Drilling into the detail of a new Chilean mining royalty tax
Loreto Pelegrí of PwC provides an overview of the potential changes as the legislative journey of a bill to reform the taxation of mining activities gathers pace.
President Boric's government programme featured not only broad tax reform but also a proposal to change the taxation of mining activities in Chile.
Unlike other economic activities, mining involves a non-renewable natural resource owned by the state, which has exclusive, inalienable and imprescriptible ownership of all mines. Hence the state demands ‘economic rents or Ricardian rents’, where higher taxes are justified because mining generates extraordinary income given the use of the natural resources that are being exploited.
However, the taxation must be reasonable in such a way that a balance is found between allowing the mining industry to be competitive, making the necessary investments, and contributing to the economic development of the country.
Since 2006, a 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 are based on the level of annual sales and, from 2010, on the prices of the mineral. The tax rate varies between 5% and 14%, depending on the profit margin. This scale is applicable only to mining exploiters with annual sales that exceed a value equivalent to 50,000 metric tons of fine copper (MTFC).
Increased activity around the draft bill
A draft bill that would modify the mining royalty regime is under discussion in Congress. Although the bill started through a parliamentary motion presented by deputies to the House of Representatives on September 12, 2018, its discussion has accelerated during the past year. The government has presented three packages of amendments to the bill, converting it into a project that complies with constitutional legality given the exclusivity that the president has in tax matters.
The first amendments to the bill were presented in July 2022 and specified that a new tax would be established (instead of a "compensation to the State", as indicated in the original bill) called a "mining royalty", repealing the tax on mining activity set forth in Article 64 bis of the Chilean Income Tax Law.
The new mining royalty would enter into force on January 1, 2024. However, taxpayers benefiting from the tax invariability of Article 11 ter of Decree Law No. 600, Law No. 20.026 or Law No. 20.469 will continue to be governed by the provisions in force until the date on which the invariability ends. However, these taxpayers may voluntarily submit to the new rules in advance.
The proposed royalty has a hybrid nature and combines an ad valorem component that would be applied to annual sales of copper and a variable element linked to the mining operating margin.
A reformulated approach
On October 25 2022, the government of Chile submitted to Congress new substitute indications for the bill on mining royalties – the discussion of which is in its second constitutional stage in the Senate – due to discussions with mining companies from the private sector and experts in the mining industry.
The original project was significantly reformulated to include:
A simplification and reduction of the ad valorem component without regard to the price of copper;
A change in the base of the variable component, which will be determined based on mining operating margin ranges instead of copper prices;
A reduction or elimination of the ad valorem component for companies that could face operating losses as a result of its application; and
The inclusion of depreciation as part of the calculation of the mining operating margin.
Considering these changes, it is estimated that the mining royalty would collect an additional 0.6% of GDP, of which 0.46% of GDP would result from the new structure and the remaining 0.15% from a growth in production and costs.
According to the proposal, the hybrid nature of the royalty is combined as follows:
An ad valorem component that will be applied to annual sales of copper, with a rate that will no longer be progressive, but flat at 1% for mining operators that annually sell more than the equivalent of 50,000 MTFC (mining operators with annual sales not exceeding 50,000 MTFC will be exempt from this component). If the adjusted taxable mining operating income (RIOMA) is negative, the ad valorem component paid will be the positive amount resulting from subtracting the negative amount of the RIOMA from the determined ad valorem tax; and
A component on the mining margin, applied to the RIOMA:
(i) Mining operators with annual sales that are more than 50% derived from copper and exceed the equivalent value of 50,000 MTFC will be subject to rates that will fluctuate between 8% and 26% depending on the mining operating profit (instead of between 2% and 36%, as established in the previous package of substitute indications), regardless of copper prices;
(ii) For mining operators with annual sales that exceed 50,000 MTFC but that are less than 50% derived from copper, a progressive rate will be applied based on the mining operating margin, according to a progressive scale between 5% and 34.5%, per tranche, and with a maximum effective rate of 14%;
(iii) Mining operators with annual sales greater than the value equivalent to 12,000 MTFC and that do not exceed the value equivalent to 50,000 MTFC will be subject to a rate equivalent to the average per ton based on a progressive scale between 0.5% and 4.5%, according to tranches of values equivalent to the MTFC sold; and
(iv) Mining operators with annual sales not exceeding 12,000 MTFC will be exempt from this component.
Regarding the determination of the RIOMA, the idea is maintained that the component on the mining margin of the royalty is added to the tax base and the ad valorem component is accepted as an expense; and with respect to the depreciation of fixed assets, accelerated depreciation will be added, and the normal depreciation instalment may be deducted. Organisation and start-up expenses should be considered as an addition to RIOMA.
In the first days of January 2023, the Mining and Energy Committee of the Senate approved the mining royalty. Before the vote, the executive branch presented a series of indications that modified the distribution of the resources collected by the royalty tax to regions, which were also approved.
Given the legislative recess in February, the bill will be reviewed and discussed during March by the Senate Finance Committee, before being voted on in the Senate, and then it must return to the House of Representatives.