Written by Carla López V., Practice Lead (Chile)
On September, 2018, a new bill was submitted before the Chilean Congress for the amendment of the specific mining royalty in Chile -in force since 2010- namely the “IEAM” (Spanish acronym for Impuesto Especifico a la Actividad Minera); a system that progressively establishes taxes on the operating margin of mining concessions. In practice, this means it applies once the operating costs have been discounted to the sale price[1].
This bill, which has been widely debated lately in Chile, is currently being discussed before the Senate’s Energy and Mining Committee, seeks to replace the IEAM with a steady 3% tax on gross sales derived from the exploitation of all concessional mineral substances, plus lithium.
This 3%, however, is a minimum floor that considers additional marginal rates indexed to the price of copper -through tranches- based on the annual average price registered on the London Metal Exchange, while also pondering discounts on marginal rates depending on the level of processing.
The resources derived from the new IEAM will be allocated 25% to a Regional Convergence Fund, integrated by the communes that belong to the regions in which mining is carried out to finance local development projects. The remaining 75% will go to finance initiatives in the respective regions, for the repair, mitigation or compensation of environmental impacts caused by the mining activity; for infrastructure development; and for investment or research in state universities.
Reactions to this amendment have varied across the political and business spectrum as it will most definitely affect the parameters under which the economic viability of mining projects is determined.
On one hand, private mining companies have declared that if the proposal is implemented in the current terms, they would see significant declines in their profits and a disincentive to investment, which would affect real profits and competitiveness.
In response, these companies have proposed to modify the current IEAM by incorporating additional regional taxes and promoting collection upon profit margin instead of sales[2], while also considering the depletion of non-renewable mineral.
However, on the other hand, there is also the general view that the current mining taxation system in Chile is insufficient and that it does not properly compensate the lessening and exhaustion of natural resources.
This, while also rebutting the “loss of profit” argument since the new IEAM is outlined to still secure a revenue surplus that by itself compensates the risk incurred into by mining companies; allows capital recovery; and ensures normal profit margins for the activity, therefore not affecting future resource allocation.
Regardless, there is a consensus on both sides that this discussion is a great opportunity to move towards a green-mining path, and that the current mining royalty is insufficient for sustainable and socially responsible mining; a royalty that which currently places Chile with one of the lowest mining tax collections in the world.
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[1] The effective IEAM rate ranges from 0.5 to 1.93% for medium-sized mining (producers with equivalent sales between 12,0000 and 50,000 metric tons of fine copper) and from 5% to 14% for large-scale mining (equivalent sales above 50,000 metric tons of fine copper), and on all concessional mineral substances. All mining operators with annual sales of less than the equivalent of 12,000 metric tons of fine copper are exempt from IEAM.
[2] Source: https://www.senado.cl/royalty-minero-empresas-apuntan-a-modificar-el-actual-impuesto-especifico
