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New copper tax clouds Freeport's outlook in Indonesia

* Freeport could face $5 bln in extra taxes over next 3 yrs-Reuters calculation

* Export taxes could breach Freeport, Newmont contracts

* Goverment says will stick to its guns

* Arbitration could be a possibility -source

By Randy Fabi and Michael Taylor

JAKARTA, Jan 17 (Reuters) - Indonesia's top copper producer, Freeport McMoRan Copper & Gold, faces paying billions of dollars more in taxes if it fails to convince the government to back down from a new export tax, a dispute sources say may end in legal arbitration.

Freeport and fellow miner Newmont Mining, which together account for virtually all copper mining in Indonesia and are exempt from export taxes under their current contracts, are expected to meet with finance ministry officials later on Friday.

President Susilo Bambang Yudhoyono on Saturday gave Freeport and Newmont a reprieve from a controversial mineral ore export ban, but then surprised the U.S.-based majors by imposing an export tax.

Freeport, which produces 73 percent of Indonesia's copper output, has halted concentrate exports from the world's fifth-largest copper mine since Dec. 15, and has yet to resume shipments as it waits for greater clarity from the government on the new policies.

"International arbitration is a probability, if the government does not move on the issue of the export tax," said a source close to the situation, who asked not be named because of the sensitivity of the matter.

Freeport declined to comment but a company spokeswoman said before the ban took effect on Sunday that legal action was seen as a last resort.

Under the new regulations, a tax for copper concentrate exports will be raised to 25 percent from 20 percent and levied on Freeport and Newmont for the first time. The tax will rise to 60 percent by the end of 2016, before exports of concentrate are banned from 2017.

As a result, Freeport could pay around $5 billion more in taxes over the next three years, according to Reuters calculations based on the company's production forecasts and assuming copper prices of $3.50 a pound, and estimates by two industry sources.


Indonesia's tough new policies are aimed at forcing miners to process mineral ores within the country, part of plans to transform Southeast Asia's biggest economy from being simply a supplier of raw materials into a producer of finished goods.

That would increase its foreign revenue and narrow the current account deficit, which has undermined investor confidence and battered the rupiah currency.

Under their current contracts, Freeport and Newmont are exempt from paying export taxes or any other government charges not included in their agreements. The two firms pay corporate income taxes of 35 percent plus royalties and other fees.

"The proposed export tax would be a brand new tax - on top of all the others we are obligated to pay - not accounted for in the Contract of Work we signed with the government," said Newmont spokesman Omar Jabara.

"The contract explicitly sets the types and levels of taxes and rate we are required to pay, thereby contractually assuring predictability and stability around our existing tax obligations."

Freeport in 2012 paid the government around $1 billion in taxes and fees, while Newmont has given more than $3 billion since 2000.

Newmont, which produces about 24 percent of Indonesia's copper output, said operations at its Batu Hijau mine remained normal and its first concentrate shipment of the year was expected later this quarter.

Government officials said they were open to discuss the matter with Freeport and other miners, but would not back down from the new regulations.

"All are treated equally by the law. The government has prepared themselves just in case Freeport and Newmont or any other (miners) take our policy to arbitration," said Bachrul Chairi, director general of foreign trade at the trade ministry.

The government is under pressure ahead of elections this year to ensure that foreign companies are not seen winning more favourable treatement than local miners.

The finance minister earlier this week told reporters the new regulation was a "form of punishment" for companies that did not have domestic smelters.

Union officials have warned the new tax will force layoffs at Freeport, but a top company official said there were no such plans yet.

"It is an absurd policy," said Syahrir Abubakar, executive director of the Indonesian Mining Association. "With the high export tax, the mining industry will be forced to stop and close their activity."

Freeport and Newmont are also involved in contract renegotiations with the government, and any legal action on tax could hinder their hopes of an extension agreement that would allow them to work longer at their lucrative mines.

Freeport's copper production in Indonesia provides around 19 percent of the company's total global revenue, and its contract is due to expire in 2021.