'More is not always collected by creating more taxes'

Chile’s recently approved mining royalty bill will be applied to large-scale copper operations as of next January and is part of a package of tax reforms that the government of Gabriel Boric is pushing to obtain more revenue for social programs and economic development.

Among the positive aspects of the royalty, players in the sector have highlighted the end of the tax’s uncertainty. The levy will be on mining companies that produce the equivalent of or greater than 50,000t/y of fine copper, allocating part of the resources to three funds that will total US$450mn to benefit regional governments, municipalities and especially mining areas.

However, there is still concern about how the royalty will be applied, what will be the mechanism for collecting and distributing the resources, and what the impact of the tax reform that is still under discussion in Chile will be. To find out more, BNamericas speaks with Andrés Ossandón, a tax expert at law firm Arteaga Gorziglia.

BNamericas: What do you think of the mining royalty as a tax scheme?

Ossandón: It’s a good bill. Although the rates increased and an ad valorem tax is established on the sale of the mining product [copper], the maximum rates as a tax burden are reasonable although slightly higher than in countries with which we compete, such as Peru and Australia. Chile continues to be competitive in variables such as labor costs, legal stability and the rule of law.

BNamericas: Players in the sector claimed that an incentive mechanism for investment should have been included, such as tax invariability.

Ossandón: Mining investment is long term and needs certainties, such as taxes. If the tax is high, let's keep it high for the duration of the investment and don't change the rules in the meantime. This bill was the result of an agreement between different positions and political parties in congress, but nothing guarantees that it won’t be discussed again. For this reason, a mechanism like the one that existed in Chile until 2015 was lacking, to guarantee the investor that the rules would remain unchanged during the life of a mining project. Several mining companies have invariability pacts that will expire this year or in 2030.

BNamericas: What do you think of the ad valorem component that will be levied on annual copper sales?

Ossandón: In general terms, I’m not in favor of taxes that don’t tax the taxpayer's income, and this is a tax that is based on sales. In short, they discourage investment.

However, it was reflected in the bill that if the operating profit is negative, the ad valorem tax decreases or will be reduced to zero as a safeguard so that the company doesn’t pay the tax in a loss situation, when profits aren't generated or when the tax burden is excessive.

BNamericas: What will be the mechanism for determining the collection and distribution of the royalty?

Ossandón: The internal revenue service [SII] plays a fundamental role in determining taxes, and the general treasury is in charge of collection. The budget law, meanwhile, distributes the collection, both derived from taxes and other means of financing, and assigns the resources annually.

A part of the royalty resources will be used to create three funds that together add up to US$450mn and this financing must be determined by a specific law and by the budget law. Finally, it’s the State that will allocate these resources.

BNamericas: How can oversight of royalty collection be strengthened?

Ossandón: Due to the important role of large-scale copper mining in the national context, these companies are constantly supervised, and they are the first to comply with tax regulations. Certainly the State has to protect itself and the SII has many oversight powers, like customs, and both receive a lot of information from third parties, such as banks, financial institutions, public organizations, etc. These institutions cross-check their data to verify everything declared by the taxpayers.

The royalty law will maintain the obligation to report the financial statements of mining companies to the securities regulator [CMF]. It also creates an additional mechanism … for the declassification of information that did not exist before. In other words, there will be more information to control tax obligations. However, it’s very important that the tax authority and the different agencies always incorporate technological improvements to improve control mechanisms.

BNamericas: Is it positive that a country bases a large part of its financing on tax collection?

Ossandón: No. Taxes are necessary for the State to cover certain expenses. But the State must also create the conditions for taxpayers to generate income on which taxes can be collected. Without income, for many types of taxes that exist, there will be no basis on which to apply taxes.

It must be a priority for the State to generate the necessary incentives and conditions so that all types of investors can invest and develop their activities freely under the rule of law and so that income, in turn, is taxed with proportional and fair taxes, and not confiscatory or arbitrary ones. More is not always collected by creating more taxes. Many times more is collected by creating the conditions for the generation of wealth, investment and income.

BNamericas: What do you think of the government's tax reform bill that was rejected in March by congress and is still under discussion?

Ossandón: It contemplates different tax reforms. One of them is the royalty, as well as adjustments or modifications and new rules to the income law, tax code, VAT law and other regulatory areas.

A positive element [of the rejected bill] was to offer a support mechanism for small and medium-sized enterprises [SMEs], whose sector is temporarily subject to a reduced income tax with a rate of 10% that was established as assistance during the pandemic, and that next year it will suddenly increase to 25%.

The government's tax bill proposed increasing this tax progressively and not all at once. It was a measure to benefit SMEs. However, there were adjustments and modifications that weren't good for the investment environment in the country, such as establishing taxes on retained earnings [in investment companies].

In addition, it established a wealth tax that has been proven, in foreign jurisdictions, not to be a good collection mechanism because it ends up scaring away investors. I’ve seen how taxpayers change their investment decisions and postpone their projects in the face of this type of tax. These elements should have been separated to achieve the approval that the government sought.