Chile, Peru - How much do mining companies contribute?

The debate on royalties is not over yet.

How much do mining companies in the region contribute to tax revenues, and as a result, development? The issue has generated a heated debate in Chile and Peru, the region’s two biggest metals producers.

With regard to the taxes and other contributions paid by the mining sector in Latin America, cánones (payments on income from the extraction of natural resources) and royalties (percentage paid on production) are the principal source of revenues paid to governments — in addition to income tax, which is paid by all companies.

Few taxes paid

Aside from the royalty and canon payments, which are relatively small, mining companies in countries like Peru and Chile have benefited from tax breaks.

In Chile, foreign mining companies in Chile, such as Canadian-owned Noranda, Falconbridge, Teck Cominco and Placer Dome, can operate under the Statute of Foreign Investment that practically frees them from any taxes. From 1991 to 2002, foreign mining companies in Chile have paid an annual average of US$160 million.

From 1990-2001, the National Copper Corporation (Codelco), the world’s single largest copper producer, paid $10.6 billion to the state while private mining companies contributed only $1.6 billion, even though the latter produced 25 percent more metals than Codelco.

In 2002, private international companies paid the Chilean state $20 million in sales tax and a tax on foreign trade, which is just 0.45 percent of their sales of $4.4 billion that year, according to information from Chilean senator Jorge Lavandero.

In Peru, tax breaks as well as tax stability agreements obtained by large mining companies during the government of former president Alberto Fujimori (1990-2000) meant that companies paid lower income taxes on their profits.

Between 1998 and 2003, income tax paid by mining companies in Peru totaled, on average, 2.7 percent of the total tax revenue received by the Peruvian state in this period, Peruvian economist Juan Aste Daffós said.

Nevertheless, Peruvian miners say they pay a lot of taxes.

Peruvian mining businessman Augusto Baertl maintains that mining is the economic activity that pays the most income tax in the country. In 2003, mining companies paid around $300 million, which is 23 percent of total income tax revenues, he said.

Aste Daffós argues that mineral prices are cyclical and for this reason a long period should be considered in order to establish the average of taxes paid rather than taking a year of high international prices like 2003 as a reference.

Over the last few years, however, it is the issue of royalties and the canon that has generated the most controversy.

In 2002, Congress modified the mining canon law, increasing it to 50 percent of income tax from 20 percent. In 2004, the distribution of the canon was modified to benefit producing districts (according to the indexes of poverty rather than the number of inhabitants in a province where the mine is located).

Although those measures seemed positive, the mining canon has been small, reaching just 0.7 percent of mining exports. The Peruvian mining canon is also very small compared with income generated by sales. An example: in the 1993-2002 period the canon paid by Minera Yanacocha, Latin America’s biggest gold producer, was just 3 percent of its mineral sales, and the canon received by Cajamarca department, where the mine is located, was equivalent only to 1.3 percent of its sales, said Aste Daffós.

Nevertheless, government officials said that with the modifications in the canon law and the boom in metals prices beginning in late 2003, the canon rose substantially. Energy and Mines Minister Glodomiro Sánchez said that in 2004 the canon rose to 450 million soles ($136 million) from 120 million soles ($36 million) paid to regions where mines operate in 2001.

Royalties in question

Last year, the legislatures in both countries sought to pass laws to oblige mining companies to make larger economic contributions by paying royalties.

Peruvian legislator Javier Diez Canseco defined royalties as "the compensation to the nation for the extraction of its natural resources" rather than as a tax.

In June 2004, Peru’s Congress approved the royalties law, which applies a charge of 1 percent on the sales of $60 million, 2 percent for sales of $60-$120 million and of 3 percent for sales over $120 million. It is estimated the state will receive around $40 million in revenues this year in royalties. All of the resources received from the royalties will go to the region where the mines are located.

Even though the bill was signed into law by the president a month later, debate on the issue has continued. One of the points in discussion is the proposal that the royalties should be linked to the level of international metals prices.

The Chilean government, on the other hand, decided that a royalty should be applied in order to set aside funds for a time when mineral resources have run out.

Nevertheless, in last August the Chilean Senate rejected the bill that set a royalty equivalent to 3 percent of mining sales. The royalties were expected to bring in revenues of $100 million which would have been used for a fund for innovation, technological research and development.

The government of President Ricardo Lagos plans to present a second bill of royalties, establishing a payment of 4 to 5 percent of operating profit above 8,000 annual tributary units, equivalent to $5 million.

The debate continues in both countries, where the mining companies argue that a measure like this will do nothing more than discourage mining investment.

In the meantime, National Society of Mining, Petroleum and Energy (SNMPE), the guild representing the mining sector, has asked the Constitutional Tribunal to declare the law unconstitutional. It argues that Peruvian legislation already contemplates an economic retribution paid to the state for the extraction of natural resources.

The Constitutional Tribunal will have to rule in the coming months on the law branded as "discriminatory" by the SNMPE. Because the level of royalties was not linked to international metals prices, the SNMPE argues that the law could even be considered a confiscation because in years when metal prices are low, since the companies would still have to pay the royalty even if they were to post losses.