Written by Ian Cardenas, Paralegal
A mining royalty consists of a specific tax levied on large mining companies in consideration of the fact that they exploit limited and non-renewable natural resources. While the mining sector will often react negatively to the though of additional taxes, the philosophy behind a mining royalty is that the communities and areas where multinational mining companies work in should also be able to enjoy and share in the vast profits that these operations see.
In Chile, this government-backed initiative was promoted with the aim of modifying the taxes that large companies in the mining sector pay, while establishing a wider distribution of resources to regional governments and municipalities throughout the country.
After a five-year process, Congress has now passed the new mining royalty regime into law. This measure is estimated to generate tax revenues of approximately 0.4% of the Gross Domestic Product (GDP) and, according to official figures, around 450 million additional dollars will be allocated to regional governments and municipalities through three specific funds. This initiative can undoubtedly contribute to the decentralized development of the country, especially in the municipalities where mining companies are located.
In the words of Finance Minister Mario Marcel. “On our part there has been every willingness to help bring positions closer together and generate a new royalty that increases fiscal resources which, in turn, can also be channeled in large part to the regions and municipalities, including those that are most affected by mining activity. And also to be able to invest from the State in matters that help to diversify the country’s productive base”.
On the other hand, the Undersecretary of Regional and Administrative Development (Subdere), Nicolás Cataldo, highlighted:
We have very good news for the country’s municipalities, as the bill creates two new funds that will go to municipalities that are more dependent on the Common Municipal Fund, which have less permanent income and need it most. And also to those mining municipalities that assume the negative externalities of the mining process.”
After the approval of the initiative, it has been noted how the project was able to reach the necessary consensus for its progress. Through dialogue it has been possible to gather suggestions from senators, trade unions and other guests to generate mechanisms for fair remuneration for the exploitation of natural resources without losing competitiveness in international markets.
Now, the President’s signature is the last step for the mining royalty to be approved. However, its regulations state that it will not come into force until 2024, and it will be added to the 2024 and 2025 Budget Law.
The scale of rates is modified to apply the tax based on the operating margin of mining companies producing more than 50,000 metric tons of fine copper, which will fluctuate between 8% and 26%. For the calculation of the operating margin, it is allowed to deduct the expenses of the production site, inputs and depreciation.
In addition, it was proposed to establish an ad valorem tax at a flat rate of 1% for large copper miners whose production exceeds 50,000 metric tons of fine copper, thus excluding medium-sized miners. If the operating margin is negative, this tax will not be payable.
How the royalties will be distributed
The proceeds of this tax will be distributed via 3 specifically created funds:
- The Externalities Compensation Fund for Mining Communities will receive an injection of US$ 55 million per year (800,000 UTM), which represents an increase of US$ 35 million over what was initially proposed.
- The Territorial Equity Support Fund will have resources of US$ 170 million per year (2,500,000 UTM), an increase of US$ 100 million. In addition, it is established that the previous year’s income will be considered in the calculation, and that the payment will be made in four annual instalments instead of two.
- The Regional Fund for Productivity and Development will receive an annual contribution of US$ 225 million, and will be distributed according to the rules of the National Fund for Regional Development.
Finally, the funds for municipal benefit will be freely available and may be used without time limits, and may be accumulated from one year to the next. In addition, a rule of publicity and control of the use of the resources is added, and Congress must be informed about it.