MINING ROYALTY BILL

15 June 2021 | By María Soledad Diharasarri L. and María Valentina Walker A.

Among the many issues that are on Chile’s legislative agenda, there is one in particular that has generated opposing and controversial positions among the different parties involved. We are referring to the bill that establishes a new mining royalty.

In most of the countries of the world that have mining resources, a special and specific taxation has been implemented for the exploitation and production of this type of resources, establishing differential rates, specific charges on sales or profits, among other mechanisms and plans.

In our country, the current royalty or specific tax on mining activity (hereinafter indistinctly referred to as “STMA”), was established in 2013 and is in force until today.

The Chilean royalty is a progressive tax, which is applied to the operating margin, i.e., after deducting operating costs from the sale price of the mineral. The rate of this tax, depending on the segment, ranges from 0.5% to 1.93% for medium mining, and from 5% to 14% for large mining, with an exempt segment when annual sales are less than the equivalent of 12,000 metric tons of fine copper.

At the beginning of May of this year, the Chamber of Representatives approved a new bill that establishes “a compensation in favor of the State (Chile) for the exploitation of copper mining, lithium and all concessionable substances, equivalent to 3% of the ad valorem value of the minerals extracted”.

It also states that “In the event that the average annual price of copper, recorded according to the quotations of the London Metal Exchange, exceeds two dollars per pound, the compensation for that additional part of the price, between two dollars and two dollars and fifty cents per pound of copper, will be equivalent to 15 percent of the ad valorem amount of the annual sales; for that additional part of the price higher than two dollars and fifty cents and up to three dollars per pound, it will be equivalent to 35 five percent; for that additional part of the price above three dollars and up to three dollars and fifty cents, it will be equivalent to 50 percent; for that additional part of the price above three dollars and fifty cents and up to four dollars per pound, it will be equivalent to 60 percent; and for that additional part of the price above four dollars per pound, it will be equivalent to 75 percent”.

This new bill not only seeks to raise the minimum rate of the specific tax on mining activity to 3%, but also requires additional compensation when the price of copper is above the ranges established in the law, which are based on the average annual price recorded on the London Metal Exchange. Thus, for example, for an average price equal to 4 USD/lb, the effective rate of the specific tax on mining activity would be close to 21.5%.

This tax increase, according to experts, could considerably affect the viability and economic convenience of current and future mining projects, taking into consideration contract prices, production and exploration costs, applied technology, etc.

Additionally, and if the bill approved by the Chamber of Representatives becomes law, it must be considered that according to the data provided by the Chilean Minister of Mining and Energy, Juan Carlos Jobet, “Chile would practically become a country in which companies would have to pay double the tax they pay in other countries with which we compete to bring capital and to have international market participation in copper (…) This fact is important to keep in mind. With this tax it is not that we are a little above or below, we are completely out of range”.

Currently, the discussion of the project is in the Senate Mining and Energy Committee, and the Government expects that the project can be moderated in the next legislative stage.

 

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This information is a courtesy service of PALMA, and does not constitute an opinion or legal advise in respect to any particular case.