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Chile’s lower house mining committee will begin debating on April 14 proposed changes to a bill that would add a new tax on the ad valorem value of copper and lithium output above certain levels.
Earlier this week, mining and energy minister Juan Carlos Jobet told BNamericas that the government is confident the bill will not progress as constitutionally the executive branch has prerogative in tax matters.
BNamericas talked with mining consultants, lawyers and industry associations about what would happen if some of the proposed modifications recently suggested by legislators are approved.
Some lawmakers want to increase from 3% to 10% the tax on copper extraction, and that when prices are over US$4.50/lb, mining companies must assign 100% of additional income to the State, while other legislators asked for a modification whereby mining companies would pay 25% of additional income if copper prices are US$2-3/lb.
Likewise, when prices are US$3-4/lb the percentage would increase to 50%, and if it reaches US$4-5/lb, 70%. If copper prices are over US$5/lb, miners would have to pay 100% of the additional income.
According to Diego Hernández, head of national mining association Sonami, the new tax could put miners’ cash flow in a complicated position.
“In a low-price scenario, a royalty on sales will most affect companies with the highest costs putting them in a delicate cash-flow position. Depending on prices, it may happen that companies won’t have operating margins to be able to pay the royalty,” he told BNamericas.
Senior consultant at CRU, Francisco Acuña, also warned of a potential drop in copper prices.
“The ad valorem royalty is on sales, but there could be a scenario with low [metals] prices where profits [of the mining companies] decrease and even so, the tax is charged on that extracted or sold. In that case there could be a risk for mining companies, because they could have red numbers and still must pay the royalty,” he told BNamericas.
If the bill is rejected in the lower house, legislators still have a chance to push for a constitutional change to advance legal initiatives like this one, which is currently the exclusive prerogative of the president, but according to lawyer Luciano Cruz, that would be a bad sign for foreign investors.
“In the first place, that would recognize that the bill is illegal as it hasn’t passed the constitutionality test, and secondly, because trying to change the constitutional rules to pass a specific bill that is known to have faults is a populist measure, especially when a rise in copper prices is combined with a constituent assembly process,” he said.
Chileans are due to go to the polls on May 15-16 to elect representatives to draw up a new constitution.
Earlier this week, Chile’s copper studies center Cesco said in a statement that what is needed is “to generate an instance of rigorous and serious dialogue in a transversal scenario. We believe the constitutional process that will soon take place in Chile can meet these requirements.”
Since the end of February, the government and mining industry leaders have argued that approval of the royalty bill would discourage investments.
CRU’s Acuña said that “the evaluation of projects will consider the low-price scenarios. [Investment] decisions that must be made now could be delayed if it isn’t clear how the tax will be, while generating uncertainty until that is clear.”
Cruz ruled out that new investment would be affected but highlighted that these initiatives “go in the opposite direction to what is needed to promote productivity and long-term growth in a sustainable way that allows us to generate wealth, instead of stifling an industry that is key to our economy.”
Photo credit: Codelco
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