The government sent Congress a bill proposing a new special income tax on mining on December 14 2004. Its approval has been granted by the Chamber of Deputies and the bill is now in the Senate.
This is a new attempt of the Chilean government to tax mineral extraction, after the bill proposing a mineral royalty was not passed by Congress in August 2004.
The main features of the newly-proposed special income tax up to its approval by the Chamber of Deputies, including the indications sent to the Congress on March 11 2005, are as follows:
The special tax applies of 5% on "net operating income" applies.
Net operating income is defined as annual sales of mineral less annual costs and expenses related thereto, which are deductible for ordinary income tax purposes. In the determination of net operating income, however, interest payments, accumulated losses, accelerated depreciation and start-up expenses which are amortized over a period shorter than six years cannot be deducted.
The taxpayer is the mineral exploiter.
When the ratio of "net operating income" to total revenue from sales at the year end is less than 8%, the tax rate (5%) is reduced by multiplying the tax rate by the ratio that results from dividing the aforementioned ratio by 8%.
The special tax is considered a deductible expense for the purposes of the determination of the net taxable income subject to the so-called first category tax (corporate tax), which now stands at 17%.
The tax is payable in April of every year. Notwithstanding, the bill proposes monthly tax advance payments.
The bill proposes several amendments to the tax-invariability regime established in Decree Law 600 (the Foreign Investment Statute).
Mining companies that have submitted to the tax-invariability regime established in Decree Law 600 have the right to choose to keep unchanged for 12 years this special income tax at the 4% rate.
Powers to combat tax evasion are granted to the Chilean tax authorities, including specific powers to challenge pricing for transfers between related parties resident in Chile.
If passed, the special tax would apply from January 1 2006. The political discussion around this bill is now central as to how it will affect medium-and-small mining companies.
Julio Pereira (j.pereira@cl.pwc.com), Santiago
