Financial terms of contracts 1. In adopting rules, regulations and procedures relating to the financial terms of contracts between the Authority and the entities or persons referred to in article 153, paragraph 2 (b), and in negotiating those financial terms in connection with a contract in accordance with Part XI and those rules, regulations and procedures, the Authority shall be guided by the following objectives:
(a) To ensure optimum revenues for the Authority from the proceeds of commercial production; (b) To attract investments and technology for the exploration and exploitation of the Area; (c) To ensure equality of financial treatment and comparable financial obligations for all contractors; (d) To provide incentives on a uniform and non-discriminatory basis for contractors to enter into joint arrangements with the Enterprise and developing States or their nationals, to stimulate the transfer of technology to the Enterprise and to developing States and their nationals, and to train the personnel of the Authority and of developing States; (e) To enable the Enterprise to engage in seabed mining effectively at the same time as the entities or persons referred to in article 153, paragraph 2 (b); and (f) To ensure that, as a result of the financial incentives provided to contractors under paragraph 14, of contracts reviewed in accordance with article 19 of this Annex or of the provisions of article 11 of this Annex relating to joint ventures, contractors are not subsidized so as to be given an artificial competitive advantage with respect to land-based producers.
2. A fee of $500,000 shall be levied for the administrative costs of processing each application for a contract of exploration and exploitation. The Council shall review the amount of the fee periodically to ensure that it covers the administrative costs incurred. If the costs incurred by the Authority in processing an application are less than the fixed amount, the Authority shall refund the difference to the applicant.
3. A contractor shall pay an annual fixed fee of $1 million as from the date of entry into force of the contract. If the approved date for commencement of commercial production is postponed because of a delay in issuing the production authorization, in accordance with article 151, the annual fixed fee shall be waived for the period of postponement. From the commencement of commercial production, the contractor shall pay either the production charge or the annual fixed fee, whichever is greater.
4. Within one year from the commencement of commercial production, in accordance with paragraph 3, a contractor shall choose, for the purposes of its financial contribution to the Authority, between the following:
(a) Payment of a production charge only; or (b) Payment of a combination of a production charge and a share of net proceeds.
5. (a) If a contractor chooses to pay a production charge only as a means of satisfying its financial contribution to the Authority, the charge shall be fixed as a percentage of the market value of the processed metals produced from the polymetallic nodules recovered from the area covered by the contract, according to the following schedule:
(i) Years one to ten of commercial production.......... 5 per cent (ii) Years 11 to the end of commercial production......... 12 per cent (b) The said market value shall be the product of the quantity of processed metals produced from the polymetallic nodules recovered from the area covered by the contract and the average price for those metals during the relevant accounting year, as defined in paragraphs 7 and 8.
6. If a contractor chooses to pay a combination of a production charge and a share of net proceeds as a means of satisfying its financial contribution to the Authority, the amounts shall be determined as follows:
(a) The production charge shall be fixed as a percentage of the market value, determined in accordance with subparagraph (b), of the processed metals produced from the polymetallic nodules recovered from the area covered by the contract, according to the following schedule:
(i) First period of commercial production........ 2 per cent (ii) Second period of commercial production....... 4 per cent If, in the second period of commercial production, as defined in subparagraph (d), the return on investment in any accounting year as defined in subparagraph (m) falls below 15 per cent as a result of the payment of the production charge at 4 per cent, the production charge in that accounting year shall be 2 per cent instead of 4 per cent.
(b) The said market value shall be the product of the quantity of processed metals produced from the polymetallic nodules recovered from the area covered by the contract and the average price for those metals during the relevant accounting year, as defined in paragraphs 7 and 8.
(c) (i) The Authority's share of net proceeds shall be taken out of that portion of the contractor's net proceeds which is attributable to the recovery of the resources of the area covered by the contract, referred to hereinafter as attributable net proceeds; (ii) The Authority's share of attributable net proceeds shall be determined according to the following incremental schedule:
SHARE OF THE AUTHORITY Portion of attributable First period of Second period net proceeds commercial production commercial production That portion representing a return 35% 40% on investment greater than 0% but less than 10% That portion representing a return on investment equal to 42.5% 50% or greater than 10% but less than 20% That portion representing a return on investment equal to 50% 70% or greater than 20% (d) (i) The first period of commercial production referred to in subparagraphs (a) and (c) shall commence in the first accounting year of commercial production and shall end in the accounting year in which the contractor's development costs, together with interest on the unrecovered portion thereof, are fully recovered by its cash surplus, as set out below.
In the first accounting year during which development costs are incurred, unrecovered development costs shall equal the development costs less cash surplus in that year.
In each subsequent accounting year, unrecovered development costs shall equal the unrecovered development costs at the end of the preceding accounting year, plus interest thereon at the rate of 10 per cent per annum, plus development costs incurred in the accounting year and less the contractor's cash surplus in that accounting year. The accounting year in which unrecovered development costs first become zero shall be the accounting year in which the contractor's development costs together with interest on the unrecovered portion thereof are fully recovered by its cash surplus. The contractor's cash surplus in any accounting year shall be its gross revenues less its operating costs and less its payments to the Authority under subparagraph (c); (ii) The second period of commercial production shall commence in the accounting year following the end of the first period of commercial production and shall continue until the end of the contract.
(e) "Attributable net proceeds" means the product of the contractor's net proceeds and the ratio of the development costs attributable to the recovery operation to the contractor's total development costs. If the contractor engages in the recovery, transport of polymetallic nodules and production of basically three processed metals, cobalt, copper and nickel, the amount of attributable net proceeds shall be not less than 25 per cent of the contractor's net proceeds. Subject to subparagraph (n), in all other cases, including those where the contractor engages in the recovery, transport of polymetallic nodules and production of basically four processed metals, cobalt, copper, manganese and nickel, the Authority may prescribe, in its rules, regulations and procedures, appropriate minimum percentages which shall bear the same relationship to each case as the 25 per cent minimum does to the three-metal case.
(f) "Contractor's net proceeds" means the contractor's gross revenues less its operating costs and less the recovery of its development costs as set out in subparagraph (j). (g) (i) If the contractor engages in the recovery, transport of polymetallic nodules and production of processed metals, "contractor's gross revenues" means the gross revenues from the sale of the processed metals and any other monies deemed reasonably attributable to operations under the contract, in accordance with the financial rules, regulations and procedures of the Authority. (ii) In all cases other than those specified in subparagraph (g)(i) and (n)(iii), "contractor's gross revenues" means the gross revenues from the sale of the semi-processed metals produced from the polymetallic nodules recovered from the area covered by the contract and any other monies deemed reasonably attributable to operations under the contract, in accordance with the financial rules, regulations and procedures of the Authority. (h) "Contractor's development costs" means:
(i) All expenditures incurred prior to the commencement of commercial production which are directly related to the development of the productive capacity of the area covered by the contract and to activities related thereto in operations under the contract in all cases other than those specified in subparagraph (n), in accordance with generally recognized accounting principles, including, inter alia, costs of machinery, equipment, vessels, processing plant, construction, buildings, land, roads, prospecting and exploration of the area covered by the contract, research and development, interest, leases, licences and fees; and (ii) Expenditures similar to those set out in (i) above, incurred after the commencement of commercial production, which are necessary to carry out the plan of work, except those chargeable to operating costs. (i) The proceeds from the disposal of capital equipment and the market value of capital equipment that is no longer needed for operations under the contract and which is not sold shall be deducted from the contractor's development costs during the relevant accounting year. When these deductions exceed the contractor's development costs, the excess shall be added to the contractor's gross revenues.
(j) The contractor's development costs incurred prior to the commencement of commercial production, referred to in subparagraphs (h)(i) and (n)(iv), shall be recovered in 10 equal annual instalments from the date of commencement of commercial production. The contractor's development costs incurred after the commencement of commercial production, referred to in subparagraphs (h)(ii) and (n)(iv), shall be recovered in 10 or fewer equal annual instalments so as to be fully recovered by the end of the contract.
(k) "Contractor's operating costs" means all expenditures incurred after the commencement of commercial production in the operation of the productive capacity of the area covered by the contract and in activities related thereto in operations under the contract, in accordance with generally recognized accounting principles, including, inter alia, the annual fixed fee or the production charge, whichever is greater, expenditures for wages, salaries, employee benefits, materials, services, transporting, processing and marketing costs, interest, water, electricity, etc., preservation of the marine environment, overhead and administrative costs specifically related to operations under the contract, and any net operating losses carried forward or backward as set out below. Net operating losses may be carried forward for two consecutive years, except in the last two years of the contract, in which case they may be carried backward to the two preceding accounting years.
- l)In the event that the contractor is engaged in the extraction, transport of polymetallic nodules, and the production of processed and semi-processed metals, "investment costs corresponding to extraction" means the portion of the contractor's investment costs directly related to the extraction of resources from the area covered by the contract, in accordance with generally recognized accounting principles and the Authority's financial rules, regulations, and procedures, including, inter alia, the application fee, the fixed annual fee, and, where applicable, the costs of prospecting and exploration of the area covered by the contract and a portion of research and development costs.
- m)"Return on investment" in an accounting year means the ratio between the attributable net income of that year and the investment costs corresponding to extraction. For the calculation of this ratio, the investment costs corresponding to extraction shall include the costs of acquiring new equipment or replacing equipment used in extraction, less the original cost of the replaced equipment.
- n)In the event that the contractor is engaged only in extraction:
- i)"Attributable net income" means the total net income of the contractor; ii) "Net income of the contractor" shall be as defined in subparagraph (f); iii) "Gross income of the contractor" means the gross income derived from the sale of polymetallic nodules and any other income reasonably attributable to operations carried out under the contract in accordance with the Authority's financial rules, regulations, and procedures; iv) "Investment costs of the contractor" means the costs incurred before the commencement of commercial production, as indicated in subparagraph (h)(i), and the costs incurred after the commencement of commercial production, as indicated in subparagraph (h)(ii), which are directly related to the extraction of resources from the area covered by the contract, in accordance with generally recognized accounting principles; v) "Operating costs of the contractor" means the operating costs of the contractor, as indicated in subparagraph (k), which are directly related to the extraction of resources from the area covered by the contract, in accordance with generally recognized accounting principles; vi) "Return on investment" in an accounting year means the ratio between the net income of the contractor in that year and the investment costs of the contractor. For the calculation of this ratio, the investment costs of the contractor shall include the costs of acquiring new equipment or replacing equipment, less the original cost of the replaced equipment.
- o)The costs referred to in subparagraphs (h), (k), (l), and (n), in the portion corresponding to interest paid by the contractor, shall be taken into account only to the extent that, in all circumstances, the Authority, pursuant to Article 4, paragraph 1, of this Annex, considers that the debt-to-equity ratio and the interest rates are reasonable, taking into account existing commercial practice.
- p)The costs mentioned in this paragraph shall not be considered to include the payment of corporate income taxes or similar levies imposed by States on the contractor's operations.
7.- a) "Processed metals," as mentioned in paragraphs 5 and 6, means metals in the most basic form in which they are customarily traded on international end-use markets. For this purpose, the Authority shall specify in its financial rules, regulations, and procedures the relevant international end-use market. In the case of metals not traded on such markets, "processed metals" means metals in the most basic form in which they are customarily traded in representative arm's-length transactions.
- b)If the Authority has no other means of determining the quantity of processed metals produced from polymetallic nodules recovered from the area covered by the contract, as referred to in paragraphs 5(b) and 6(b), that quantity shall be determined based on the metal content of the nodules, the processing recovery rate, and other relevant factors, in accordance with the Authority's rules, regulations, and procedures and generally recognized accounting principles.
8.- When the international end-use market has a representative pricing mechanism for processed metals, polymetallic nodules, and semi-processed metals produced from nodules, the average price on that market shall be used. In all other cases, the Authority, in consultation with the contractor, shall determine a fair price for these products in accordance with paragraph 9.
9.- a) The costs, expenses, and income, and the determinations of prices and values referred to in this article, shall be the result of transactions in the free market or on an arm's-length basis. In the absence of such transactions, they shall be determined by the Authority, in consultation with the contractor, as if they had resulted from transactions in the free market or on an arm's-length basis, taking into account relevant transactions in other markets.
- b)In order to ensure compliance with and enforcement of the provisions of this paragraph, the Authority shall be guided by the principles adopted and the interpretations given on arm's-length transactions by the United Nations Commission on Transnational Corporations, the Group of Experts on Tax Treaties between Developed and Developing Countries, and other international organizations, and shall adopt rules, regulations, and procedures establishing uniform and internationally acceptable accounting rules and procedures, as well as the criteria to be used by the contractor for selecting independent qualified accountants acceptable to the Authority for the purpose of auditing in compliance with such rules, regulations, and procedures.
10.- The contractor shall provide the accountants, in accordance with the Authority's financial rules, regulations, and procedures, with the financial data necessary to verify compliance with this article.
11.- The costs, expenses, and income, and the prices and values referred to in this article, shall be determined in accordance with generally recognized accounting principles and the Authority's financial rules, regulations, and procedures.
12.- Payments to the Authority under paragraphs 5 and 6 shall be made in freely usable currencies or in currencies which are freely available and effectively usable in major foreign exchange markets, or, at the contractor's option, in their equivalent in processed metals at market value. Market value shall be determined in accordance with paragraph 5(b). The freely usable currencies and currencies which are freely available and effectively usable in major foreign exchange markets shall be defined in the rules, regulations, and procedures of the Authority, in accordance with prevailing international monetary practice.
13.- The contractor's financial obligations to the Authority, as well as the rights, fees, costs, expenses, and income referred to in this article, shall be adjusted by expressing them in constant values referenced to a base year.
14.- To further the objectives set out in paragraph 1, the Authority may adopt, taking into account the recommendations of the Economic Planning Commission and the Legal and Technical Commission, rules, regulations, and procedures that provide, on a uniform and non-discriminatory basis, incentives for contractors.
15.- Disputes between the Authority and the contractor concerning the interpretation or application of the financial provisions of the contract may be submitted by either party to binding commercial arbitration, unless both parties agree to settle them by other means, in accordance with Article 188, paragraph 2.