Turquoise Hill Resources routed its investment in one of the world’s largest copper deposits through Luxembourg, avoiding $559 million (U.S.) in Canadian corporate tax between 2010 and 2016, according to a new report. A company spokesperson says the arrangement was approved by the CRA.

By MARCO CHOWN OVED Investigative Reporter
Wed., Jan. 31, 2018

A Canadian mining company operating in one of the world’s biggest copper deposits has avoided more than half a billion dollars in Canadian tax over the last seven years, according to a report released Wednesday.

By using a complex network of tax haven subsidiaries and lending money to itself at high interest rates, Turquoise Hill Resources has also deprived the government of Mongolia — where the mine is located — of an additional $230 million (U.S.), states the report produced by the Dutch non-profit SOMO.

“It’s shameless tax avoidance,” said Vincent Kiezebrink, one of the report’s authors. “It doesn’t just affect the world poorest, but also regular people in Western countries as well.”

“The more multinationals keep avoiding taxes, the more regular folks will have to pay for public services that are important not only for people, but also for the multinationals,” said Kiezebrink, who is a researcher at the Centre for Research on Multinational Corporations, known by the Dutch acronym SOMO.

Turquoise Hill, a mining company headquartered in Vancouver and listed on the Toronto Stock Exchange, used letterbox companies in Luxembourg and the Netherlands to make almost $7 billion in loans to its Oyo Tolgoi mine in Mongolia between 2010 and 2016, the report states.

The interest charged on these loans allowed the company to reduce its taxes in Mongolia and transfer much of its profits to low-tax Luxembourg instead of Canada.

This structure allowed the company to avoid paying $559 million in Canadian corporate income taxes ($690 million Canadian at current exchange rates), while only paying $89 million (U.S.) in tax in Luxembourg, according the report.

Turquoise Hill’s Luxembourg subsidiary, which has only one part-time employee, has declared $2.1 billion in profit and paid 4.2 per cent in tax, the report stated.

British-Australian mining group Rio Tinto, which owns 51 per cent of Turquoise Hill contests SOMO’s findings.

“The flawed SOMO report contains a number of unsubstantiated and incorrect allegations regarding tax,” wrote spokesperson Illtud Harri. “Oyo Tolgoi is one of Mongolia’s largest taxpayers and is paying its fair share of tax.”

Harri said the mine’s tax planning arrangements cannot be abusive because the Mongolian and Canadian governments both agreed to them. Turquoise Hill told SOMO it received a written approval from the Canada Revenue Agency.

That the CRA signed off on the plan points to the political nature of the problem, said Jamie Kneen, a spokesperson for MiningWatch Canada, an advocacy group that studies irresponsible mining practices.

“We’re basically saying Luxembourg can take $100 million and we get nothing. What’s the incentive for Canada?” said Kneen. “If that’s considered a legitimate tax policy, then the policy needs to change.”

In 2001, Turquoise Hill, then known as Ivanhoe Mines, discovered the Oyu Tolgoi copper and gold deposit in southern Mongolia. To secure its claim, it entered into a partnership that gave the Mongolian government a 1/3 stake in the mine.

Construction on the mine began in 2011 and it went into production in 2013. It is expected to become the third largest copper producer in the world by 2025.

The company says it has paid more than $1.7 billion in tax in Mongolia. More than $1 billion of that is sales tax on goods it has purchased. The mine has not paid any corporate income tax in Mongolia.

SOMO questions why Canada allows mining companies operating abroad to route their business through third countries that have nothing to do with the mine, but happen to have low tax rates.

“Some of these schemes are legal and that’s a huge political problem,” said Kiezebrink. “Our own tax authorities are allowing this.”

“Canada could put pressure on Luxembourg authorities who are providing a sweetheart deal for companies that have no business in their country at all.”

SOMO says the Turquoise Hill example is reflective of a larger problem in the mining industry. “Mining companies have access to an array of dubious measures which allow them to lower their tax bill in the countries where they operate,” the report states.

The result is that Canada, which is home to more than 60 per cent of the world’s mining companies, collects little tax, and impoverished countries receive little benefit from the extraction of their mineral deposits, said Kneen.

“In Mongolia, it’s a human rights issue because the government doesn’t have enough money to adequately fund their education system, or provide clean drinking water for their people.”

Several Canadian pension funds own stakes in the mine, including the Canada Pension Plan ($24.9 million), the Public Sector Pension, which operates pensions for the federal public service, the Canadian Armed Forces, the Royal Canadian Mounted Police, ($16.9 million) and the British Columbia public sector pension ($16 million).

The Star’s investigation into the Paradise Papers revealed that Canadian pension plans and university endowments are invested in offshore tax havens that deprive the Canadian government of $10 to $15 billion in tax revenue every year.