Potential modification of Chilean mining royalty tax
Loreto Pelegrí of PwC provides an overview of potential changes relating to mining royalty tax in Chile.
Given the context of social crisis and pandemic, one of the reflections that has been present in the matter of mining income is revived, in terms of its fair and equitable distribution, that is, of how to structure the exploitation of non-renewable mineral resources economically and legally between the investor and the state; if state ownership of the mines justifies higher income taxation, or if the mechanism to compensate the state for mineral extraction should be another.
Currently under discussion in Congress is the bill that "establishes in favour of the state a compensation, called mining royalty, for the exploitation of copper and lithium mining”.
The draft bill started through a parliamentary motion presented by members of the Chamber of Deputies dated September 12 2018, and accelerated its discussion during this year, being approved with some indications in the same Chamber. It is currently under discussion in the Senate.
The bill expressly states that in Chile there is no royalty, but rather a specific mining tax. For this reason, it proposes the incorporation of a ‘compensation’ in the form of royalty, since according to the literal wording of the bill: "the royalty constitutes a right and not a tax technically speaking".
This discussion of whether it is a mining royalty or a tax seems a bit byzantine, since in practice all other taxes that affect the mining industry and not another industry should be classified as royalty. In any case, given that today with the current political Constitution the exclusive initiative in tax matters is held by the executive branch, whoever is elected President in December 2021, will have to send a new bill to improve or replace the bill that is currently being discussed in Congress, in such a way as to eliminate any doubt about its constitutionality.
Since 2006, the specific mining tax has been in force in Chile. In general terms, this tax is applied on the profits obtained by a mining exploiter, which is based on the level of annual sales, and, from 2010 onwards, on the prices of the mineral as well. The tax rate varies between 5% and 14%, depending on the profit margin. This scale is applicable only to those mining exploiters whose annual sales exceed the value equivalent to 50,000 metric tons of fine copper.
The royalty proposed by the bill would apply a uniform tax of 3% on the market value of copper, lithium and any concessible substance. In addition, in the case of copper, rising marginal rates are applied to gross sales, ranging from 15% to 75% depending on the price of the metal, starting at $2 per pound. Unlike the current royalty, the one under discussion would be paid by all mining exploiters with sales greater than 12,000 tons.
With this bill, the tax burden would rise, especially for mines with low operating margins since it does not consider their ability to pay, and various analysis and studies have already been carried out that show that, if the bill is approved, the total tax burden of large mining in Chile could reach levels that are not competitive.
The bill lacks a series of technical concepts and clarity in some respects. The fact that the royalty was not considered a tax would generate a series of difficulties, for example, the provisions of the Tax Code would not be applicable, including those relating to taxpayers' rights and the GAARs.
Likewise, the bill does not mention anything about what would happen to the current specific mining tax so that, in a literal interpretation of the same, it would lead to conclude that if the project is approved as it is, both would be applied: a royalty and the specific tax on mining activity. However, according to statements made by the same Congressmen who sponsor the initiative, the proposed royalty would be established on the understanding that the specific tax would be repealed.
Fortunately, during the discussion that has taken place within the Mining and Energy Committee in the Senate, where the mining industry and the experts were heard, the idea has gained strength, that this bill, as it is, is not viable for the small and for the large copper mining companies, since it could affect the industry´s competitiveness at the international level as well as foreign investment.
The proposal that has been circulating and that is also contained in the programmes of some presidential candidates is to modify the specific tax on mining activity, changing the rates in such a way as to make it more progressive with lower margins, and adding a minimum ad valorem tax, so that mining companies should pay even when they are in a position of tax loss.