Chile's tax proposal could limit appeal of mining projects

Chile’s finance ministry has proposed some changes to the mining royalty bill that were well received by industry players.

While authorities seem keen to lower the burden, the proposed rates are still very high, Alicia Domínguez, tax partner and head of consulting firm EY’s energy and mining department, tells BNamericas in this interview.

Domínguez also details the advances and which problems should still be addressed.

BNamericas: Are the modifications the finance ministry proposed for the mining royalty bill a step forward?

Domínguez: The proposals contribute to the objective of preserving a competitive tax burden in Chile for the development of the mining industry and apparently do not have a substantial impact on the collection estimated by the government. The significant drop in the rate of the ad valorem component of the mining royalty constitutes a step toward recognizing how extremely onerous it could have been to continue with rates that could have reached 7%.

It is also a positive element that the rates of the mining margin component depend progressively on each company’s operating margin and no longer on copper prices, which distanced this tax from the reality of company profits.

However, it seems the rates are still very high, taking the total tax burden of companies to levels that can negatively impact the appeal of new mining projects, according to calculations by some industry players.

In this regard, it would be advisable to continue reviewing these calculations and agree on the bases of the quantitative discussion to achieve the desired total competitive load.

General agreement seems to have emerged on achieving a total tax burden that is competitive for the industry. However, consensus has not been reached on the definition of the total burden for companies. To this adds that the industry will not only be affected by the new mining royalty but also by other tax changes that are currently being discussed in congress.

Accepting the deduction of the depreciation of fixed assets in the calculation of the taxable base was also a success. But it’s incomprehensible why the reduction of pre-operational expenses was not accepted, which are essential to the exploitation of any new project.

BNamericas: What about the reduction of the ad valorem component to 1%?

Domínguez: A mining royalty is a good measure, but if the ad valorem component is a good measure depends on the perspective. From a tax collection perspective, it is a very efficient tax. But from a business perspective, a tax of this nature can become very onerous and regressive, because it does not consider ability to pay, since it doesn’t tax profits, but sales, that is, the rational thing is to understand the owner of the mineral, the State, as one more supplier of business inputs, with the difference that its value is not negotiable as in most other cases.

BNamericas: According to the proposal, companies are exempt from the ad valorem payment if the operating margin is negative. How would this negative margin be defined?

Domínguez: This is a success of the proposed modifications, which intend to mitigate the problem of ability to pay the ad valorem component.

This way, it is understood that even when there are mineral sales, the tax payment will not proceed if costs and expenses prevent the taxpayer from registering a positive [taxable mining operating income] RIOM.

The bill establishes that if the RIOM is negative, the ad valorem component will be adjusted in terms of subtracting the amount of the negative RIOM.