Chile's royalty bill debate 'has reached a middle point'

Chile is readying adjustments to its mining code as it continues to debate a mining royalty bill.

The revamped code takes effect in February 2023 and will bring increases in the costs of annual mining concession fees and a new coordinate system for the delimitation of mining properties. Experts have indicated that the effects of the changes to the code will only be evident once it is in place and may require further reforms. 

The royalty bill, meanwhile, is still under analysis after the latest modifications presented by the finance ministry, which managed to address part of the concerns expressed by the industry.

The government proposal now sets a rate based on operating profits instead of on copper prices and reduces the ad valorem component to 1% on copper sales, with exemptions for those companies that have losses as a result of its application. In addition, it included depreciation as part of the calculation of operating earnings.

To get a fresh take on the particularities of these legislative matters, BNamericas spoke with Rony Zimerman, lead attorney in the natural resources and mining area at law firm Lembeye.

BNamericas: What do you think of the finance ministry's modifications to the royalty bill?

Zimerman: The modifications are a move in the right direction. Industry concerns appear to have been heard and the form and levels of taxation were moderated. The ad valorem tax was substantially lowered and a payment exemption regarding the ad valorem tax was allowed where a company can show losses. Additionally, the progressive tax rate was reduced and a deduction was allowed with respect to depreciation that was not in the previous drafts. We appear to have reached a middle point, although studies still confirm that the effective tax rate will go up quite a bit.

Chile has an effective rate of around 37%. With this model it will rise by 10 points. In other words, we would be left with a higher rate than Peru, which reaches 42%. With the initial proposal, it was estimated that the effective rate would reach close to 60%. Now we are down to 47%. In any case, there will be a significant increase for copper mining.

BNamericas: About the ad valorem tax on copper sales, should it still be included in the bill?

Zimerman: I don't like ad valorem, because if a company is not profitable and yet is still subject to this tax   on sales, clearly there is a disincentive to investment. It will be necessary to see how the new provision will be applied in the case that companies are having losses. As a lawyer who works with foreign investors, I don't think it's wise to impose this type of tax on an industry that is already in a difficult situation.

BNamericas: What would you salvage from the royalty bill?

Zimerman: This law is more specific regarding where the funds will go, which will be the municipalities and the places where mining operations are carried out. And the sums reaching these areas will be greater than occurs today. This is positive.

BNamericas: What should the new mining tax consider?

Zimerman: The main thing is to encourage mining. Steps must be taken to bring in more exploration investment. In Chile the costs are high – for example it’s cheaper to undertake exploration in the state of Nevada, in the US, than it is here. Clients mention the costs of labor, energy, water, etc. which they see as high in the Chilean sector.  In addition, Chile has  a geology with increasingly lower grades. Chile has many challenges to take advantage of its resources. With more taxes, competitiveness will become more difficult.

BNamericas: Was it necessary to create a new tax model, or would it have been enough to have modified the current specific mining tax?

Zimerman: This is a political issue. The impetus to impose a new royalty dates from before the recent constituent process [to draft a new constitution] when the discussion regarding mining companies' contributions to the Chilean economy became a national issue. There is certainly in the general public a lack of understanding regarding the real contribution that mining makes to the economy of this country. There is a lack of understanding of the mining investment cycle and risks, as most mining projects lose money before they earn any, if any. They can spend more than 15 years investing millions, before achieving and positive financial results.

Also the political impulse to collect more is focused on large companies that, mainly, are foreign owned in Chile which may make it easier to go after this industry. But the authority must consider the jobs these project generate, the taxes they currentlypay, the benefits through the development of secondary clusters of actors and suppliers, etc…. In other words, having an active and healthy industry is much better than having a higher tax rate and but far less investment.

BNamericas: How do you see the current mining scenario?

Zimerman: You've had a period of great uncertainty in recent years for investments. Before there was stability and certainty. It was said that in comparison with other regional jurisdictions, perhaps in Chile there was more bureaucracy, the mining costs were more expensive, but ultimately the situation was more certain and this permitted mining investment. On the other hand, in recent years, what I’ve heard the most from clients are questions about what’s happening with the constituent process, with the social unrest, with nationalization, with the royalty, with the new modifications to the mining code, with the intricacies of the formation of the lithium industry, permitting matters etc.

BNamericas: What do you think of the reforms to the mining code?

Zimerman: It’s the most important mining reform carried out in Chile since the 1980s [although] there was little discussion, publicly, within the industry or in the legislateure regarding this modification. I think there are some changes that move in the right direction, such as the proposal to progressively increase concession fees. This seeks to address a problem regarding the ease with which companies formed and held large numbers of mining concessions without being obligated or incentivized to explore [or exploit] them because the constitution and holding fees were cheap and there was no other requirement than to pay an annual fee.

The concept of “use it or lose it” which I just noted is similar to what currently exists regarding water rights - where those who do not use their water rights will be subject to increasing annual fees. I think the result could be positive, it may , allow third parties to better access mining concessions that are sitting idle, and make the system more dynamic. Importantly, under this new mining fee system   the higher annual fee costs can be lowered if the company demonstrates that it is actually using the mine [the concession] or if it is in the process of obtaining environmental approvals regarding such concessions. But regulations are still lacking to see how the new rates will be applied and how they will be verified if these concessions are used or not.

BNamericas: What do you think of the obligation to register the new coordinates of mining properties in the registry of mines within specific timeframes?

Zimerman: The mining registries are often overwhelmed and I don't see the deadlines that were given to make the inscriptions in both [mining and geology bureau] Sernageomin and the registry as feasible and the sanctions for not registering in time or registering incorrectly are severe.

BNamericas: What do you think of the hoarding of mining concessions? Will it be possible to eradicate it with the reformed mining code?

Zimerman: This is related to the earlier question regarding changes to the mining license fees and the incentive that mining companies will have to let go of concessions they are not actively exploring or exploiting.  I think that the new incentives will help this process or “hoarding” as you note and may make the concessions market more dynamic, permitting greater access and exploration.