Chilean Government Rethinks Mining Taxation Plan

The country’s finance ministry has added proposals to the bill being debated in the Senate that would simplify the proposal for mining royalty payments and reduce the ad valorem element

A miner working in a copper mine operated by Chilean state-owned company Codelco. Source: Bloomberg
October 26, 2022 | 11:51 AM

Read this story in

Spanish

Santiago — Chile’s Ministry of Finance has presented a set of proposals to the Senate’s mining and energy commission that “significantly reformulate” the mining royalty bill the upper house is currently discussing, according to a ministry press release.

The proposals include a simplification and reduction of the ad valorem component, and a change in the proposed variable tax rate, which will be determined on the basis of mining operating margins instead of copper prices.

The reduction or elimination of the ad valorem component would apply for companies that could face operating losses due to its application, while currency depreciation would be taken into account as part of the calculation of mining operating margins.

PUBLICIDAD

What would the changes imply?

Broadly speaking, the government proposal would establish a flat-rate ad valorem tax of 1% for large copper mining projects whose exploitation exceeds 50,000 tons, thus excluding medium-sized mining operations.

“In the event that the operating margin is negative, the payment of this tax will not be applicable,” according to the finance ministry’s proposals.

Likewise, the scale of rates to apply the tax would be modified according to the operating margin of the mining companies, which will fluctuate between 8% and 26%. For the calculation of the operating margin, the expenses of the production site, raw materials and depreciation may also be discounted.

“Considering these changes, it is estimated that mining royalties would inject an additional 0.6% of GDP, of which 0.46% of GDP would be the result of the new structure, and the remaining 0.15% would be the result of the growth in production and costs,” the proposals state.

PUBLICIDAD

How would the revenues be collected?

The royalty project is part of the tax reform proposal of President Gabriel Boric, which aims to raise 3.6% of GDP.

Photo: Chilean Finance Ministrydfd

With the new amendments to the royalty bill, new recipients are incorporated, which would distribute a significant part of the resources received to local and regional governments, with special priority to those in which mining takes place.

To compensate for the negative external factors affecting mineral extraction, a total of $20 million will be distributed among the 25 mining communes that have mining operations within their territories and which are subject to the payment of the royalty, according to the ministry.

In addition, a contribution to the so-called municipal common fund of $60 million is proposed, which would double what is currently paid to the treasury, and $280 million would be made available for another regional productivity and development fund.

An ongoing debate

According to the government, the modifications proposed are the result of several weeks of conversations with legislators and representatives of the mining industry.

“We are grateful for the conversations held in recent weeks, which have allowed us to find an alternative that better balances the tax collection objectives with the growth and development of the industry,” Finance Minister Mario Marcel said.

PUBLICIDAD

He added that the government also considered proposals made by specialists and academics during hearings on the bill in the Senate.

According to a report released on Friday by think tank CEP, the proposal would raise the total tax burden for large copper mining companies to between 47% and 74% of profits, depending on the price of metals.

Meanwhile, companies with a production of fewer than 100,000 tons per year would be taxed at between 56% and 70%,above the current range of 36% and 43%. That would put Chile above the tax rates of other copper-producing countries, affecting lower-margin companies more intensely, according to analysts.