Rio Tinto has given up trying to negotiate settlement of a two-year-old tax dispute with the Mongolian government and has sent the matter to a United Nations arbitration panel.

The matter relates to $US155 million ($234 million) of extra taxes that Mongolia believes Rio's subsidiaries should have paid between 2013 and 2015, and suggests a further deterioration of the relationship between the government of the developing nation and its biggest private sector employer.

Rio has operated the Oyu Tolgoi copper and gold mine in Mongolia for seven years, and a multibillion-dollar expansion of the mine is Rio's most important and controversial growth project.

UN arbitration has long been viewed as a last resort for the tax dispute; Rio and its subsidiaries have legally been eligible to send the matter to the United Nations Commission on International Trade Law (UNCITRAL) since about May 2018.

Negotiation periods have been extended on numerous occasions over the past two years in the hope a settlement could be reached, but the patience of Rio and its subsidiaries was finally exhausted on Friday.

“We have worked diligently with the government and tax office representatives in Mongolia to find a mutually acceptable settlement and came to the conclusion that arbitration is the best way forward to resolve this issue,” said Rio's copper and diamonds chief executive Arnaud Soirat.

Rio's exposure to Oyu Tolgoi comes through its majority ownership of Canadian company Turquoise Hill Resources, which in turn owns 66 per cent of the Mongolian company that runs the mine.

That Mongolian company, Oyu Tolgoi LLC, is technically the entity that initiated the formal international arbitration process on Friday.

The matter will now be heard by a three-member arbitration panel run by UNCITRAL in London.

Rio firmly believes its subsidiaries have paid all appropriate taxes in Mongolia.

The failure to reach a negotiated settlement comes after a $US30 million settlement was reached in 2014 over Mongolia's belief that Rio's subsidiaries owed it $US130 million in unpaid taxes.

The move to arbitration also does not bode well for a new round of talks due to begin between Rio and Mongolia over power supply for Oyu Tolgoi.

Rio's subsidiaries confirmed this week that a new coal-fired power station for Oyu Tolgoi would be delivered about a year later than the deadline set by the Mongolian government.

Rio and its subsidiaries said they would try to reach a "mutually acceptable" outcome with the government over power.

The power talks add to the long list of difficult negotiation topics between the nation and Rio, with the two parties also in talks over ways to reduce costs on the mine, and the interest rates applied to money that Rio loans to Oyu Tolgoi LLC.

An underground expansion of the existing Oyu Tolgoi mine was expected to cost $US5.3 billion when it was launched in 2015, but will now cost somewhere between $US6.5 billion and $US7.2 billion.

Building the power station will require spending a further $US924 million.

The Australian Financial Review revealed in November that a former worker on Oyu Tolgoi had claimed in a United Kingdom court that he warned senior Rio officials about cost and schedule blowouts months before the company disclosed the issues to investors in 2018 and 2019.

In December Mongolia floated the idea that it might exchange its 34 per cent stake in the mine for improved royalty flows.

Published Date:2020-02-21