Lawmakers in Biggest Copper Nation Ratchet Up Tax Proposal

The worst-case scenario for Chilean copper producers in a debate over a new royalty system just got a lot worse.

On Monday, a congressional mining committee in the biggest copper-producing nation approved a version of the bill that would charge higher rates at times of high prices.

The original text had a flat 3% tax on sales. The new version adds marginal rates starting at 15% on sales derived from copper prices of between $2 and $2.50 a pound and as much as 75% on sales generated from prices above $4. At current prices, the effective rate would be 21.5%, although miners could discount refining costs.

Even before the modification, the industry had indicated the proposal would stifle investments. Both company and government representatives want the existing sliding tax on profit, rather than sales, to be given a chance to operate at high prices of $4-plus. While Chile’s mining society declined to comment on the modified bill, BTG Pactual analyst Cesar Perez-Novoa wrote that it “carries a severe risk of reducing the attractiveness of Chile as a mining jurisdiction.”

The bill’s proponents say the new mechanism would reap $7 billion a year, based on an average price of $3.88 a pound, at a time when Chile is looking to bolster social services and resolve lingering inequalities.

Lawmakers in Biggest Copper Nation Ratchet Up Tax Proposal

“The argument that making a percentage so high causes companies to fail is not effective because it depends on the price of copper,” said Communist Party representative Daniel Nunez, who heads the finance committee and was one of the authors of the new article. “If the price is $2.50, they will pay much less. It is viable from the point of view of the miners.”

To be sure, there’s a long way to go before the bill passes and the government has indicated it could seek to block its passage via the constitutional court on the grounds that tax measures in Chile have to be introduced by the government. In the meantime, the bill goes to the finance committee and then back for an article-by-article lower house vote before moving to senate.

“It is likely to be challenged with determination by the Executive, and might even attract lawsuits from foreign mining companies in the International Chamber of Commerce,” BTG’s Perez-Novoa wrote.

While lithium sales would be subject to the initial 3% rate, the sliding system based on prices doesn’t consider lithium. That is yet to be discussed, Nunez said.

The initial proposal, introduced in 2018 by opposition lawmakers, has gained momentum amid rallying metal prices. It would fund regional development projects, responding to the rising social and environmental standards of investors and supply chains. Countries around the region are also looking at new revenue sources to help citizens recover from the pandemic.

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