Why Chile could end up with a higher tax rate than other copper producers

Chile’s finance ministry has proposed a set of modifications to the mining royalty bill.

The ministry proposes a flat-rate ad valorem tax of 1% for miners that produce over 50,000t/y of copper and a tax exemption if operating margins are negative.

In addition, the proposal involves modifications of tax rates of 8%-26% on operating margins, from which operating expenses, basic inputs and depreciation could be deducted.

The changes are based on some industry requests.

But uncertainty persists regarding the impact on competitiveness and new investment.

To find out more, BNamericas talks to mining lawyer Daniel Weinstein, who is a partner at Urzúa Abogados law firm.

BNamericas: Do the finance ministry’s modifications to the planned mining royalty reform represent an advance?

Weinstein: These suggestions are an advance with respect to what was being discussed. I think the opinion of experts was heard. However, even if approved, Chile would have a higher effective tax rate than the copper-producing countries that compete with us. Obviously, this discourages investment, especially for the development of new projects.

To determine the optimal effective tax burden, one must keep in mind not how much mining companies that are already operating will earn; what must be considered is whether a potential investor who wants to develop a mining project is going to do so in Chile or in another country where they can obtain greater profitability.

BNamericas: Is the 1% flat-rate ad valorem tax a good measure?

Weinstein: More important than the ad valorem tax is the effective tax rate, how much mining companies pay in total. Having said that, it is progress that the ad valorem tax has been reduced to 1%.

BNamericas: How would the effective rate be impacted?

Weinstein: It would be heavily affected. The modifications were just released, so the numbers that have been given are preliminary, but in any case, it will be a high [tax] rate. Preliminary calculations speak of an effective rate of around 50%. Today our effective rate is 38.4%, while copper-producing countries have an average of around 40%.

If we consider this higher effective rate together with the decrease of copper ore grades from 1.3% to 0.6% over the last 20 years, and add to this the complexities of our environmental system, there is little incentive for the development of new projects. Nor should we forget that the costs of copper mining in Chile are already higher than the average for the rest of the world.

BNamericas: The new modifications include an option to be exempt from the ad valorem tax if the operating margin is negative. How would this be defined?

Weinstein: Simply put, if a company faces losses, it could be exempt from paying this tax. However, information is still lacking for further determination.

BNamericas: What about the change in rates based on operating margin? Is this still a risk?

Weinstein: This reduction is progress, but as with the ad valorem tax, I think the effective tax rate is important, which, added to the ad valorem and operating margin components, will be considerably higher than that of the copper producers with which we compete. 

In fact, only Zambia and the [Democratic Republic of the] Congo would be left with a higher tax burden than Chile, if these modifications are approved as they were proposed.