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Can LatAm unlock its mineral riches with tax breaks?
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Tax incentives could be a determining factor for Latin America to unlock its full mining potential, even for the critical minerals required for the energy transition. However, providing such breaks is more easily said than done.
According to a study prepared by industry association the International Council on Mining and Metals (ICMM), a 10% cut in corporate income tax for mining firms in Latin America could produce 1% annual GDP growth, create 400,000 jobs by 2040 and result in US$41 billion in additional tax revenues for governments over the next 17 years.
"Decreasing corporate income tax rates for mining can decrease the tax burden, increasing the region’s international competitiveness and increasing investment. This can increase both industry and broader economic output," the ICMM states in the study titled "Unlocking Prosperity: Tax Principles for Sustainable Mining". The full document can be seen here.
However, the current trend in Latin America seems to be adding to the tax burden for miners rather than offering them incentives, partly in an effort to shore up public finances, the shortage of which makes it difficult to create room for tax incentives.
"The most important Latin American countries in the mining sector have demonstrated the opposite stance, creating more tax burdens on mining. This is because there is an ideologization of the activity, associated with a serious reputational problem," Paulo Honório de Castro Júnior, president of Minas Gerais state tax law association IMDT and head of tax affairs at law firm William Freire Advogados, told BNamericas.
"In addition to not providing any specific tax benefit for mining, Brazil has just proposed a new duty, the so-called selective tax of up to 1% on the extraction of iron ore. Chile, in 2023, promoted regulatory changes that meant its royalties could reach 46.5% of the activity's net operating profit," he added.
According to Castro Júnior, the heaviest mining tax burdens in Latin America are seen in Brazil and Peru, with total levies on profits approaching 50%.
This is a concern, given that the tax structure of mining jurisdictions plays a predominant role in the development of projects to supply the energy transition.
REQUIRED INVESTMENTS
The ICMM, which is formed by major global mining and metals companies, and national, regional and commodities association members, estimates that by 2030, the total required investment to meet demand for the minerals and metals needed for the global energy transition will be between US$360 billion and US$450bn.
Latin America is competing for a share of these investments with projects in other regions across the globe, meaning that some tax incentives would help sway investors’ decisions.
"It is recommended that these countries adopt measures such as the Critical Mineral Exploration Tax Credit (CMETC), provided in Canada. But that doesn't seem to be the Latin American trend," Castro Júnior underlined.
The CMETC is a tax incentive that provides investors in companies exploring for certain critical minerals with a 30% tax credit based on the amount invested.
That tax break is offered for projects involving copper, nickel, lithium, cobalt, graphite, a rare earth element, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, a platinum group metal and uranium.
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