According to experts, maintaining a stable tax burden is the most important measure for mining investment promised by the “miscellaneous” bill.
A few years ago, uncertainty surrounding what would happen with the mining royalty was enough to halt investments by several companies. This was, for example, one of the reasons that delayed the expansion of El Abra in 2021, an initiative presented this year that will cost US$7.5 billion.
With the enactment of the mining royalty in 2023, many of those uncertainties were cleared. Today, the government’s proposal for tax stability goes even further, providing greater certainty to the sector.
The law that established the mining royalty respected the pre-existing stability agreements of projects already covered under DL 600 or other previous regimes. It also established a “maximum combined effective tax burden—royalty plus first-category corporate tax, plus final taxes—which sets a ceiling for predictability,” note Juan Cristóbal Ciudad, Head of Macroeconomic and Market Analysis at Plusmining, and Fiorella Ulloa, Head of Regulatory and Political Analysis at the same consultancy.
The government’s proposal seeks to expand that certainty regarding the taxes applied to large investment projects over the long term. “The new proposal goes further and aims to close all gaps, including the royalty, corporate tax, depreciation rules, the use of losses, and VAT recovery, in addition to providing protection against new mining taxes or increases in mining fees.
With these measures, a much higher standard of legal certainty would be achieved, setting a very high bar in the region in terms of mining competitiveness,” says Andrés Martínez, Head Partner of Legal and Tax Consulting at KPMG Chile.
Ciudad and Ulloa agree that the proposal closes a gap that emerged after the repeal of DL 600 in 2016. Specifically for mining, where investment cycles range from 10 to 20 years and the risk of post-investment fiscal redesign is one of the most important factors in capital allocation decisions, this is the most significant measure of the bill, both experts note.
“This new tax stability regime would neither remove rights nor impose new burdens on mining royalty taxpayers. It would simply stabilize the mining royalty rules for a certain period, ensuring that new mining investments protected by this stability are not exposed to future changes that could make their tax burden more onerous,” says Alicia Domínguez, Head Partner of Energy and Mining at EY.
However, doubts about the bill remain. “The cost, as a trade-off, is real: it limits the State’s future capacity to recalibrate the royalty and may create asymmetries between old and new operations with very different tax burdens depending on when they entered the regime,” say Plusmining consultants.
It is also unclear which types of projects would be eligible for tax stability for mining companies. “How the law is ultimately written is very important to determine whether all investments will be subject to this change or not, because in mining US$50 million is not much. This implies that there could be hundreds of investments per year that could fall under this law,” says Juan Ignacio Guzmán, CEO of GEM Mining Consulting.
The expert believes that “it does not make much sense to have tax stability across the board.” More logically, he says, it should benefit only new projects or expansions and extensions of existing mines.
Source: El Mercurio