Romanian Mining Taxation System: Rosia Montana Mine...

Romanian Mining Taxation System:

Rosia Montana Mine Financial Model

Prepared by:

James M. Otto

December 2009*

*COMPANY NOTE: Recently updated information regarding certain taxes overlooked, current costs and �nancing estimations will materially increase the government share of project proceeds from those set out in this report. Independent veri�cation of this increase is pending.

Romanian Mining Taxation System: Rosia Montana Mine Financial Model James Otto

Table of Contents

1. Executive Summary ………………………………………………………… 1 2. Background: Financial Mine Models …………………………………………. 4 3. The Romanian Mining Fiscal System …………………………………….. 4 4. Description and Appraisal of the Rosia Montana Financial Mine Model … 5 5. Gold Mine Comparative Tax Study ………………………………………… 6 6. Summary and Final Observations …………………………………….. 8 Annex A. Description of Romania’s Mining Fiscal System …………….…… 10 Annex B. Subjective Appraisal of Rosia Montana Financial Mine Model …. 12 Annex C. About the Author ……………………………………………………………. 16

Abbreviations

GRL Gabriel Resources Ltd. ETR Effective Tax Rate IRR Internal Rate of Return NPV Net Present Value USD United States Dollars VAT Value Added Tax

List of Tables

Table 1. Rosia Montana Mine: Government Revenues and Effective Tax Rates Table 2. Competitive Position of Romania’s Fiscal System on a Model Gold Mine

List of Figures

Figure 1. Breakdown of Total Estimated Taxes to be Paid Over the Life of Rosia

Montana Mine

Acknowledgements The Author would like to acknowledge the valued assistance of Gabriel Resources Ltd and their accountants PricewaterhouseCoopers who provided information on the Romanian fiscal system. This study would not have been possible without the information and mine model provided by Gabriel’s Corporate Controller, Katerina Sikova and former Corporate Director of Finance and Treasurer, Derrick Weyrauch. Information and clarifications provided through Gabriel Resources Ltd by PricewaterhouseCoopers and Musat and Asociatii (legal counsel) were especially useful.

Preparation Verification This report was prepared solely by James M. Otto.

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Romanian Mining Taxation System:

Rosia Montana Mine Financial Model

1. Executive Summary

The purpose of this report is to provide an independent-party examination of a financial model prepared by Gabriel Resources Ltd (GRL) of the proposed Rosia Montana mining project to verify whether the model reasonably estimates measures of taxation such as “total effective tax rate” and the various taxes, fees and state participation established pursuant to Romanian law.

The Author of this report is widely acknowledged as an expert in mining taxation who has assisted many governments in the development of their mineral sector legal and fiscal systems (see Annex C). He was formerly a professor of mineral economics at the Colorado School of Mines and his books on mine taxation, published by the World Bank, United Nations and others are referenced worldwide by mining taxation experts. While the mine model, information about the Romanian fiscal system and funding for this report were provided by GRL, the Author worked independently, and this report reflects solely his opinion. This report contains the following:--

background describing how mine financial models can be used as an aid in understanding mine economics including government and company revenues.

description of the Romanian mining taxation system, the Rosia Montana cash flow

mine model and an assessment of whether the model reasonably estimates the fiscal system and measures of taxation, as well as profit distributions to the government held equity share (the description of the Romanian tax system was derived from a detailed questionnaire developed by the Author and completed by GRL in consultation with PricewaterhouseCoopers, Musat and Asociatii (legal counsel), and tax authorities).

summary table of effective tax rates in over twenty nations for a smaller-scale model

gold mine. The key findings of this report are as follows: -- Based on my examination of the Rosia Montana mine model, I can confirm that the model estimates all major and most minor taxes, fees, imposts, and participation paid to government by the mine and its employees (on their salaries), and the estimation methods used are reasonable. The model provides an estimate of cumulative tax measures including Effective Tax Rate (ETR) and total tax receipts, and has the capability to calculate the ETR and government fiscal receipts taking into account escalation (price and cost increases) and the time value of money (discounted cash flow analysis). Given the production, cost, price and timing assumptions used in the model, the project (mining company, excise taxes on fuel, and mine employees on their salaries) is estimated to generate the fiscal revenues and yield the effective tax rates reported in Table 1 (see Figure 1 for breakdown).

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Table 1. Rosia Montana Mine: Government Revenues and Effective Tax Rates Cash Flows (undiscounted) Cash Flows (discounted at 5%) Revenues and Costs Total

Government Revenues (billion USD)

Effective Tax Rate

(%)

Total Government Revenues (billion USD)

Effective Tax Rate

(%) Not escalated (constant dollars)

1.72 44 1.08 44

Escalated at 3% 2.17 46 1.34 45 Escalated at 10% 3.27 48 1.96 48 As Table 1 shows, the estimated absolute dollar revenues that would be received by the Romanian government (including by both central and local governments) directly from the project would range from $1.7 billion to $3.3 billion over the 18 year project period, depending on the assumptions made for future prices and costs. If discounted at 5% to the value today, that future tax revenue stream is worth between $1 billion and $2 billion. The share received by the Romanian government ranges from 44% to 48% depending on the reader’s preferred revenue and cost escalation rate and discount rate. The model calculates first tier taxes paid by the mine and its employees (on their salaries) but does not estimate taxes paid by third parties (such as contractors, suppliers, and businesses that employees use), and thus the model’s estimate of total taxes paid to government as a result of the project understates potential government fiscal receipts. Taxes paid by third parties, sometimes called indirect, induced or secondary taxes, can be appreciable. Gabriel Resources reported to the Author that it estimates taxes paid by its direct suppliers of goods and services for work relating to Rosia Montana would total about USD550 million. A 2009 study prepared on the project by Oxford Policy Management estimated that “crude estimates of the additional revenue coming from indirect taxes would be in the region of 1.5 to 1.75 times the magnitude of the project generated indirect tax revenues: i.e. the revenue multipliers on this element would be 2.5 to 2.75. This would occur as firms benefiting from increased production to supply the mine spend their additional incomes on other goods and services which are themselves taxed. In addition to the inter-industry effects, the boost to the wider economy comes from increased income and consumption at the household level (these are the induced effects). Therefore the overall impact of direct, indirect and induced effects from the project on government revenues might be as high as 4.0 times the revenue contribution of the RMP.”1

1 THE ECONOMIC IMPACT OF THE ROSIA MONTANĂ GOLD PROJECT IN ROMANIA, Oxford: Oxford Policy Management, September 2009, p.40.

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Figure 1. Breakdown of Total Estimated Taxes to be Paid Over the Life of the Rosia Montana Mine

Social Security, Unemploy …

Property Taxes

Excise Taxes

Construction/ Inspection Permits

Customs Duty and Tariffs

Exploitation Licence

Forestry Tax

WHT - Dividends

WHT - Interest

Royalties (Au, Ag, Quarry min)

Cadastral and Land Use Taxes Payroll Income

taxes

W/H on Services

Govt Share Dividends

Income Tax

Stamp Taxes

Note: some very minor taxes and fees that are calculated in the model have been omitted from the graph. The distribution is based on a base case assuming no price and cost escalation, and not taking into account the time value of money (undiscounted).

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2. Background: Financial Mine Models Financial mine models are used extensively in the mining industry. Such models are used as an aid in understanding a project’s economic potential and can be used for a wide variety of applications including the optimization of mine design, profitability assessment, financing, and a host of other applications including tax system analysis. There is no standardized approach defining the exact form and content of financial mine models, and different investors will use different approaches. For any one project a variety of models may be developed that are optimized for various applications. Additionally, such models evolve with a project and may gain complexity as the project moves through the inception, pre-feasibility, feasibility and operational phases. Although financial models vary widely, most will calculate various summary measures such as internal rate of return (a measure of profitability2) and net present value (the worth of the project over time taking into account the time value of money3). Models that are used for tax system analysis will usually also calculate the distribution of net revenues between the investors and the government. Effective Tax Rate (ETR) is a useful measure for understanding the division of net revenues between the government and the investors over the life of the mine and is defined as follows: value of all amounts paid to government ETR Tax Rate = --------------------------------------------------------------------- value of project’s “before-tax” cash flow ETR can be calculated either taking the time value of money into account (discounted cash flow analysis) or not (undiscounted). Generally, financial mine models estimate the cash flow of the project over the life of the project. Revenues, costs and taxes are estimated for each year based on assumptions about factors such as the level of production, value of sales, operating costs, capital costs, various taxes and so forth. In an ideal financial model, every factor that has a monetary value would be included in the model, but in practice, factor estimates are approximate. Key factors such as production, prices and costs in the future cannot be known in advance and so most models allow for key factors to be varied (sensitivity analysis) to understand the project’s economics under a variety of different scenarios. 3. The Romanian Mining Fiscal System The current Romanian mineral sector fiscal system is described in Annex A and is based on a comprehensive questionnaire provided by the Author to GRL who completed the questionnaire in consultation with their external accountants, tax specialists, legal council, and relevant taxation authorities. The questionnaire used to collect information is identical to the one that the Author has used in mineral sector fiscal reform work for many governments. GRL cooperated fully with the Author in seeking clarification on the details about various taxes and deductions. The Author would like to especially acknowledge the clarification role

2 IRR is defined as that interest rate which equates the sum of the present value of cash inflows with the sum of the present value of cash out-flows for a project. An alternative, but numerically identical definition, is that the IRR is the interest rate at which the net present value of a project is equal to zero. 3 For the government, NPV will be the sum of all taxes and equity-related distributions paid to it. For the investor, this will be the sum of the project’s cash flow after all costs, taxes and government equity distributions have been paid. In order to take into the account the time value of money, i.e. the preference to receive money sooner rather than later, when calculating the NPV sum, discount factors are applied to the cash flow in each year to adjust the amounts to a base year equivalent. The discount factor rate that is applied in the calculation will vary depending on investor and government preferences.

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filled by PricewaterhouseCoopers and Musat and Asociatii (legal counsel). It should be noted that some elements of fiscal laws are vague or can be interpreted in different ways, and the information reported in Annex A is thought to be a reasonable but not necessarily exact description of the fiscal system that may be applied to a Romanian gold mine. The Author did not take undertake an examination of the underlying statutory documents (laws and regulations) and relied solely on the questionnaire process in identifying the features of the Romanian mining sector fiscal system. 4. Description and Appraisal of the Rosia Montana Financial Mine Model Limitations of the analysis The appraisal of the Rosia Montana financial model was restricted to only taxation related matters. Estimates of taxes, fees, and participation related distributions are sensitive to engineering, production, cost, price, timing and other assumptions. Mine engineering and production estimation is not an exact science. Mines are designed to achieve a desired production capacity but actual production of the mineral to be sold may vary considerably as a result of geologic, engineering, metallurigical, labour and other factors. Likewise, capital and operating costs and prices can vary significantly from year to year and are difficult to estimate and forecast. It was reported to the Author that ore production and mineral recovery assumptions, costs, revenues and other pertinent information used in the model are based on realistic estimates provided to GRL by firms specializing in the preparation of feasibility studies and engineering services.4 The Author is not an expert in mine cost estimation and is unable to comment on whether the “engineering” and price and cost assumptions are reasonable for the Rosia Montana project. It is customary in the industry for a financial model to have the capability to vary production and recovery levels, costs and prices so as to allow a variety of reasonable scenarios to be assessed. The Rosia Montana model follows usual industry practice and has the capability to accommodate a range of production and recovery levels, costs and prices so as to facilitate sensitivity analysis. The “base case” price assumptions that are reflected in the sample results of the scenario reported in Figure 1 are: for gold - USD900/ounce, for silver - USD12.50 ounce. The Rosia Montana financial mine model is complex consisting of many EXCEL workbooks that estimate various production parameters and costs. The two workbooks examined by this Author contained over 7000 lines of EXCEL spreadsheet containing 44 worksheets of calculations and information. A cell by cell examination of formulas and information was not done, but rather the analysis focused on those parts of the model especially pertinent to fiscal analysis. General overview Mine financial models usually only estimate first-tier taxes, fees and participation--those directly paid by the mining company to the government, including various withholding taxes that are paid by the mining company on behalf of a second party, such as a foreign contractor. Second and lower tier taxes (sometimes called secondary, tertiary, induced or multiplier effect taxes) are also paid by contractors, employees, and suppliers directly to 4 Assumptions based on 2009 Canadian national instrument 43-101 Technical Report prepared by Coffey Mining Pty. Ltd., Independent Mining Consultants, Inc. (IMC), Metifex Pty. Ltd. (Metifex), MWH Americas, Inc. (MWH), Aurifex Pty. Ltd. (Aurifex) and Micon International Limited (Micon) as published in March 2009 and filed at www.sedar.com). In addition to the costs reported in the 43-101 filing, the model includes USD175,000,000 to take into account a combination of post-March 2009 timing differences and items which Gabriel is incurring but were exclusions from the 43-101. A review of the Technical Report and subsequent assumption changes was beyond the scope of this report.

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http://www.sedar.com/


government. It is customary in the industry for a financial model to capture only first tier taxes. The Rosia Montana model follows usual industry practice and estimates mainly first tier taxes. However, excise taxes paid to/through diesel and fuel oil suppliers and payroll related taxes paid by employees have been included for a more robust model. Because other second tier taxes are not included, the model’s estimate of total taxes paid to government as a result of the project, which is based mainly on first tier taxes, understates potential government fiscal receipts. The examination of the Rosia Montana mine financial model revealed that it probably was originally developed primarily as a tool to aid activities relating to applications such as engineering optimization (determining production scale, technology, facilities, infrastructure…), costing, profitability analysis and financing rather than for tax analysis. As such, the methods used for estimating various taxes made use of approximation techniques that did not in all cases provide an exact tax result. For example, for some items, some taxes have been combined with costs and deducted as part of depreciation rather than being expensed as incurred. Such treatment tends to have some but not a large impact on the total taxes paid over the life of the mine, and affects the timing of tax payments. This estimation approach provides a conservative estimate of discounted ETR (in practice, the discounted ETR may be slightly higher). Methodology The method used to analyze the Rosia Montana financial mine model was to verify whether the model substantially and reasonably estimates fiscal cashflows based on the Romanian fiscal system reported in Annex A. The detailed results of the analysis are summarized in Annex B. Annex B includes a description of the major fiscal attributes defining the fiscal system (as described in Annex A), the approach used in the mine model5, and the Author’s subjective assessment of whether the mine model approach reasonably estimates the relevant tax system attribute. Note that although the fiscal system attribute is not always exactly mirrored in the mine model, the mine model approach may be in some cases be judged adequate because the difference in the estimation method is relatively minor when compared to the total fiscal take. As reflected in Annex B, all major and most minor taxes, fees, imposts, and participation paid to government are reflected in the model and the estimation methods provide reasonable estimates. 5. Gold Mine Comparative Tax Study A key question for governments and investors is: what level of taxation represents a fair distribution from a mining project? If taxes are too high, investors may seek out other nations to invest in, but if too low, the nation may needlessly forgo revenue. In a prior study by this Author6, the effective tax rate for a model gold mine (a mine smaller than the planned Rosia Montana mine) was estimated for over twenty jurisdictions including Romania. The results are shown in Table 2. The results of that study found that Romania, in contrast to many other nations, has a very high effective tax rate, and for smaller mines the fiscal system would result in a decision by most companies not to invest (inadequate internal rate of return). The Rosia Montana mine model effective tax rate cannot be compared directly to the EFT calculated in the comparative model because the cost structures and price assumptions are different. However, 5 The parts of the Rosia Montana mine financial model reviewed included two EXCEL files: one file that estimates various costs and other inputs (RMGC - OwnersCostEstimate_2008 v21-ver29Jan2009 Master.xls, and one file that uses these inputs for analysis (RMP 43-101-2008 Cash-Flow–Rev 7 (modified v15).xls. 6 James Otto, “Romanian Mining Taxation System: Competitive Position 2009,” unpublished report prepared for Gabriel Resources Ltd, May 2009.

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the results of that study are reported here to illustrate that the Romanian fiscal system is a high tax jurisdiction when compared to many other nations. Table 2. Competitive Position of Romania’s Fiscal System on a Model Gold Mine

Country

Foreign Investor’s Internal Rate of Return

(%)

Effective Tax Rate - ETR (un-discounted)

(%)

Effective Tax Rate - DETR (discounted at 12%)

(%) Lowest taxing quartile

Sweden 19.2 29.1 47.2 South Africa 18.8 32.6 50.6 Chile 18.3 36.8 56.2 Argentina 16.6 42.5 67.6 W. Australia 15.2 43.1 76.3 Peru (2005) 15.0 45.2 NA Egypt (2007) 13.7 45.2 NA

Second lowest taxing quartile Zimbabwe 15.7 45.9 73.9 USA (Nevada) 15.1 49.3 78.7 Papua New Guinea (2002) 13.3 52.6 NA Bolivia 12.2 52.4 98.7 Kazakhstan 13.5 54.4 89.6 Greenland 14.7 54.9 82.9 Tanzania 12.7 57.9 95.1

Second highest taxing quartile Mozambique (2002) 12.6 59.9 NA Ghana (2009) 11.4 59.0 104.7 Indonesia (7th gen COW 2002) 11.2 61.2 NA Uzbekistan 11.2 62.0 105.4 Mexico 10.4 62.9 111.5 Philippines (2007) 8.3 67.8 NA Ontario Canada 10.7 68.3 106.8

Highest taxing quartile Dominican Republic (2001) 8.2 68.6 NA Ivory Coast 9.1 69.1 120.0 Indonesia (non-COW 2007) 7.9 72.8 NA Romania (2009) 7.4 72.8 134.9 China 7.1 73.9 136.5 Vietnam (2007) 6.2 77.5 NA Poland 3.0 90.2 160.7 Burkina Faso -1.6 106.0 204.6

NA – not available. Source: Table 2, James Otto, “Romanian Mining Taxation System: Competitive Position 2009,” unpublished report prepared for Gabriel Resources Ltd, May 2009. Note: values in the table for all jurisdictions except Dominican Republic, Egypt, Ghana, Indonesia, Mozambique, Papua New Guinea, Peru, Philippines, Romania and Vietnam are extracted from: J. Otto, J. Cordes and M. Betarseh, Global Mining Taxation Comparative Study, second edition, IGRPM Colorado School of Mines, March 2000.

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6. Summary and Final Observations This study has analyzed the Rosia Montana financial mine model to determine whether it reasonably reflects the Romanian mineral sector fiscal system. Based on my examination of the Rosia Montana mine model, I can confirm that the model estimates all major and most minor7 taxes, fees, imposts, and participation paid to government by the mine and its employees, and the estimation methods used are reasonable but not exact. The model provides an estimate of cumulative tax measures including Effective Tax Rate (ETR) and total tax receipts, and has the capability to calculate the ETR and government fiscal receipts taking into account escalation (price and cost increases) and the time value of money (discounted cash flow analysis). Given the production, cost, price and timing assumptions used in the model, the project (mining company, excise tax payers with regard to fuel products sold to the mine, and mine employees on their salaries) will have an effective tax rate of 46%, and pay to the government over the life of the mine about USD 2.2 billion. This estimate is based on undiscounted cash flows and assumes that revenues and costs are escalated at 3% per year, a reasonable and conservative assumption. When revenues and costs are not escalated and cash flows are not discounted, the effective tax rate is 44%, and over the life of the project, it will pay about USD 1.7 billion in fiscal revenues to the government (see Figure 1 for breakdown). Discounted cash flow analysis is a tool often used by professional project financial analysts to take into account the time value of money. If a discount rate of 5% is applied to the project cash flows, the project will have an effective tax rate of between 46% and 48% (46% when revenues and costs are not escalated annually and 48% when they are escalated at 10%). Assuming no price or revenue escalation, the present value of taxes paid to the government will be slightly greater than USD 1.0 billion (in 2009 dollars). If prices and costs are escalated at 3%, the present value of tax receipts will be approximately USD 1.3 billion. The model calculates mainly first tier taxes paid by the mine and its employees but does not estimate most taxes paid by third parties (such as contractors, suppliers, and businesses that employees use), and thus the model’s estimate of total taxes paid to government as a result of the project understates potential government fiscal receipts. Taxes paid by third parties, sometimes called indirect, induced or secondary taxes, can be appreciable. Gabriel Resources reported to the Author that it estimates taxes paid by its direct suppliers of goods and services for work relating to Rosia Montana would total about USD550 million. A 2009 study prepared on the project by Oxford Policy Management estimated that “crude estimates of the additional revenue coming from indirect taxes would be in the region of 1.5 to 1.75 times the magnitude of the project generated indirect tax revenues: i.e. the revenue multipliers on this element would be 2.5 to 2.75. This would occur as firms benefiting from increased production to supply the mine spend their additional incomes on other goods and services which are themselves taxed. In addition to the inter-industry effects, the boost to the wider economy comes from increased income and consumption at the household level (these are the induced effects). Therefore the overall impact of direct, indirect and induced

7 Some minor taxes that in relation to the overall tax take were insignificant are not included in the model.

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effects from the project on government revenues might be as high as 4.0 times the revenue contribution of the RMP.”8 In a prior study prepared by this Author, the Romanian fiscal system was compared to that in over twenty other jurisdictions. Using a gold mine spreadsheet model the study concluded that the Romanian fiscal system was a high tax jurisdiction, and that given similar investment alternatives, most investors would not invest in Romania.

8 THE ECONOMIC IMPACT OF THE ROSIA MONTANĂ GOLD PROJECT IN ROMANIA, Oxford: Oxford Policy Management, September 2009, p.40.

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Annex A. Description of Romania’s Mining Fiscal System

Tax System Attributes • Income tax

• 16% on company profit • deductions for computing taxable income: • feasibility studies: amortized over the life of the mine • pre-production exploration costs: amortized over the life of the mine • mine-site development costs: “intangible costs” amortized over the life of the mine • equipment costs: the taxpayer may elect to depreciate: 1) according to published schedules of straight-

line lives for different categories of equipment and plant with depreciation lives typically in the 3 to 12 year range; or 2) take 50% of the cost in the first year of production, and the remainder at a straight-line rate based on the depreciation life of the respective equipment/plant • costs qualifying for depreciation or amortization may not be adjusted for inflation

• costs associated with local community infrastructure: expensed and available for 5 years carry forward, but only if directly related to mining operations

• the following types of costs may be deducted for calculating net taxable income: pre-production exploration costs; mine-site development costs; feasibility study cost; annual operating costs; depreciated capital cost of equipment and plant; loan interest (subject to thin capitalization rule of 3/1), royalty, fees based on land area (exploration tax levy, exploitation tax levy), property taxes, payroll taxes, community related infrastructure directly related to mining operations, deforestation taxes/fees.

• Royalty: • on gold - 4% net smelter return; deductible • on silver - 4%; deductible • on mining waste products – 4%; deductible • on aggregates - 10%; whether or not consumed on the mine site or sold; deductible

• License fee: nominal • Excess profits tax: none • Withholding taxes:

• on interest: 16%, deductible • on dividends and distributions remitted abroad: 16%, deductible • on salaries and fees paid to foreign (non E.U.) consultants: 16%, deductible

• Import duty on foreign equipment: mines are exempt • Export duties on minerals: none. • VAT on goods and services: 19%, 3 to 5 months for claims; if minerals are exported, input VAT is

refundable. If equipment is sourced from within the E.U., the sales transaction is exempt from VAT. • Property tax: paid annually

• on value of buildings: up to 1.5%; based on book value, prudent accounting practice may result in book value being reset to market value every three years, otherwise the rate can be as high as 10%

• on value of land: locally set rate is applied and is based on a set fee per unit area • Area based fees:

• prospecting tax levy: 250RON/km2, annual, deductible • exploration tax levy: this value escalates over time; initially 1,000RON/km2; it is doubled after 2 years,

and becomes 5 times higher after 4 years. • exploitation tax levy: 25,000 RON (US$10,200) per square kilometer

• Construction, permit and inspection fees: typically three are paid at rates of 1%, 0.1% and 0.7%; the basis is capital construction costs not related to mobile and processing equipment

• Taxes/fees/charges related to forested areas: a number of forested area related charges can apply and these can be significant (for example: Tax for permanent declassification of the land; Equivalent value of the land to be declassified; Equivalent value of the growth loss; Equivalent value of the dismantled objectives; Expenses for afforesting and maintaining the vegetation until the full-grown state is reached. Calculation of the various charges is, in some cases, based on standard statutory formulas; reportedly a set of such charges might be on the order of $35,000 or more per hectare of forested land. Additionally, when a project takes forested land it may be required to reforest other land not subject to the mining concession (i.e., with “new” land plots at least 5 times more valuable and at least 3 times larger). Estimates of the costs associated with this requirement indicate about $55,000 or more per hectare of the concession area that is forested. The combined impact of all forestry related charges will vary depending on the circumstances of the forested area being impacted, but a reasonable estimate is $90,000 per hectare. Applicable legislation includes: the Forestry Code adopted through Law no. 46/2008, as further amended and supplemented; Order no. 58/2003; Draft Order approving the Methodology for establishing the equivalence in value of lands and for computing

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the financial obligations for permanent or temporary use change of lands in the forestry fund; Order no. 715/2008 on approving the average price of a cubic meter of standing timber, …).

• Road tax: minor tax on some vehicles • Environment tax: minor tax on some vehicle usage • Excise tax on diesel: the percentage of tax is dependent on the current fuel price; reason being, the tax is a

flat amount in Euro’s for every 1000/litres; approximately 37 to 40%, charged to the petrol company • Payroll taxes paid by employer: 19.5% of salary for social security; health tax 6% 2007, 5.5% in 2008,

5.2% at Dec 2008; 1% unemployment; 0.75% labour cards; 0.4 to 3.5% risk tax; 0.85% health assurance; 0.25% guarantees fund

• Payroll taxes paid by employee: the following taxes are paid on a salary basis adjusted to first deduct payroll taxes paid by employer: 9.5% social security, 0.5% unemployment, 6.5% health tax; 16% income tax

• Stamp taxes: range form 0.5 to 1% based on transaction value of certain transactions such as sales of real property

• Tax incentives: • loss carry-forward: 5 years (from year of loss) • tax holidays: none. • tax credits: for donations made to non-governmental organizations; foreign tax credits on certain

payments paid abroad • special deductions: none for most mines. Note: for mines established prior to 2004, qualifying

investments in a disadvantaged zone were able to, in some instances, deduct 50% of the investment made against income

• tax stabilization: none • Local equity requirement: there is no mandatory requirement that an equity share be held by Romanians • Government equity requirement: there is no mandatory requirement that an equity share be held by the

government, but for some legacy deposits and mines sometimes a joint venture profit sharing arrangement is used; for example 19.3% free equity for a known gold deposit

• Local community development: expenses incurred in regard to investment in community infrastructure may be expensed as incurred and carried forward for up to 5 years if related to mining operations; expense incurred for recurrent community related expenses such as for teacher salaries, health clinicians and so forth are not tax deductible. There is no local development tax.

• Ring-fencing: no ring-fencing for most operations Source: derived from Author’s fiscal questionnaire as completed by GRL in consultation with PricewaterhouseCoopers, Musat and Asociatii, and tax authorities.

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Annex B. Subjective Appraisal of Rosia Montana Financial Mine Model

Fiscal System Attribute (from Questionnaire) Model approach Adequacy • Income tax - 16% on company profit 16% Yes

Deductions for computing taxable income: • feasibility studies: amortized over the life of

the mine • pre-production exploration costs: amortized

over the life of the mine • mine-site development costs: “intangible

costs” amortized over the life of the mine • equipment costs: the taxpayer may elect to

depreciate: 1) according to published schedules of straight-line lives for different categories of equipment and plant with depreciation lives typically in the 3 to 12 year range; or 2) take 50% of the cost in the first year of production, and the remainder at a straight-line rate based on the depreciation life of the respective equipment/plant

• costs qualifying for depreciation or

amortization may not be adjusted for inflation

• cost overrun, financing and timing

adjustments

Preproduction costs are accumulated then depreciated at a 20% rate (over 5 yrs) Mining equipment is depreciated over 6 years Depreciation is not adjusted for inflation Estimates of cost overruns, additional financing and timing of disbursements made in Sept 2009 ($175,000,000) have been depreciated as a lump sum using units of production (UOP) method over the life of the mine

Yes (Note: while the sum of amortization is the same for either 5 years or life of mine, the government will tend to receive lower income tax in the early years and more tax in the later years using the 5 year method) Yes Yes Yes (Note: a more accurate method would have been to attribute these costs to their respective cost element; in reality, the government will tend to receive higher income tax in the early years and less tax in the later years using the UOP method, therefore the UOP method used is conservative)

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• royalty: • on gold - 4% net smelter return; royalty is

deductible • on silver - 4%; royalty is deductible

• on aggregates – 10% or 4%; whether or not consumed on the mine site or sold; deductible

4% of gold revenue, deducted as incurred 4% of silver revenue, deducted as incurred 10% of construction cost of quarry materials, 4% if from pit (waste dump), deducted for computing taxable income—if after development, included in sustainable capital and deducted as depreciation

Yes Yes Yes

• Area based fees: • prospecting tax levy: 250 RON/km2,

annual, deductible • exploration tax levy: this value escalates

over time; initially 1,000 RON/km2; it is doubled after 2 years, and becomes 5 times higher after 4 years.

• exploitation tax levy: 25,000 RON

(US$10,200) per square kilometer

Not accounted for, but probably not applicable Not accounted for, but probably not applicable 25,000RON/ km2

Not applicable for period modeled Not applicable for period modeled Yes

• withholding tax on interest: 16%, deductible • withholding tax on dividends and distributions

remitted abroad: 16%, not deductible • withholding tax on salaries and fees paid to

foreign (non E.U.) consultants: 16%, deductible

16% on interest 16% on dividends remitted abroad 16% on salaries and fees paid to non-E.U. consultants

Yes Yes Yes

• import duty on foreign equipment: mines are exempt

• export duties on minerals: none.

Provision has been made for certain items sourced outside the EU which may be subject to duty None

Yes Yes

• VAT on goods and services: 19%, 3 to 5 months for claims; if minerals are exported, input VAT is refundable. If equipment is sourced from within the E.U., the sales transaction is exempt from VAT.

VAT on several minor items such as donated infrastructure have been included where exemption or refund is not available

Yes

• Property tax: paid annually • on value of buildings: maximum rate 1.5%

if assets are revalued every 3 years; based on book value, prudent accounting practice may result in book value being reset to market value every three years, otherwise the rate can be as high as 10%

1.5% of building value

Yes

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• on value of land: locally set rate is applied

and is based on a set fee per unit area

602 to 622RON/h deducted for income tax purposes

Yes

• Construction permit and inspection fees: typically three are paid at rates of 1% upfront, 0.1% upfront inspectorate fee and 0.7% fee (the last fee is in practice broken down & paid on a monthly basis over the construction period; the basis is capital construction costs not related to mobile and processing equipment

1% construction permit fee, upfront inspection fee 0.1%, and monthly inspection fee 0.1%

Yes

• Agricultural land use change taxes/fees (details unknown)

865h x [(1,000: cost of documentation/h) + (700: cadastre tax/h) + (150: ANIF/h)]

Unknown Note: detailed information on these minor taxes (Col.1) were not provided to the Author, the sum of these taxes is small: less than USD 1 million

• Taxes/fees/charges related to forested areas: a number of forested area related charges can apply and these can be significant (for example: Tax for permanent declassification of the land; Equivalent value of the land to be declassified; Equivalent value of the growth loss; Equivalent value of the dismantled objectives; Expenses for afforesting and maintaining the vegetation until the full-grown state is reached. Calculation of the various charges is, in some cases, based on standard statutory formulas; reportedly a set of such charges might be on the order of $35,000 or more per hectare of forested land. Additionally, when a project takes forested land it may be required to reforest other land not subject to the mining concession (i.e., with “new” land plots at least 5 times more valuable and at least 3 times larger). The combined impact of all forestry related charges will vary depending on the circumstances of the forested area being impacted.

USD10,015,000 (30,045,028 RON) based on an estimate of combined fees of 100,185RON per hectare and 273 hectares, calculation method to arrive at 101,185 value is not provided in the model

Yes Note: although the calculation used to arrive at the RON/hectare value is not provided in the parts of the model given to the Author, using the rough guideline estimate of $35,000/h X 272h = USD9.5million, which is close to the modeled sum of the forest taxes/ fees/charges

• Excise tax on diesel & fuel oil: the percentage of tax is dependent on the current fuel price; reason being, the tax is a flat amount in Euro’s for every 1000/litres; approximately 37 to 40%, charged to the petrol company 37-40% (depending on barrel price), charged to the petrol company, deductible

38% rate applied to diesel and fuel oil price, added to the cost basis and deducted for taxable income purposes through depreciation

Yes

• Payroll Related Taxes: deductible • paid by employer:

• 19.5% of salary for social security; • 5.5% in 2008, 5.2% at Dec 2008

health tax;

19.5% social security; 5.5% health insurance;

Yes

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• 1% unemployment; • 0.75% labour cards; • range 0.4 – 3.5%;

• 0.85% health assurance; • 0.25% guarantees fund

• paid by employee: the following taxes are paid on a salary basis adjusted to first deduct payroll taxes paid by employer: • 9.5% social security • 0.5% unemployment • 6.5% health tax

• 16% income tax

1% unemployment; 0.75% Chamber of Labour fee; 1.387% fund for accidents; 0.85% contribution for sick leave 0.25% guarantee fund for salaries 9.5% 0.5% 5.5% 16% withholding on salaries

• Stamp taxes: range form 0.5 to 1% based on transaction value of certain transactions such as sales of real property

Stamp tax included in real estate transaction

Yes

• tax incentives • loss carry-forward: 5 years (from year of

loss)

Loss carry forward is included in the model

Yes

• government equity requirement: there is no mandatory requirement that an equity share be held by the government, but for some legacy deposits and mines sometimes a joint venture or other profit sharing arrangement is used

20% government interest in net dividend, after cash reserve

Yes

• local community development: expenses incurred in regard to investment in community infrastructure may be expensed as incurred and carried forward for up to 5 years if related to mining operations; expense incurred for recurrent community related expenses such as for teacher salaries, health clinicians and so forth are not tax deductible. There is no local development tax.

Community related costs have been estimated and are deducted through depreciation

Yes Note: the five year limit has not been included in the model and the costs during development are depreciated (not expensed)

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Annex C - About the Author

Professor James Otto (retired) holds degrees in law, mineral economics and engineering. He has worked for multilateral agencies, governments and mining companies in over fifty nations on matters relating to mining policy, laws and taxation. His accomplishments include leading or participating with teams to write mining laws and/or designing fiscal systems in over twenty nations. His books and studies on mining policies, laws, regulation and taxation have become standard references for many governments and companies. He is co-author of The Regulation of Mineral Enterprises: A Global Perspective on Economics, Law and Policy (RMMLF, 2002), editor and co-author of The Taxation of Mineral Enterprises (Graham and Trotman/Kluwer, 1995), and co-author of Global Mining Taxation Comparative Study (Colorado School of Mines, 1996, 2000). His latest book, on mineral royalties, was published by the World Bank in 2006. He has published two edited books with the United Nations on sustainable development and mining. He has edited/co-authored three books on Asia/Pacific mineral sector regulation, investment and taxation: Mining Legislative Frameworks in Asian Countries (Mining Journal Books Ltd. in conjunction with the United Nations Revolving Fund, 1998), Minerals Industry Taxation Policies for Asia and the Pacific (United Nations ESCAP, 1992), and Mineral Investment Conditions in Selected Countries of the Asia-Pacific Region (United Nations ESCAP, 1992). Professor Otto was formerly United Nations Chief Technical Advisor (UNDTCD), Assistant Director and Riotinto Senior Lecturer at the Centre for Petroleum and Mineral Law and Policy at the University of Dundee (the largest natural resources law program in Europe), Director of the Institute for Global Resources Policy and Management at the Colorado School of Mines (and Research Professor of mineral economics), and founding Director of the Environmental and Natural Resources Law Graduate Studies Program at the University of Denver Sturm College of Law (the largest natural resources law program in North America).

James Otto Attorney and Mineral Economist 1344 Scrub Oak Circle Boulder, Colorado 80305 USA [email protected] phone: 1-303-494-8241 fax: 1-303-554-0227

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