The moment is today, by Pedro Francke

By: Pedro Francke, Minister of Economy and Finance

Mining is essential for the development of Peru. It is the main generator of foreign exchange and source of financing for the public treasury. To close social gaps, our country requires resources from mining.

Today, as the world is going through a new period of historically high mineral prices, that opportunity is even greater. For this reason, we need to change the mining tax regime seeking two objectives: (i) maintain its competitiveness so that investments are sustained and (ii) maximize the taxes that the State can obtain from extraordinary income due to the increase in prices. The Ministry of Economy and Finance is receiving advice from the International Monetary Fund (IMF), which has information from all countries, to propose a reform that meets both objectives.

Extraordinary income

The export prices of our main minerals began to rise in April 2020. From that date until September of this year, 27.9% of the total exported came from this higher price, that is, an additional US $ 13,673 million for that effect.

So is there room to increase the progressivity of the tax regime? Let us remember that in 2011 there was a change with the same objective, and that this modification has allowed that today we are receiving more income from higher exports. The question then is whether, preserving that scheme, is there room for additional State participation?

According to preliminary reports from the IMF, the Peruvian tax system for mining is internationally competitive, with a lower or similar burden to other countries rich in natural resources. In parallel, Peru has comparative geological advantages and lower production costs compared to countries such as Chile and Canada.

In this sense, there is room to improve the State’s participation in mining profits without affecting its competitiveness, and focusing the greatest progressiveness on large companies, which are those with the lowest average production costs. At this point it is important to specify that the mining tax scheme excludes artisanal and small producers. In 2020, only 69 companies were affected by this regime.

Can we afford to postpone this reform?

According to the BCR, the terms of trade would reach the highest point in the last 20 years between 2021 and 2022, surpassing those registered in the previous boom. Furthermore, the global trend towards an energy transition away from fossil fuels is expected to increase the demand and the price of metals such as tin and, above all, copper. For the medium and long term, it is estimated that the copper price will remain approximately 25% above its 2020 price. (See info)

We must then ask ourselves whether next year’s surpluses derived from higher mineral prices should be shared in a greater proportion between large companies and the State, or remain only in the former, most of them transnational.

Let us remember that already in 2006-2012, when another cycle of high prices was registered, we were not able to take full advantage of it because the current fiscal scheme was only created in the last quarter of 2011.

This time, we have not taken full advantage of 2020 and 2021. Will we also lose the following years?

A shared bet

The tax reform transcends the current government. It should be a shared priority of the State insofar as it is an essential instrument to finance the closing of social gaps. The Public Budget 2022, approved in Congress with 116 votes in favor and only 2 against, is a palpable example of this. The additional demands for public investment projects – which it was not possible to incorporate – totaled S / 60,000 million. And the country’s infrastructure gap reaches S / 100,000 million.

Let us remember that more than 90% of schools do not have adequate infrastructure; that 75% of health centers of the first level of care do not have the necessary capacity either; and that 50% of hospitals either. Just to give some examples.

In 2021, public investment will reach the historical record of S / 36,000 million in execution, surpassing the peak of 2018, prior to the pandemic. This improvement is the product of policies and actions taken in recent governments. One of them, the MEF technical assistance to regional and local governments, to which we are placing greater emphasis and resources, and which we will reinforce next year with a new proposal to strengthen decentralized management.

Furthermore, the reform itself, proposed to Congress and which we hope will be approved in the coming weeks, contains important measures in the same direction. For instance:

• Replicate the successful model used for the Pan American Games for large infrastructure works.

• Expand the Tax Works mechanism for expansion, rehabilitation and replacement works, for National Emergency works, as well as for operation and maintenance. Thus, for example, the highest mining taxes would not all have to be transferred to the state. Companies will have more resources that could be invested in their own areas of influence.

• Simplify and facilitate the processing of public and private investments in State entities, as well as the unlocking of paralyzed works.

Today that a new wave of Covid-19 overshadows the world, we must agree on the need to ensure greater resources to strengthen public health and to close the huge social gaps that the pandemic itself was responsible for confronting us.

The time for tax reform is today ❖