* Freeport could face $5 bln in extra taxes over next 3 yrs -Reuters calculation
* Export taxes could breach Freeport, Newmont contracts
* Government says will stick to its guns
* Arbitration could be a possibility -source
By Randy Fabi and Michael Taylor
JAKARTA, Jan 17 Indonesia's top copper producer, Freeport McMoRan Copper & Gold, faces 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 current contracts, are expected to meet finance ministry officials on Friday.
President Susilo Bambang Yudhoyono 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 them as it awaits greater clarity on new government policies.
In an internal memo, the company said it would slightly reduce production from Monday, due to uncertainty over the new rule and scheduled maintenance.
"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.
The new rules hike to 25 percent a tax for copper concentrate exports, from 20 percent, and levy the tax 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 aim to force miners to process mineral ores in the country, as part of plans to transform Southeast Asia's biggest economy into a producer of finished goods, from being simply a supplier of raw materials.
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."
Freeport in 2012 paid the government around $1 billion in taxes and fees, while Newmont has paid more than $3 billion since 2000.
Newmont, which produces about 24 percent of Indonesia's copper output, said operations at its Batu Hijau mine were 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 off 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 to receive more favourable treatment than local miners.
The new regulation was a "form of punishment" for companies that did not have domestic smelters, the finance minister told reporters this week.
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 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.