Mongolia slaps $155M tax bill on Turquoise Hill's mine; NGO claims company owes more

Turquoise Hill Resources Ltd. and parent Rio Tinto Group’s ambition to build one of the world’s largest copper and gold mines, called Oyu Tolgoi, in Mongolia’s Gobi Desert, has hit a number of stumbling blocks in recent weeks.

Last week, Jean-Sebastien Jacques, the chief executive of Rio Tinto, flew to Mongolia’s capital city to meet with prime minister Ukhnaagiin Khurelsuk about how to build “win-win” partnerships.

One looming dispute is the Mongolian government’s claim that Oyu Tolgoi owes an additional US$155 million in taxes — the mine’s second tax dispute since 2014.

In another setback, earlier this month, Turquoise Hill also declared a ‘force majeure’ after a convoy of trucks hauling concentrate from Oyu Tolgoi to China, where it is smelted, was disrupted by protests at the two countries’ border.

Jacques did not announce solutions to either problems, but his visit may not have been fruitless. He announced a working group with the Mongolian government to address issues such as the high funding costs of Oyu Tolgoi, power solutions and how to enable more money to flow to the town next to the mine. The company also announced opening a new office in the country.

By Tuesday, the border protests, which were unrelated to Oyu Tolgoi, had reportedly cooled off.

But if the past is any indication, Mongolia is unlikely to collect $155 million in taxes.

“Oyu Tolgoi LLC has paid all taxes and charges required,” Turquoise Hill Resources stated in a press release.

A company spokesman said it has 30 days to appeal the Mongolian tax audit assessment.

In 2014, appealing proved a successful route for the company. That June, Turquoise Hill announced a Mongolian tax audit had found US$127 million in “unpaid taxes, penalties and disallowed entitlements” for three years, 2010 to 2013, associated with the initial development of the Oyu Tolgoi mine.

By September, an appeal to the Tax Dispute Resolution Council of the Mongolian General Taxation Department slashed the amount owed by more than 75 per cent to US$30 million.

Now, the tax feud centers on withholding taxes: Oyu Tolgoi LLC did not pay taxes from 2013 to 2015 on the management fee taken by Rio Tinto and Turquoise Hill, and the Mongolian government believes it is obligated to do so, among other issues, according to an analyst report released earlier this month by Canaccord Genuity’s Dalton Bareto.

“We believe this situation will likely play out in a similar manner (to 2014),” Bareto wrote, noting he spoke to management.

By one calculation, however, Turquoise Hill owes much more in taxes and not just to the Mongolian government. The Netherlands-based Centre for Research on Multinational Corporations, also known as SOMO, will issue a report on Wednesday finding that Turquoise Hill lobbied the Mongolian government for concessions that have saved the company hundreds of millions of dollars in taxes and other payments, according to a source.

In addition, the report will also say that the company structured its financing in a way that allowed it to avoid paying hundreds of millions of dollars in taxes in Canada, where the company is based and is traded, the source said.

In a statement Tuesday, the company challenged the report as “inaccurate or unsubstantiated”, but declined to comment on details. 

“Turquoise Hill and Oyu Tolgoi are committed to tax transparency. Turquoise Hill believes that our tax practices are not only compliant with local laws, international standards and voluntary commitments ... Oyu Tolgoi's operation is making substantial contributions to Mongolia's economy and long-term development," the company said in a statement.

In 2016, the Oyu Tolgoi mine paid approximately US$189 million in taxes, according to the website for Oyu Tolgoi LLC. Meanwhile, Turquoise Hill reported $1.2 billion in revenue and $210 million in net income, according to the company’s 2016 annual report.

The vast mining operation in the middle of the Gobi Desert, about 80 kilometres north of the Chinese border, is currently operating as an open pit.

Turquoise Hill is engaged in a years-long process of developing an underground portion that will bring development costs to $12 billion. The financing has come from a number of sources including a massive $4.4 billion deal inked in 2016 that includes Export Development Canada, the European Bank for Reconstruction and Development, the International Finance Corporation, the Export-Import Bank of the United States, the Export Finance and Insurance Corporation of Australia.

That underground portion contains 80 per cent of the mine’s value, and is not expected to begin production for several years and will not reach peak copper production until 2025, according to disclosures to investors by Turquoise Hill.