Miners in Chile to pay more taxes as long-awaited reform approved

La Moneda Palace has housed the presidential branch of Chile’s national government since 1846. (Image courtesy of Chofaska | Wikimedia Commons.)

Chilean lawmakers have approved an amended mining royalty bill, in the works for almost two years, which will require companies operating in the country pay more taxes and royalties to the government.

The bill, endorsed by the Senate last week, was approved by a vote of 101 in favour to 24 against on Wednesday evening. It now requires only the signature of President Gabriel Boric, who has publicly backed it, to become law. 

The bill sets up a maximum tax rate of around 47% for companies that produce over 80,000 tonnes of fine copper a year, considered high by the industry.

It also imposes a flat-rate ad valorem tax of 1% on miners that produce more than 50,000 tonnes per year, as well as an additional 8% to 26% tax depending on the miner’s operating margin.

Depreciation, as well as supply and work costs, would be taken into consideration in calculating a company’s returns.

Mining companies in Chile, the world’s top producer of copper and the no.2 producer of lithium, currently have a tax burden of 41% to 44% which is what main competitors, such as Peru, impose on large producers.

The tax ceiling for units of giant mining companies, including BHP (ASX: BHP), Anglo American (LON: AAL) and Teck Resources (TSX: TECK.A | TECK.B) (NYSE: TECK), was the focus of debate for months as Boric’s administration attempted to increase its take of earnings, without undermining Chile’s competitiveness.

End to uncertainty

Mining association Sonami expressed relief that the measure ended uncertainty over the type of reform lawmakers would ultimately adopt.

“It puts an end to a period of almost 5 years of uncertainty for the sector, which hurt the country’s main productive activity,” Sonami president Jorge Riesco said in a statement.

The association described the final legislative language as “better” than what was initially proposed by the government, giving credit to Finance Minister Mario Marcel for introducing industry-friendly revisions.

The divisive bill has not left everyone satisfied, with some criticizing the “ad valorem” clause. “It creates the obligation to pay the tax even when there are no profits,” explained mining law advisor and academic Maria Paz Pulga.

“If you sell in periods of low prices, you make a loss not only in terms of profit, but also because you have to pay the tax,” Puga noted.

The approved bill indicates that firms with negative operating profits will not have to pay the ad valorem component of the tax.

Marcel applauded the vote result, highlighting that the higher government take required of miners would address past abuses.

“With this legislation, we seek to avoid what happened many times with our country’s natural riches: they were exploited, they disappeared, which left very little for the country and its future development,” he said in a statement.

The new tax scheme, effective on January 1st, 2024, would inject about $1.5 billion a year into the state’s coffers, according to official figures. From that figure, nearly $450 million will be distributed to regional governments for social spending.