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MINING ROYALTY NEWS Peru, Chile Eye High Metals Prices (May 05, 2004)

SOUTH AMERICA The GOVERNMENT OF PERU has presented a mining royalty bill to congress for debate this week. The in...


SOUTH AMERICA The GOVERNMENT OF PERU has presented a mining royalty bill to congress for debate this week. The initiative requires mining companies to make payments, which can be deducted from future income taxes, the mining and energy ministry (MEM) said in a statement.

"We are presenting a transparent proposal that has been defended in a public hearing and we will see what support it has," said MEM minister Jaime Quijandra.

The bill involves establishing three rates of payment (1%, 2% and 3%) for each metal according to metal prices. Small-scale and artisan miners would pay zero, according to mining vice-minister Csar Polo. It is estimated the measure would raise approximately US$70 million annually, and the funds would be treated in the same way as income tax with 50% channeled to the regions via the mining canon, and 50% for the state treasury.

In comparison, a bill proposing a flat 3% royalty on mineral production, proposed by lawmaker Alejandro Or and approved by the congressional mines and energy commission in December 2003, would raise US$76 million/year in additional taxes. But the government does not support this alternative.

Although Peru’s private mining sector admits that the government’s proposal is better than Or’s, they still argue that the measure would negatively impact cash flow.
Quijandra argued that the charge would not put Peru at a disadvantage with respect to Chile: "We have a different tax structure, a different geological structure and as for its potential, we all know it’s larger than Chile’s.

The GOVERNMENT OF CHILE has recently announced its intention to introduce a new mining tax that will consist of applying a 0% to 3% charge on gross sales depending on individual companies’ operating margins.

The Chilean proposal has met a barrage of criticism from mining companies arguing that higher taxation and changing the rules of the game will frighten off investors. They have highlighted the enormous investment made under the current tax regime over the last 15 years with its important knock-on impact on the country’s infrastructure and economic development.

But a mining industry source pointed out that the introduction of a royalty was not a bad thing so long as the rules of the game weren’t changed halfway through a programmed investment, adding that the tax was common in other countries. "It is critical that tax regimes remain stable for the life of projects but the introduction of royalties will not radically change the appetite of multinationals coming to Chile," he said.

Chilean mining companies have signed contracts with the state under Foreign Investment Statute DL600 under which they have agreed to pay a higher but unchangeable rate of corporate tax. However, as DL600 also allows these companies to defer paying taxes through the accelerated depreciation of assets, many of the large multinationals operating in Chile have paid little or no income tax since starting operations. This is expected to change over the next few years as projects reach the end of accelerated depreciation, although companies can extend the life of this mechanism by initiating expansion projects.


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