Select Committee on Trade and Industry Written Evidence


APPENDIX 1

Memorandum submitted by Anglo American plc

ANGLO AMERICAN'S HISTORY IN BRAZIL

  Anglo American is a FTSE top 20, UK-based mining and natural resources company with significant investments in some 60 countries, including several in South America, in platinum, base metals, coal, ferrous metals, paper and packaging, industrial minerals, gold and diamonds.

  Anglo American is a long-term investor in Brazil. Our involvement dates back 34 years. Following the acquisition of 40% of Unigeo, a prospecting Joint Venture, we first opened offices as Anglo American do Brasil (Ambras) in January 1973 in Rio de Janeiro. One of Ambras' first ventures was in the gold mining industry, and over time Ambras opened and acquired ownership of such mines or projects as Morro Velho, Jacobina, Crixas and Salobo. Anglo American's present-day gold interests are represented by our 41.8% interest in our independently-managed associate, AngloGold Ashanti, and are not covered by this note.

  A major development of our involvement in Brazil came with the acquisition in 1981 of 40% followed two years later by acquisition of the remaining 60% of Empresas Sudamericanas Consolidadas SA, the company holding the Hochschild Group's South American interests. In Brazil these included a range of base metal, phosphate and petrochemical mines and industrial plants. Base metals and phosphate operations represent the basis for Anglo American's managed Brazilian operations today.

ANGLO AMERICAN IN BRAZIL TODAY

  Anglo American Brazil currently employs 2,300 people and provides jobs for some 1,800 contractors. In 2005 our operations generated some $185 million in added value, $500 million in earnings, $90 million in exports and $41 million in corporate taxes and royalties. The Group's managed assets in Brazil are valued at $546 million and we have just announced a major new investment with a vlue of some $1.2 billion in a nickel project at Barro Alto.

  The Group's current activities are divided into two main teams; base metals and phosphates. The Base Metals operations are located in four municipalities of the state of Goias and consist of a niobium mine, Catalo and nickel operations at Codemin and Baro Alto.

  Anglo American also has a 73% shareholding in Copebras, a leading producer of phosphate fertilisers, phosphoric acid and sodium tripolyphosphate: these operations are centred in Catalao and Cubatao.

  In addition we have a corporate office in Sao Paulo and conduct extensive exploration activities in Brazil. We have always sought to develop the skill-base of our Brazilian employees—virtually all our in-country workforce are Brazilian nationals.

  In accordance with Anglo American's Good Citizenship Business Principles, which recognise that we will be more successful as a company if the communities where we operate grow through economic and social development, our operations in Brazil give a high priority to sound environmental management, workplace safety and addressing key social priorities. We are proud of our long-standing engagement in Brazil and committed to sustaining and growing it over time.

ISSUES

  By and large, Brazil is a good place to do business. Its strengths include the robustness of its democracy; good institutions and a vibrant civil society; its stable regulatory framework and excellent natural and human resources. We are pleased to enjoy strong relationships with our stakeholders in Brazil, including the public sector at all levels. Nonetheless, we would draw the Committee's attention to three issue which present obstacles to more effective involvement:

    —    Limitations on foreign companies owning assets in border zones: Federal law 6634/79 sets out special requirements for companies to do business in the Border Zones, and this includes mining companies. A particular concern is the requirement in this law that 51% of total and controlling equity of a company must be held directly, or indirectly, by Brazilian citizens. It similarly requires two thirds of employees and the majority of managers to be Brazilian citizens.

    As noted above, and as is made clear by the value added that our operations create for the Brazilian economy, Anglo American is committed to ensuring proper returns to the Brazilian people and Government from its operations. While Anglo American does not currently have any direct investment in the border zone, we are minority partners in potential projects and these restrictions pose real limits on our scope to develop our operations.

    —    Taxation issues—no double taxation treaty between the UK and Brazil: Brazil has agreed and put in place Double taxation Agreements with a number of overseas jurisdictions including inter alia: Canada, Chile, China, France, Germany, Luxembourg, Netherlands and Spain. However, no such agreement currently exists with the United Kingdom.

    Cross-border investment can be seriously impeded if there is a danger that the returns on investment may be taxed twice. The Organisation for Economic Cooperation and Development (OECD) Model Tax Convention and the worldwide network of tax treaties based upon it, help to avoid that danger by providing clear consensual rules for taxing income and capital in each jurisdiction. For most types of income, especially business profits and investment income, double taxation is prevented through a double taxation treaty by allocating taxing rights between the resident and source countries and by requiring the elimination of double taxation where there are competing taxing rights.

    If Brazil were to negotiate and put in place a double taxation agreement with the UK this would remove or reduce the risk of double taxation for UK investors into Brazil (and vice versa).

    —    Taxation issues—transfer pricing: Brazilian legislation on transfer pricing is not in line with OECD guidelines on transfer pricing. Law No.9430 of 27 December 1996 introduced transfer pricing legislation in Brazil with respect to cross-border transactions between a Brazilian resident and a foreign related-party. The Brazilian tax authorities have the power to allocate or adjust income for corporate income tax and social contribution tax purposes if they deem that the transfer price used is not appropriate.

  Conceptually this is no different from many other jurisdictions that have domestic transfer pricing rules. However, in general, Brazilian transfer pricing rules do not follow the transfer pricing guidelines outlined in the OECD Model Convention. For example, Brazilian transfer pricing rules often apply fixed-profit margins on transactions between related parties. This can create tax uncertainty and lead to administrative problems for multi-national investors particularly where the other jurisdiction in which the related-party is based requires the transfer pricing transaction to be in compliance with their own transfer pricing rules which are based on the OECD Model. This gives rise to both tax compliance and contractual difficulties and in addition, can lead to potential economic double taxation as there may be a mis-match between the two sets of transfer pricing rules such that the allowable expense in one jurisdiction differs significantly from the table income in the other.

  If Brazil were to bring its transfer pricing legislation in line with to OECD Model, Brazil would then comply with the transfer pricing rules applicable in most other jurisdictions with the result that the concerns referred to above for multi-national investors would be significantly reduced or possibly eradicated completely.

5 January 2007





 
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