On Friday 13 December 2013, the Cook Islands Parliament passed the Income Tax Amendment Act 2013. Together with the Seabed Minerals (Royalties Regulations 2013, the Cook Islands Government formalised the tax framework for the mining industry (including seabed mineral mining).
In addition to normal company taxes, mining operations are required to pay a 3 per cent royalty on the value of minerals they extract. They are also required to pay a resource rent tax (or additional profits tax) on any profits they derive beyond a certain level.
The resource rent tax has been set at a tax rate of 25 per cent after positive cash flows exceed costs by 20 per cent.
This regime ensures the Government receives revenue from the royalty as soon as production commences, company tax on profits made, while also providing the government a share of the economic rents (or profits derived from resource extraction) of more profitable projects.
Other taxes that will relate to the mining sector are non-resident withholding taxes, VAT, and company tax.
To ensure that the company tax system is able to cope with the mining activities and associated significant international transactions, a number of other reforms were also put into the legislation. These changes will apply to all companies in the Cook Islands, but in practice, will largely affect only mining company operations.
The changes include: introducing thin capitalisation rules (to prevent financing through excessive debt); strengthening the transfer pricing rules (rules governing charges between related entities) by introducing an arm’s length rule and specifying acceptable methods for determining arm’s length prices; ensuring income from mining activities is treated as Cook Islands source income; and ring-fencing mining expenditure to specific projects, except for unsuccessful mining exploration expenses.
A number of provisions under the current law that are likely to be important to mining companies have been retained, including: the current company tax rates (20 percent for resident companies and 28 percent for non-resident companies); capital allowances (depreciation rates) based on the useful life of the asset; and unlimited loss transfer (except for substantial changes of ownership).