With the global commodities markets in a deep slump, mining companies operating in one of the Kingdom’s riskiest and most heavily-taxed industries are lobbying for a less onerous tax regime to account for the high upfront capital costs and risk of mineral exploration and extraction.

“The fundamental concept in business is high risk leads to high reward, however tax policies in Cambodia don’t reward risk-taking in the mining business,” Rajeev Moudgil, director of Mesco Gold (Cambodia) Ltd, said yesterday.

“We have requested that the government . . . recast tax policies to attract investment.”

He said it was important to understand the nature of commercial-scale mining, which is a high-risk investment with a long horizon before companies can even hope to generate a profit.

Mesco’s own Phum Syarung gold project in Ratanakkiri province, set to be Cambodia’s first commercial-scale gold mine when it comes online later this year, is a prime example of the industry’s cumbersome tax obligation.

Three years since the Indian firm purchased the mining rights from Canadian mineral exploration firm Angkor Gold for $1.2 million plus a net smelter royalty, and invested over $5 million in developing the mine, it is already on the hook for a hefty Cambodian tax bill without ever having drawn an ounce of gold.

The company pays a 26 per cent import and value-added tax (VAT) on the heavy equipment it needs to operate. It also pays an inflated 30 per cent annual corporate tax, as well as 14 per cent tax on any dividends it distributes to its shareholders.

And once production begins, Mesco will be liable for a 6 per cent government royalty on production, in addition to a 10 per cent export tax on any gold it sends abroad for refining.

“All these taxes leave nothing much in the hands of investors,” said Moudgil. “I believe this is one of the key reasons for low foreign investments in developing mining in Cambodia despite huge potential.”

Mesco has appealed to the Cambodian government to apply a uniform 20 per cent corporate tax and scrap the dividend distribution tax – or postpone it until capital invested in the project is recovered. The company is also seeking a reduction of the export tax, import duty and royalty fees.

Richard Stanger, chairman of the Cambodian Association of Mining and Exploration Companies (CAMEC), said the private sector industry body intends to lobby the government to lower “Draconian” tax rates on mining operations in light of the global downturn in oil and metal prices that have notched up capital risk while lowering return on investment.

“The difference between mining companies and, say, garment manufacturers, is that garment makers can come and set up a company, which can be in production in 2-3 months, gets tax concessions and a tax holiday, and then eventually after five years of not paying too much tax, they can either shut the business down or pay 20 per cent corporate tax,” he explained.

By comparison, he continued, mining companies must spend years and sink large amounts of money into exploring and developing a resource before – assuming they are successful – they can hope to see the first return on investment. And from the moment they set their boots on the ground, the companies must “pay corporate tax at a rate of 30 per cent – and with zero tax holiday.”

Stanger also questioned the logic of some taxes, such as the 10 per cent export tax applied to unrefined products. He explained that the tax applies “if you’re producing oil or a concentrate, like a copper concentrate, and export it without putting it through the refinery in Cambodia.”

While this might make sense in developed markets with refining capacity, in Cambodia there are no refineries for oil or minerals, “so why should we have to pay this tax?”

Meng Saktheara, a secretary of state at the Ministry of Mines and Energy, stressed that the export tax was “not a fixed policy,” and investors could seek an exemption from an ad hoc inter-ministerial committee.

He said mining companies will need to carefully evaluate whether it makes more economic sense to build a refinery here for the minerals they extract, or pay the export tax on concentrate to refine them abroad. The underlying purpose of the tax was to ensure that Cambodia receives full value on its natural resources.

“Take gold, for example,” Saktheara said. “The mining company may want to take our unrefined, semi-processed gold to another country like Singapore to refine and give value-added over there. So Cambodia would lose out.”

He added, however, that some of the obligations imposed under Cambodia’s tax law may be too rigid and should be reconsidered.

“We understand their [mining company] concerns, especially at this critical time,” Saktheara said.

“The current regime is not responsive to [commodity price] fluctuations, and we need to introduce a new fiscal policy that is much more responsive and flexible.”

Anthony McClure, managing director of Mekong Minerals Ltd, an Australian mining outfit with prospects in eastern Cambodia, said an equitable tax regime would ensure that the Kingdom attracts mining firms committed to sustainable practices.

“The government has a real opportunity to provide forward thinking, progressive fiscal policies to get this industry moving,” he said.

“The country must present itself as being globally competitive in these areas to encourage the investment dollars and technology. With constructive policies in place, Cambodia will have substantial opportunity for a successful and responsible mining industry.”