Oyu Tolgoi's brewing tax row

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The year of 2019 could possibly be considered as one of the most unstable years in Oyu Tolgoi project’s life period.

Even though this year is the 10th anniversary of the (first) investment agreement of the project, the Oyu Tolgoi project encountered severe obstacles this year, such as Oyu Tolgoi LLC announcing an increase of the preliminary estimates for development capital of 1.2 billion to 1.9 billion USD because of an unexpected and challenging geotechnical issues bringing complexities in the construction of Shaft 2. This, of course, led to a decrease of share value for its parent company, Canadian-based Turquoise Hill Resources, which holds a 66 percent stake in the company.

Another major hurdle was Parliament appointing a working group to examine and evaluate the investment agreement implementation. The working group introduced its conclusion to the Parliamentary Standing Committee of Finance on May 29, 2019. The working group concludes that the investment agreement should be amended and the Oyu Tolgoi Underground Mine Development and Financing Plan (Dubai Agreement) should be terminated. Eight out of 12 lawmakers in the working group agreed and signed on a conclusion stating that the Dubai Agreement must be canceled.

The reasons for this conclusion were stated as follows. First, the agreement is too biased and serves the investor side the most. The agreement is less beneficial to the owner of the asset (deposit) because the principle of “to be mutually beneficial” is broken. Second, it is not accurate that on the Oyu Tolgoi Underground Mine Development and Financing plan concluded on May 18, 2015, it deemed that the feasibility study is a non-binding document and allows Rio Tinto (parent company of Turquoise Hill Resources) to bring up excuses to increase the operational costs arbitrarily. Third, Rio Tinto put the mining licenses and assets of the company as a pledge in order to obtain loans for the investment of the project. Accordingly, Rio Tinto charges interest with respect to the respective amount of the investment belonging to the government of Mongolia. Fourth, the term for the stable tax environment is too long, which is unprecedented.

A parliamentary group held a meeting to draft a proposal to have Parliament address the matter and it’s still not clear what will become of it. However, the investor’s side already stated their position that they will not accept any changes to the agreement.

Another issue Oyu Tolgoi is burdened with is the tax act for 150 million USD. This is not the company’s first dispute over tax matters with the government. In 2017, the company also had to deal with a tax case against the Customs Clearance Department of Customs General Administration of Mongolia. The customs handed a tax bill for 861.55 million MNT (345,971.38 USD at the time) to Oyu Tolgoi on December 23, 2016. The tax inspector fined Oyu Tolgoi for its omission of taxable income when importing electricity from China.

Obviously, the current tax dispute is much bigger and more complicated. Because of the lack of transparency, the legal grounds for the tax bill and Oyu Tolgoi’s legal grounds for opposition are not entirely clear.

Arnaud Soirat, CEO of Copper and Diamonds of Rio Tinto, mentioned in his interview with Mongolian media that it’s a case related to the stability of taxes clauses in the investment agreement. Soirat said that Oyu Tolgoi accepted and paid five million USD.

He also mentioned that the investor’s side is will go to the Arbitration in Australia because the tax issue is related to the government’s obligation to provide a stable tax environment for the taxes specified in the investment agreement.  “In case of dispute arising from the agreement, a third party refer to arbitration and belong to the Arbitration in Australia,” Soirat said.

According to a source close to the issue, Oyu Tolgoi recently sued the General Tax Authority of Mongolia through the First Instance of the Administrative Court in the Capital City. This could be related to the 150 million USD tax act. It’s possible that the company hopes to address the tax matter in Mongolia, and if unsuccessful, go to arbitration by claiming that the government of Mongolia is responsible for a stable tax environment and that the company is not liable for additions to the taxes specified as “stable” taxes in the investment agreement.

Some politicians and researchers have voiced concern about the lack of transparency and eerie silence regarding a major tax dispute. It looks like all parties involved, Rio Tinto, the government of Mongolia and Oyu Tolgoi LLC, are all busy trying to sweep the matter away with minimal public attention and impact on the implementation of the project.



Myagmardorj Buyanjargal
Myagmardorj is a freelance writer who holds a Bachelor of Law Degree from the National University of Mongolia and Bachelor of Science Degree in engineering in mining technology from the Mongolian University of Science and Technology.

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