Chile's mining royalty bill: where it stands

The debate about Chile's mining royalty bill, currently taking place in the senate's finance committee, is expected to wrap up in the upcoming year. 

Finance minister Mario Marcel said the bill should be ready before President Gabriel Boric's wider tax reform, "which is expected in April-May."

As soon as it is approved by the senate, the bill will return to the lower house for reconciliation and then to be signed into law by Boric. It would come into force before Boric's term ends in 2025, and coinciding with the expiration of several mining contracts with tax stability signed between the State and foreign investors under law decree No. 600.

Most of these contracts expire in 2023, such as those of Lundin's Candelaria, El Abra (Freeport-McMoRan), Minera Escondida (BHP) and Cerro Colorado. Others are slated to end between 2027 and 2032, like Spence (BHP).

The finance ministry's bill, sent to congress in October, proposes an ad valorem tax with a flat rate of 1% on annual copper sales of companies profitably producing over 50,000t/y. It also imposes a tax on operating profits, with rates ranging from 8% to 26%, and allowing deductions for depreciation.

Nearly a third of the royalty's proceeds, or US$420mn, would be allotted to mining municipalities and regions to offset the effects of mining operations, Marcel told an event hosted by business association ICARE earlier this week. 

About two-thirds of the proceeds would finance R&D in the country's nascent green hydrogen industry and in the SME segment. An unspecified amount would be invested in the US$1bn revamp of the Hernán Videla Lira smelter, which is owned by national company Enami, in order to process the minerals from small and mid-sized mining in compliance of the higher environmental standards. 

The royalty bill will replace a mining tax package that collected US$1.36bn in public revenue in 2021, and which some stakeholders believe was working just fine.

"Why create something new when we have an instrument that since 2005 has been working without problems for all stakeholders – mining companies, auditors, regulators from Sernageomin and the internal revenue service," Patricio Cartagena, secretary general of the local mining chamber, tells BNamericas.

An answer could be found in a local mining production study carried out by the Cochilco state copper commission. It found that, in 2021, private mining companies accounted for 67% of national mining production, with 89% of these belonging to foreign capital. Hence, a significant part of Chilean mining's gains left the country as repatriated profits. 

Another key argument is Chile's low overall tax burden compared with other OECD countries. Since 1995, Chile has averaged a 20.7% tax burden compared with 33.8% for the rest of the OECD.

The effective tax rate paid by mining companies in Chile is around 39%, including so-called first category, additional and specific taxes on mining. The rate is in line with competing jurisdictions such as Peru, Canada, Australia and the United States, where the tax burden averages 38%, according to data from the International Monetary Fund cited by Chile's mining council.

Although the bill would only apply to new projects five years after it is enacted as law, as stipulated in Boric's investment plan, it has come under criticism for its near-term focus, "instead of preserving the competitiveness of mining for the next 30 years,” says Cartagena.

"It promises to increase tax collection through 2035. Subsequently, the pressure from a drop in production would mean that, with the lower profits sustained over time, the net effect in terms of tax collection would disappear after 2035," said Juan Ignacio Guzmán, head of consulting firm Gestión y Economía Minera, at a recent industry event.

The royalty will be applied to over 60% of the national copper production, including all Codelco mining units – Chuquicamata, Radomiro Tomic, Ministro Hales, Salvador, Andina, El Teniente and Gaby – in addition to private companies Escondida, Antofagasta Minerals, Anglo American, Minera Lumina Copper, Lundin, Glencore, Teck, Freeport-McMoRan, Sierra Gorda SCM, Minera Collahuasi and Capstone Copper.

Picture: President Boric (AFP)