Russian Duma passes law on reduced taxation for underground iron ore mining

MOSCOW. July 21 (Interfax) - Russia's State Duma has passed at third reading a law to lower mineral extraction tax or MET for the underground mining of amenable ferrous metal ores.

The law increases the MET reduction factor from 0.1 to 0.25 for deposits where more than 90% of commercial ores are mined by the underground method. The concession will be valid from January 1, 2024 through 2034. The government introduced the relevant amendments for the second reading of the bill No. 369931-8.

The reduction factor for deposits that do not meet this criterion will be 1, according to MinFin's amendments.

It will also be 1 if the difference between the amount of tax using at a factor of 1 and tax at a factor of 0.25 exceeds a company's total capital expenditure for the previous tax year. This is intended to incentivize investment in underground mining, an explanatory note to the bill says.

The average cost per tonne of ore mined underground in 2021 was 1,044 rubles and for that mined by the open cast method it was 245 rubles, the note says. The adjusted cost less depreciation, interest and non-operating expenses of iron ore concentrate production at underground mines in 2022 was an estimated 5,000 rubles per tonne, which exceeds current iron ore prices on the domestic market (EXW) of 4,600 rubles per tonne.

"As a result, the operating profit of metallurgical enterprises, the raw material base of which is sustained by the underground mining of amenable ferrous metal ores, is in the negative zone," an explanatory note to the amendments said.

A reduction factor of 0.1 for the underground mining of iron ores is already being applied, Deputy Finance Minister Alexei Sazanov said in the spring. It is valid until next year. He said that according to the drafted amendments, "there will be a requirement for the need to reinvest the money that will be saved through the use of benefits in fixed assets, in capital investments for the development of underground ore deposits."

The reduced MET on underground iron ore mining from 2024 will lead to a budget shortfall of about 3.5 billion rubles in the period 2024-2034, according to the bill's financial and economic rationale. However additional budget revenue generated by increasing mining by this method will exceed the losses and amount to 0.8 billion rubles per year. In addition, the law will enable investment projects costing more than 113 billion rubles to be carried out over the 10 year period.

An increased MET on iron ore has been in effect since the beginning of last year: the rate for iron ore is set at 4.8% of the Iron Ore Fines market quotation in China. A reduced coefficient is in place for underground mining, which is set at 0.1 and is applicable to subsoil areas where the extraction of iron ore is expected to be completed no later than January 1, 2024.

An industry source explained to Interfax that despite the fact that the MET concession for underground mining of iron ore had been in effect since 2013, it was actually difficult for companies to take advantage of it "due to the failure to meet the strict condition of development and reclamation of the mine through the end of 2023."

Iron ore is mined underground by Severstal and Industrial Metallurgical Holding (IMH).