Chile proposes overhaul of mining royalty bill

Bnamericas Published: Thursday, October 27, 2022
Chile proposes overhaul of mining royalty bill

Chile’s finance ministry has proposed changes to the mining royalty bill that is in congress and that would replace the current specific tax on mining. 

The new proposals include a flat rate ad valorem levy of 1% on copper production above 50,000t/y, exempting those with lower output, and modifying the rate on operating profits to between 8% and 26%, after depreciation. 

The previous proposal put the rate on sales at 1-4% depending on production, but also over 50,000t/y. 

Finance minister Mario Marcel presented the proposed changes to the senate mining committee on Wednesday. 

If operating profits are negative because of the effect of the royalty, the company concerned would be exempt from payments.

The tax on operating profits would no longer be based on the price of copper, something that was requested by mining industry representatives who participated in the senate hearings on the bill. 

Mining association Sonami described the new proposals as “worrying.” Setting the ad valorem rate at 1% will continue to imply a high tax burden, even above 55%, the trade group said in a statement.

If approved, "The large mining companies in our country would be left with high tax rates and well above other mining countries, such as Peru and Australia, which will severely affect our competitiveness," said Sonami head Jorge Riesco.

The effective rates in Australia, Canada and Peru do not exceed 45%, Sonami said, adding that copper production in Chile has been stagnant for the last 18 years. This year it will fall 5-6%, according to state copper commission Cochilco.

The finance ministry’s proposals seek to collect an additional 0.6% of GDP in taxes and to allocate them, in large part, to local and regional governments, with priority given to mining areas. Some US$20mn would be used to offset the impacts of mineral extraction, US$60mn would go to a communal municipal fund and more than US$300mn to regional development, the promotion of investment projects and scientific and technological research, the ministry said in a statement.

Daniel Weinstein, a partner at law firm Urzúa Abogados and a mining expert, told BNamericas that “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%.

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

Mining represents about 15% of Chile’s GDP, contributing almost US$10bn to fiscal coffers in 2021 or 13% of government revenue.

Uncertainty persists and it remains to be seen how the bill, which has been under discussion for nearly four years, finally emerges. It would still need to go back to the lower house.

Experts say it is necessary to find a balance between tax collection and competitiveness to ensure new mining investment and, as a result, more income for the country.

Regarding a royalty on lithium, it is still not defined, said the president of the senate mining committee Loreto Carvajal. The country still has to decide on the governance framework of lithium, she said.

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