, Mittal is now subject to all laws of general applicability with respect to taxes unless otherwise exempted, versus in the 2005 MDA where Mittal was generally exempted from tax laws of general application unless specifically stated otherwise.
15. PARENT GUARANTY
Mittal Steel AG, the parent company of Mittal Steel Liberia, is now explicitly expressing a guarantor of the financial and environmental obligations of Mittal Steel Liberia. This provision did not exist at all in the old agreement.
16. DEBT TO EQUITY RATIO:
Mittal’s ability to leverage its Liberian operations is now limited to a maximum debt/equity ratio of 3:1. This is vitally important as the amount of debt a company takes on can seriously effect the amount of taxes it pays by reducing taxable income through excessive interest deductions. There was no such cap in the previous MDA.
(In fact not only is there a cap on the debt to equity ratio but under Liberian tax laws the deductibility of interest expense is limited to 50% of net taxable income)
17. EMINENT DOMAIN:In the previous MDA, GOL was obligated to seize private land by eminent domain for the concessionaire at concessionaire’s expense if requested to do so by Mittal. Under the new agreement, Mittal will have to negotiate its own land acquisition with private land owners, as eminent domain should only be used where private land is needed for public purpose, not for a private investor.
18. ARBITRATION AWARDS:
Should there be a dispute between GOL and Mittal for which Mittal is awarded a benefit, such arbitral award may now be taxed in Liberia whereas it was not subject to tax in Liberia before.
19. TURNOVER TAX:
Mittal is now subject to a 1% turnover tax as opposed to ½ % turnover tax in the old MDA. On every $100 million in gross revenue, GOL will now receive an extra $500,000 in turnover tax. Although this is an advance tax creditable against ordinary income taxes it will help the Government’s cash flow tremendously.
20. DISPOSITION OF ASSETS:
GOL may now buy moveable assets at the termination of the agreement at “net book value” versus ‘fair market value”. Important as most assets will probably be written down to zero at termination.
21. MARGIN OF PERFERENCE:
Under the new MDA the concessionaire is required to give preference to Liberia goods and services whenever they are available at comparable quality, price and delivery schedule.
22. TRANSFER OF OWNERSHIP:
Under the new MDA, Mittal Steel does not have the right to transfer its equity to any non-related third party without the explicit authorization of the Government of Liberia. Under the old 2005 MDA, this was a one-sided restriction with only GOL not being allowed to transfer ownership without the other party’s consent.
23. LAWS OF GENERAL APPLICATION:
Finally, perhaps the greatest accomplishment of the revised MDA was the intent by the Government to begin to bring this concession agreement within the framework of a standardized agreement that conforms broadly to tax laws of general application rather than it being an ad-hoc, one-off, individual tax-regime that is subject to arbitrary negotiation each time a new investor comes into Liberia. For example just subjecting them to “Laws of General Application” means that Mittal will now pay all the normal Governmental Agency fees such as business registration fees, motor vehicle registration, work permits, visas, fire service inspection fees, police inspection fees, etc., etc. as opposed to special rates it had under the old MDA.
24. SOCIAL BENEFITS:
The language of all the social benefits such as housing, healthcare, education, water and sanitation was tightened so as to bring the concessionaire’s obligations up to ‘international standards” and “international best practices” as opposed to merely the standards of local Liberian laws and regulations.
25. FINANCIAL SUMMARY:
In my humble opinion, all of these changes will bring additional direct financial benefits of no less than $75 - $100 million to the Government and people of Liberia over the next 10 years.
2. LIBERIANIZATION
Under the revised agreement Mittal is required to Liberianize top management according to a fixed schedule versus the vague obligation in the 2005 MDA: 25% top management must be Liberian within 5 years and 50% within 10 years. Top management is defined.
3. SCHOLARSHIPS:
Mittal is to provide $200,000 to fund overseas scholarships in addition to $50,000 to University of Liberian Geology Institute, versus only $50,000 in overseas scholarships and $50,000 to LU in the old agreement.
4. GOVERNING LAW:
The new agreement is to be governed by Liberian law as opposed to the old agreement which was governed by UK law. Important for the interpretation of desputes under international arbitration rules.
5. ENVIRONMENTAL PROTECTION
The Concessionaire must conduct an annual environmental audit and meet up with all Liberian environmental laws, including obligation to remedy and mitigate environmental damage.
6. “SIGNATURE BONUS”
Concessionaire agreed to pay a one time signing bonus of $15 million to GOL. Nothing to this effect was in old agreement every other concession agreement.7. LAND RENTAL:
The land rental of $200,000 for the first 2 years and $300,000 thereafter is indexed for inflation. In the new agreement as opposed to being fixed at $300,000 for the remaining 23 years of the agreement. This means that in 10 years, Mittal could be paying $500,000 - $600,000 a year in land rental versus just $300,000 at an inflation rate of 10% a year or $1.2 million in 15-20 years.8. ROYALTIES:
Mittal is to pay 4.5% royalties based on FOB price of iron ore at Buchanan under the revised agreement versus ex–mine head at Yekepa under the old MDA. This is huge for Government. For example if the price of iron ex Buchanan is just $23 per ton versus $20 per ton ex mine head in Yekepa, Mittal will now pay GOL $2 million a year more in royalties than under the previous agreement ($3 per ton transportation cost from Yekepa to Buchanan x 15 million tons per year x 4.5% = $2,025,000!!)
9. TRANSFER PRICING:
Another huge win for GOL. The price of iron ore upon which royalty will be based is now “fair market value … under international standards …. At arm’s length”…. Versus the vague subjective language of “invoiced sales price” in the old 2005 agreement.
In practical terms this could translate again into millions of dollars additional for GOL as “transfer pricing or under – invoicing especially in the case of a “captive mine” such as this for Mittal, is one of the classic ways in which multinational companies under-pay developing countries for natural resources and “transfer profits” out to their tax-haven parent holding company.
For example if by this new arm’s length pricing formula GOL will now get just $5 per ton FOB more in the calculation of iron ore selling price for royalty purposes, this translates into an additional $3 - $4 million per year in royalties for GOL (15 million tons x $5 = $75 million x 4.5% = $3,375,000).
10. TAX HOLIDAY:
Under the 2005 MDA, Mittal enjoyed a 5 year tax holiday on corporate taxes. Under the revised MDA, Mittal enjoys no tax holiday. Thus if Mittal starts making profits even from year 4 and 5 of operations, it will pay the full 30% in corporate taxes. So if Mittal Liberia makes only $10 million in profits in year 4 and 5, this will translate into another $3 million in corporate tax for GOL in each year.
11. WITHHOLDING TAXES:
The elimination of the general tax holiday in the revised MDA has tremendous implications in a number of fiscal areas. This is especially true in the area of withholding taxes on interest payments, dividends and payments to contractors. Under the old MDA, Mittal was exempted from withholding taxes in all of these areas. Under the revised MDA Mittal pays GOL a withholding tax of 9% on interest payments, and 6% on all payments to contractors.
The withholding tax on interest payments is once again a big win for Liberia. For assuming Mittal Liberia finances just $600 million of its $900 million capital expenditure program over the next 5 years and makes interest payments to its creditors of $48 million at 8%, GOL gets to withhold 9% of that or about $5 million.
This was one of the biggest achievements for GOL in the revised MDA. For assuming Mittal makes $700 million in payments to contractors over the next 5 years, Liberia will now realize withholding taxes of at least $42 million or 6% on these payments versus taxes being paid to some foreign jurisdiction.
12. CUSTOMS DUTIES:
Under the new agreement, Mittal pays 40% of normal customs duties on imports for years 6 – 10 of the agreement and 100% thereafter versus the 2005 agreement where Mittal merely pays a flat $400,000 a year in lieu of all customs duties for the life of the agreement.Furthermore, Mittal now pays 50% of the regular customs duty on diesel as well as gasoline versus the 2005 MDA where they were 100% exempt on diesel. And the exemption on fuel is now limited to 7 years versus 25 years in the old MDA, hereafter they pay 100% if the customs duties on all fuel.
13. ECOWAS TAX:
Mittal must pay the statutory 1% ECOWAS Tax for which it was exempted in the 2005 MDA.
14. GENERAL TAX LAWS:
Very significantly, Mittal is now subject to all laws of general applicability with respect to taxes unless otherwise exempted, versus in the 2005 MDA where Mittal was generally exempted from tax laws of general application unless specifically stated otherwise.
15. PARENT GUARANTY
Mittal Steel AG, the parent company of Mittal Steel Liberia, is now explicitly expressing a guarantor of the financial and environmental obligations of Mittal Steel Liberia. This provision did not exist at all in the old agreement.
16. DEBT TO EQUITY RATIO:
Mittal’s ability to leverage its Liberian operations is now limited to a maximum debt/equity ratio of 3:1. This is vitally important as the amount of debt a company takes on can seriously effect the amount of taxes it pays by reducing taxable income through excessive interest deductions. There was no such cap in the previous MDA.
(In fact not only is there a cap on the debt to equity ratio but under Liberian tax laws the deductibility of interest expense is limited to 50% of net taxable income)
17. EMINENT DOMAIN:In the previous MDA, GOL was obligated to seize private land by eminent domain for the concessionaire at concessionaire’s expense if requested to do so by Mittal. Under the new agreement, Mittal will have to negotiate its own land acquisition with private land owners, as eminent domain should only be used where private land is needed for public purpose, not for a private investor.
18. ARBITRATION AWARDS:
Should there be a dispute between GOL and Mittal for which Mittal is awarded a benefit, such arbitral award may now be taxed in Liberia whereas it was not subject to tax in Liberia before.
19. TURNOVER TAX:
Mittal is now subject to a 1% turnover tax as opposed to ½ % turnover tax in the old MDA. On every $100 million in gross revenue, GOL will now receive an extra $500,000 in turnover tax. Although this is an advance tax creditable against ordinary income taxes it will help the Government’s cash flow tremendously.
20. DISPOSITION OF ASSETS:
GOL may now buy moveable assets at the termination of the agreement at “net book value” versus ‘fair market value”. Important as most assets will probably be written down to zero at termination.
21. MARGIN OF PERFERENCE:
Under the new MDA the concessionaire is required to give preference to Liberia goods and services whenever they are available at comparable quality, price and delivery schedule.
22. TRANSFER OF OWNERSHIP:
Under the new MDA, Mittal Steel does not have the right to transfer its equity to any non-related third party without the explicit authorization of the Government of Liberia. Under the old 2005 MDA, this was a one-sided restriction with only GOL not being allowed to transfer ownership without the other party’s consent.
23. LAWS OF GENERAL APPLICATION:
Finally, perhaps the greatest accomplishment of the revised MDA was the intent by the Government to begin to bring this concession agreement within the framework of a standardized agreement that conforms broadly to tax laws of general application rather than it being an ad-hoc, one-off, individual tax-regime that is subject to arbitrary negotiation each time a new investor comes into Liberia. For example just subjecting them to “Laws of General Application” means that Mittal will now pay all the normal Governmental Agency fees such as business registration fees, motor vehicle registration, work permits, visas, fire service inspection fees, police inspection fees, etc., etc. as opposed to special rates it had under the old MDA.
24. SOCIAL BENEFITS:
The language of all the social benefits such as housing, healthcare, education, water and sanitation was tightened so as to bring the concessionaire’s obligations up to ‘international standards” and “international best practices” as opposed to merely the standards of local Liberian laws and regulations.
25. FINANCIAL SUMMARY:
In my humble opinion, all of these changes will bring additional direct financial benefits of no less than $75 - $100 million to the Government and people of Liberia over the next 10 years.
For detail on this article email: bentol333@yahoo.com
Or call Dr. Richard V. Tolbert, Chairman NIC on this number: +231550560
