Chile launches mining tax hike

After several years of discussion, as of January 1, 2024, a new mining royalty came into effect in Chile with which US$1,350 million will be collected annually—0.45% of its GDP—from large companies.

With this, taking advantage of a new supercycle in the prices of metals such as copper, which as a result of the pandemic broke and remains at the threshold of US$3.80 per pound – even managing to reach US$4.70 – the Government of Gabriel Boric established consensus with the Senate to execute this reform in order to close social gaps.

For example, US$450 million from the new revenue will be allocated to regional governments and municipalities to serve the most vulnerable communities. “We were able to generate agreements and innovative solutions that satisfied all the sectors involved,” said the Minister of Finance, Mario Marcel, in a statement.

The tax brings an ad valorem component and one subject to the operating margin of between 8% and 26% for mining firms that produce more than 50,000 tons of copper, and sets a maximum effective tax rate of 46.5%: that is, this It is your roof. For those that in the last 6 years have an average of less than 80,000 tons, it will be 45.5%. Small mining (less than 12,000 tons) is exempt, and medium mining (less than 50,000 tons) will only progressively contribute between 0.4% and 4.4%.

Peru still has time (but it seems impossible)

In the year of the bicentennial, Pedro Francke led the Ministry of Economy and Finance (MEF), and in accordance with the mantra of “no more poor people in a rich country”, which led Pedro Castillo to the presidency, he outlined a reform to attract more income taking advantage of the minerals boom.

They expected to collect an additional S/12,000 million per year, contemplating not only mining, but also VAT and Income Tax.

The International Monetary Fund (IMF) considered that increasing the tax burden on mining was not going to make companies less competitive; However, Congress did not grant all the powers and both Castillo and the then president of the Council of Ministers, Mirtha Vásquez, remained silent and left Francke alone.

“There is a big issue of lack of political will from the Government. With (Alberto) Otárola’s message at CADE they clearly show that there is a close alliance between the Government and the large economic groups,” Francke reflects for La República.

Economist Epifanio Baca adds that Castillo’s abandonment of ideals meant the loss of a great opportunity to get closer to what is desired from mining activity: fair taxation.

“It is impossible now to think about something like this (reform) due to the political correlation of Congress and the conservative sectors of the Executive. In 2021, the highest tax collection rates were recorded and it could have been better,” he pointed out.

A sacred duty

The Constitution states in its article 66 that renewable and non-renewable natural resources are the nation’s heritage and the State is sovereign in their use.

Here, Francke points out that the conditions are still conducive to raising the rate – currently at 30% – because the companies, from their investment projects, contemplated much lower profit margins, but now we see copper close to US$3.90. the pound and gold at US$2,000 an ounce. “Of course they pay Income Tax and there is already a royalty, but we have high prices. Chile and Colombia have already readjusted their rates upwards. There is space,” he concludes.

The word

Pedro Francke, former Minister of Economy and Finance

“Copper is at US$3.90 and gold at US$2,000. The projects that were carried out considered lower prices and now have a very large profit. “More income needs to be captured.”

Figures

• US$450 million of the proceeds will go to Chilean subnational governments.
• 29.5% is the Income Tax on mining in Peru.
• S/12,000 million was expected to be raised with Francke’s truncated reform in the MEF.