Proposed changes to Chile’s legislation have caused controversy within the local and international mining industry.
Mining is a crucial component of Chile’s overall economy. The country is the world’s largest producer of copper with a total 417,279t mined in April 2023 alone.
Chile also contains abundant reserves of gold, silver, and has uncovered significant amounts of lithium. Any changes to the country’s legislation, particularly with regard to fiscal matters, will be felt globally.
New royalty proposed
In May 2023, the Chilean government introduced a large-scale mining royalty bill, with which it seeks to modify the taxes paid by large companies by establishing a maximum potential tax burden.
According to the government, the maximum potential tax burden establishes a ceiling that the large mining companies will pay. It jointly considers payment of the specific tax or royalty, the first category tax, and final additional taxes.
This means that if the sum of these taxes exceeds said limit, the royalty will be adjusted until it reaches the maximum percentage established by law.
The bill establishes a maximum potential tax burden differentiated according to the level of production of each large mining company.
The maximum potential tax burden differentiated according to the level of production is:
- Companies that produce more than 80,000 metric tons of fine copper: 46.5% on the adjusted mining operational taxable income (RIOMA)
- Companies that produce between 50,000 and 80,000 metric tons of fine copper: 45.5% on the adjusted mining operational taxable income (RIOMA)
The government has said the initiative will establish the distribution of resources worth US$450M to regional governments and municipalities throughout Chile.
For the copper miners in particular, the additional costs will also come with new red tape and overheads in a country that is already not the easiest to operate in.
Mining Royalty bill amendments
In April, the Chilean government introduced amendments to a bill the Senate is considering on taxation of mining royalties.
According to EY Global, the changes would (i) require financial statements to be reported; (ii) include start-up and organization expenses in the taxable base of the margin component of the royalty; and (iii) cap the taxation of mining royalties at 48%.
The amendments include three fundamentals:
1. Maintaining the obligation to report financial statements to the Financial Market Commission (CMF)
Currently, mining companies subject to tax stability (under the now-repealed Decree Law 600) are required to report their audited financial statements to the CMF on a quarterly basis. However, these obligations also expire when the respective agreements do (there are several agreements under Decree Law 600, which, according to the Ministry of Finance, conclude in 2023). Considering that the information historically reported to the CMF through audited financial statements has been deemed useful for the design of public policies, the amendments apply this duty to report (also on a quarterly basis) to taxpayers in the mining industry generally.
2. Reinstating organization and start-up expenses as a cost for calculating the taxable base of the margin component of the royalty
In the project approved by the Chamber of Deputies, the taxable base of the margin component of the royalty, called “RIOMA” (Adjusted Mining Operational Income), does not consider start-up and operation expenses to be deductible (unlike the specific tax on mining currently in force). The amendments allow these types of expenses to be amortized over a six-year period, which is the maximum period established for income tax purposes. Therefore, if amortization for income tax purposes was accomplished in a period of less than six years, the RIOMA will have to be adjusted so that a six-year amortization is reflected.
3. Establishing a 48% maximum potential tax burden
The amendments cap the maximum taxation applicable to mining royalty taxpayers (called the maximum potential tax burden), including income tax, royalty, and final taxes (i.e., global complementary or additional tax) to which their owners will be subject upon profit distributions. Specifically, when the sum of the first category tax, mining royalty, and final tax that the owners would pay (assuming they distribute 100% of profits) exceeds 48% of the operational profitability — defined as RIOMA before taxes — the royalty will be adjusted so that it does not exceed 48%.
New rules on future lithium contracts in Salar de Atacama
In late May, the executive vice President of the Chilean Economic Development Agency (CORFO) delivered a document to the chairman of the state-owned copper company (CODELCO) that formalizes the role of the public company as state representative in defining future contracts with interested companies.
CORFO and CODELCO met to start the process that will directly incorporate the Chilean State into lithium production operations in the Salar de Atacama. Their aim is to begin to implement the main points contained in the National Lithium Strategy presented last April.
As owner of the mining activities in the Salar de Atacama and the entity responsible for carrying out operations there that generate the greatest benefits for the country and surrounding communities, CORFO has established basic conditions for a future exploitation contract by means of a letter.
Contract conditions
The basic conditions that CORFO has established for a future lease of its activities emphasize the maintenance of benefits for the state, environmental issues, relations with local communities and the territory, financing research and development (R+D) initiatives, scientific-technological cooperation, and preferential prices for lithium products for companies that add value in Chile:
- Maintain the benefits that the state currently receives, through lease income collected by CORFO, as well as other contributions that global mining company SQM (Sociedad Química y Minera) has committed to with the regional government, local governments, and the indigenous communities surrounding the Salar
- Maintain and improve the application of the clauses that allow the financing of R+D activities in Chile, especially in the regions where lithium is exploited, with the aim of developing and generating knowledge, technology, and capacities to promote socially sustainable development and economic progress
- Maintain and update the application of the clauses that provide for the sale of lithium products that are sold at preferential prices to companies that offer to develop productive activities of greater added value in Chile
- Update and strengthen the commitments to environmental care, in accordance with the legal regulations in force in Chile and the international standards that define the framework for implementing the national lithium strategy, in order that they tend to a sustainable operation in the long term
- Commit to the technical analysis and subsequent implementation of new lithium extraction technologies and, in general, production processes that ensure care for the environment, especially in the areas of hydrogeology, water, and energy, and that contribute as much as possible to improving the living conditions of local communities in the Salar de Atacama and Antofagasta region
- Commit to implementing the highest standards of permanent, transparent, and participatory relationship with the indigenous communities surrounding the Salar de Atacama
- Commit to developing scientific-technological cooperation activities and knowledge transfer
