Québec Unveils Its New Mining Tax Regime
The Québec Minister of Finance and the Economy, Nicolas Marceau, with the Québec Minister of Natural Resources, Martine Ouellet, yesterday, on May 6, 2013, made public the new mining tax regime for Québec, a fiscal measure that will apply to an operator’s fiscal year that begins after December 31, 2013. Considered as a hybrid of different mining taxation regimes, the new regime provides for mining taxes that are equal to the greater of (i) the minimum mining tax of an operator for the relevant fiscal year, and (ii) the mining tax of an operator’s annual profit for the relevant fiscal year. The Québec Mining Tax Act will be amended to implement the new mining tax regime.
This system will replace the tax regime that was instituted under the previous government which, as of January 1, 2012, had provided for a fixed tax rate of 16% on the operating profits of a given mine. The new regime announced today will retain, to a certain extent, this “mine-by-mine” basis for taxation.
During the last election campaign, the current government had promised to change the mining tax regime to a system similar to that which is currently applicable in Australia. This promise entailed a 5% royalty on the value of ore extracted from a given mine (a so-called "ad valorem" regime) as well as an additional 30% royalty on profits that exceed a threshold of 8% return on contributed capital. Since the election, however, industry spokespersons as well as firms specializing in mining taxation, chambers of commerce, and local communities have all lobbied the government of Québec on this issue. Each has made the government aware of its concerns that such a significant increase in fiscal burden could significantly undermine investment and employment in the Québec mining sector.
As a result, the Québec Minister of Natural Resources indicated that the government was open to discussing the new mining royalty framework prior to its adoption. The Forum on Mining Royalties followed on March 15 and 16, 2013, and allowed stakeholders in the Québec mining sector to share their respective views on the proposed reform and on the economic and industry realities that Québec faces in a globalized and highly competitive market.
A Hybrid Tax Regime
The new tax regime is a hybrid model that combines two distinct and mutually exclusive taxes: (i) a minimum mining tax based on the total output value at the mine shaft head for each mine operated, and (ii) a progressive mining tax on profits based on the profitability of the annual output of all of an operator’s mines. Mining companies would only be required pay the greater of the two amounts.
Different Tax Rates Apply
The applicable mining tax rates will vary depending on the tax payable as follows:
- For the minimum mining tax, the applicable rate is 1% in respect of the first $80M of output at the mine shaft head (which is determined taking into account certain deductions), and 4% in respect of the output value at the mine shaft head in excess of $80M. The minimum mining tax paid may be carried forward and applied against the mining tax on future profit.
- For the progressive mining tax on profits, rates are applicable according to profit margins with a maximum effective rate of 22.9%.
In addition, the new mining tax regime includes the following:
- An operator whose credit on duties refundable for losses exceeds its mining duties payable for a fiscal year may claim a refund of an amount corresponding to such excess amount.
- Where an operator is associated with one or more other operators, for purposes of the minimum mining tax, in a fiscal year, the base amount of $80M must be shared among such operators.
- A depreciation allowance will be granted to the operator in computing its output value at the mine shaft head, but this depreciation allowance will be limited to properties that are used in mining operation activities from the first accumulation site of the mineral substance after it is removed from the mine.
- An operator will be deemed to have disposed of the depreciable property that it uses in the mining operation if it ceases, as of May 6, 2013, to be an operator for the purposes of the Mining Tax Act.
- An enhancement of the processing allowance, which will allow an operator that is engaged in processing activities in Québec to benefit, depending on the type of asset, from an increase of 7% to 10%, or from 13% to 20% of the applicable rate in respect of its processing assets.
Coming Into Force
The new regime will apply in respect of the fiscal year of an operator that begins after December 31, 2013.
Impact on Mining Investment in Québec
Yesterday’s announcement comes at a time when the prices of the metals mined in Québec are falling and when, globally, the price of gold, zinc, iron and copper have experienced significant declines over the last six months. Already weakened by the downward trend in metal prices, the mining industry has not been aided by the uncertainty resulting from the lack of predictability in the mining tax regime that has persisted in Québec since the fall of 2012.
While the new hybrid mining tax regime is an attempt to resolve this uncertainty, it will also result in an increased tax burden, particularly in the earlier stages of project development, that could affect investment decisions in relation to the Québec mining industry. This is especially true when one considers the tax differentials the new regime creates with respect to other jurisdictions in conjunction with additional challenges faced by mining projects in Québec, such as typically lower grade deposit, higher production costs, climate, infrastructure gaps, distance from high growth and emerging markets and the extensive regulation of mining projects.
It remains to be seen how the Québec mining industry will react to yesterday’s announcement. It is worth noting, however, that spokespersons for the Québec Premier’s Office have indicated that Premier Pauline Marois will make an important announcement today, May 7, 2013, while in the northern Québec community of Chibougamau. This announcement, which is purported to address the development of northern Québec, will also likely need to be taken into consideration as the Québec mining industry reviews its options moving forward.
ad valorem Australia copper depreciable property depreciation allowance Forum on Mining Royalties gold iron Martine Ouellet Mining Tax Act Nicolas Marceau operator profitability Pauline Marois processing allowance Quebec royalty Taxation zinc