On March 7, 2013, the Québec government released a consultation paper containing its proposed changes to the Québec mining royalty and tax regime in anticipation of its forum on the proposed regime to be held on March 15, 2013. The Parti Québécois (PQ) government is consulting the mining industry with respect to the government’s proposed hybrid taxation regime which would combine a 5% royalty based on the value of the extracted minerals (i.e. ad valorem) and an additional tax on mining profits, in place of the existing system which is based solely on taxation of mining profits.
Background to the Consultation Paper
Prior to 1994, the royalty rate in Québec was 18% of a mining company’s profits, subject to generous refundable tax credits. As a result, the province raised little to no net royalties prior to 1994. In 1994, Québec revamped its regime, lowering the royalty rate to 12% on a mine-per-mine basis and tightening the availability of tax credits.
In 2010, the Liberal government significantly revised the regime including, among other changes, the implementation of a progressive increase of the royalty rate from 12% to 14% (2011) and finally to 16% (2012). The current total tax burden in Québec for a mining company (including royalties and federal and provincial income taxes) amounts to approximately 38.6% of its profits, according to the consultation paper.
During the last provincial election, the PQ promised a comprehensive review of the mining tax regime and committed to raise mining royalties with the expressed objective of ensuring that Quebecers receive a fair return on the extraction of Québec’s non-renewable mineral resources. The current Minister of Finance and Economy, Nicolas Marceau, highlighted the challenge in finding a fair balance between maximizing royalties, investments and employment in the mining sector.
The Consultation Paper
The consultation paper proposes a hybrid royalty scheme consisting of a 5% ad valorem royalty and an additional tax on profits that could be calculated either on: (i) the profit margin of a mine on the basis of a rate increasing with the mine’s profitability (i.e., progressive taxation), or (ii) on the “super-profits” on the basis of a 30% fixed rate.
The first option proposed would use the same tax base as the current regime except that the tax rate would increase progressively according to a certain set of profit brackets. The consultation paper proposes that profitability would be defined as a function of the annual profits of the mine operator or owner less the production value out of all its mines. The production value of a mine would represent the excess of the gross value out of each mine over the aggregate of (i) the fees relating to the treatment, handling, storing and marketing of the ore, (ii) the portion of the administration fees relating to these activities, and (iii) the allowances for treatment and for the amortization of assets used in treatment associated with the mine. However, the consultation paper neither suggested proposed rates nor brackets for this new progressive mining tax.
Under the second approach, profits in excess of a certain threshold deemed an acceptable return as a function of risk (i.e., “super-profits”) would be subject to a 30% flat rate. The consultation paper does not shed light on any prospective amount for a proposed threshold. The proposed tax would be payable and calculated on any remaining amount following the deduction from the profits of a mining company of (i) its global production costs, (ii) an allowance for amortization on the base capital invested and an acceptable return, and (iii) the applicable 5% ad valorem royalty.
In proposing this new mining tax regime, the government’s stated goals are to promote stability and equity in the mining industry by developing lasting relationships with mining companies and the communities in which they operate. The government also wants to support the competitiveness of mining companies operating in Québec in order to attract new investors, while ensuring that every company pays a fee for the mineral resources it extracts.
The proposed changes to the tax scheme were partly inspired by the new Australian regime (which, in the case of iron ore, provides for an ad valorem royalty rate of 6.5% and a “super-profit tax” of 22.5% on the profits over $125 million and, in the case of gold, an ad valorem royalty rate of 2.5%). Similar hybrid regimes currently exist in other Canadian provinces such as Alberta, British Columbia and Newfoundland and Labrador.
It is interesting to note that the potential benefits realized as a result of further transformation within Québec of the extracted raw minerals were not addressed in the consultation paper (i.e., whether local beneficiation would provide a tax credit or deduction).
Several mining industry stakeholders have expressed concerns with the prospect of higher mining royalties or taxes in Québec and have identified potential drawbacks which should be considered in designing a new regime. These include (i) remote access of deposits in northern Québec, (ii) lower mineral concentration of deposits, (iii) variable climate, (iv) distance from Asian markets, (v) comparative advantages of other jurisdictions such as Brazil, Australia, etc., (v) increasing the burden and affecting the competiveness of mining companies forced to pay taxes even if they are not making any profit, (vi) increasing risk of mining projects, (vii) deterring investors, and (viii) increasing delays or suspensions of current projects or operations of certain smaller or less profitable mines or even their termination.
The Québec government has organized a forum for consulting the mining industry on the revision of the provincial mining royalty and tax regime. The forum is scheduled to be held on March 15th, 2013 in Montréal. Participants must register and submit their briefs on March 14, 2013 or on the day of the forum. We understand the government intends to publicly announce the final terms of its new mining royalty and tax regime shortly after the forum.