Global mining and metals companies are prime targets for increased taxes and levies: Ernst & Young
As tax authorities become more aggressive, companies’ tax outlook needs to be global
Vancouver, Moscow, 19 November 2009: A new Ernst & Young report suggests the mining and metals industry may become a prime target for increased taxes and levies as governments worldwide face significant budget pressures to fund the deficits created during the global financial crisis. As a result, more globally-focused tax planning is necessary to lessen the potential impact in any one nation.
Although recent commodity prices have been down due to the global recession, there was a period of superior profits and cash flow for mining and metals companies that ended just last year when the financial markets collapsed and the recession began in earnest. This historic period of generous commodity prices has made mining and metals companies a favored target of revenue authorities for tax audits and investigations, particularly in countries heavily associated with mining and metals such as Australia, Canada, South Africa, Chile and Peru.
“As authorities continue to become more aggressive, tax functions need to devote more time to developing their relationships with them,” said Andy Miller, Global Tax Lead for Mining and Metals at Ernst & Young.
Petr Medvedev, Partner at Ernst & Young, Head of Tax and Law practice in the CIS, says: “A very similar trend is observed in our markets as well as the tax authorities are under pressure to fill the gap in the State budget while tax revenues decrease for reasons that are beyond control of the taxpayers.”
With the increased focus on the industry, 72% of mining and metals companies who participated in Ernst & Young’s Tax Survey for Mining and Metals reported an increase in controversy with tax authorities. The authorities are increasingly sophisticated in their approach, with new and stricter documentation requirements, and better cross-border information sharing methods.
These improved methods are significant considering the report also revealed that 92% of the mining and metals companies surveyed have cross-border intercompany transactions. But while the commercial and operational aspects of mining and metals companies are run globally, the tax function still tends to be run on a multinational basis.
“The survey indicates that few mining and metals companies are taking a holistic approach to tax planning and therefore may not be realizing tax benefits associated with supply chain planning and the related cost savings that can be captured from appropriate intercompany transfer pricing,” said Miller. “In the current rapidly changing economic environment, companies need to dedicate increased time to tax planning in order to take advantage of opportunities, decrease taxes and improve shareholder value.”
Not surprisingly, the report reveals that tax executives are under pressure to lower costs through improved tax planning. In fact, 86% of respondents see the importance of tax planning to improve cash flow. This means tax executives are focusing more on cash tax savings and less on the impact that tax savings may or may not have on net earnings.
“There are measures that tax executives can take to make their businesses more competitive,” said Miller. “Tax executives can look to ways to accelerate tax deductions or defer recognition of income which can generate cash tax savings.”
The report also reveals that global climate change is an issue tax executives will need to deal with in the intermediate and long term as governments move to introduce carbon emissions schemes, which are likely to have a direct impact on the profitability of the mining and metals sector.
“Carbon emission schemes open up new avenues for governments to increase taxation and alternatively provide tax incentives to reduce greenhouse gas emissions,” said Miller. “The survey indicates that despite this emerging issue, there has been very little involvement of the tax function in planning for the impact of climate change legislation on the business.”
Petr Medvedev adds: “While carbon unit trading is on the agenda of some of the Russian metals and mining companies the level of interest that we see is not comparable to that of their Western rivals.”
However, tax executives in the industry do appear to recognize the significance of emerging climate change legislation and related greenhouse gas regulation. More than 40% of survey respondents said that this was something that they should consider in the future.
Overall, in these tough economic times the global tax executive must learn to do more with less. Tax functions will continue to face a myriad of challenges. As the global economy slowly pulls out of recession, demand for minerals and metals will likely rise. Tax functions will be faced with higher income taxes, moving planning to an even higher priority.
About the survey
The 2009 Tax Survey for Mining and Metals complements the 2008 Ernst & Young Global Tax Risk Survey, summarizing the views of tax directors of global companies across all industries. This study provides a more in-depth understanding of issues confronting the mining and metals industry.
Ernst & Young conducted telephone interviews with more than 40 tax directors of the top 100 global mining and metals houses in the first half of 2009.
This report represents the views of these tax directors on the key challenges they face through all phases of the tax lifecycle – planning, provision, compliance and controversy.
About Ernst & Young
Ernst & Young is a global leader in assurance, tax and legal, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
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