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The tax burden of mining companies in Peru is already higher than the rates in Chile, Canada and Australia. (Photo: Government of Peru)
Wednesday, August 25, 2021
Perspectives

Peru: Higher Mining Taxes Will Hurt Investment


Raising mining taxes will hurt competitiveness and foreign investment, experts warn.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Peru’s new finance minister, Pedro Francke, told Reuters Aug. 9 that the government can raise mining taxes without diminishing the sector’s competitiveness. The government heavily relies on taxes from the mining sector, and President Pedro Castillo has vowed to implement more social programs to help the poor. How much could the government seek to raise mining taxes, and how much success will it have at getting such a hike through Congress? How strong are the Peruvian government’s finances, and to what extent are mining tax increases needed for the country’s fiscal stability? Is Francke right that increased taxes in the sector would not harm Peru’s competitiveness and ability to attract investment?

Ricardo Labó, mineral economist and former vice minister of mines of Peru: Compared to previous taxation changes in Peru’s mining sector, this time there is still uncertainty on when and how those changes will happen. Finance Minister Francke recently announced that he will send Congress a proposal before the end of the year, with approval expected next year. However, the government has released no details other than what was announced during the campaign: changing the mining royalty scheme, creating an additional tax or modifying the income tax rate. Peru’s mining tax burden is already around 47-50 percent. Any change needs to be carefully assessed in terms of its impact on competitiveness, which does not only depend on taxation. If a proposal hasn’t been made, how can the government be so sure that it won’t affect competitiveness? So far, the government has been consistent in starting to apply what its platform mentions. In terms of taxation, the plan states that the government’s share from mining should rise to 80 percent. The Perú Libre party’s founder and secretary general has reconfirmed this in recent media interviews. However, the government hasn’t approached mining companies to start any discussion about this topic. By this time of the year in 2011, then-President Ollanta Humala’s government had already delineated the structure of the royalties and the Special Mining Tax, and by September, Congress had already approved those changes. The current government has started to make announcements that will require it to increase its budget to fulfill its populist promises. For now, the increase in metals prices will help the government avoid more fiscal deficits, but the mineral’s markets are volatile, and high prices won’t last forever. What the government really needs to focus on is improving the management of the mining taxes already being paid; the execution record of the regional governments’ budgets is less than 60 percent, so giving them more resources won’t solve the issues the country needs to address.

Jenny Guardado, assistant professor in the Edmund A. Walsh School of Foreign Service at Georgetown University: Assuming that a tax hike (however watered-down) can pass through Congress, which still remains to be seen, two factors will be crucial to determine the impact of this policy on Peru’s competitiveness and revenue collection.

The first is: which companies will the government tax? Will companies with tax stability agreements be spared? Although higher taxes are never welcome news to investors, the prospect of reneging on signed contracts would be even more damaging to the government’s credibility and would send a chill to investors well beyond the mining sector.

Moreover, contract renegotiation may lead to litigation, further delaying revenue collection. One advantage is that Peru appears to have signed fewer tax stability agreements vis-à-vis neighboring Chile, which provides the government some room for negotiation.

The second question is: how much can taxes increase? With sky-high copper prices (not seen since 2011), there are also some opportunities to obtain more revenue before undermining the competitiveness of Peru’s mining sector. According to an ECLAC study this year, the government’s share of revenue from mining taxes collected in Peru has historically been lower than those in Chile, and there are some incentive-compatible tax changes that could improve government finances. Politically, with the prospect of Chile (the number-one copper producer) also looking to raise mining taxes in the near future, the Peruvian government’s policy might not be out of step with the regional sentiment and can blunt some of the impact on its image that it would otherwise have. Remaining within the legal framework and reasonable tax brackets will be key.

Beatriz De la Vega, tax advisory partner at KPMG Peru: Currently, President Castillo is continuing with the idea of implementing a windfall tax and changing the current royalty system. The government has not yet specified a target amount. Finance Minister Francke has indicated that he would be sending legislation to Congress before the end of this year. Its success would be uncertain, considering that the ruling party has only 28 percent of the seats in Congress.

At the end of last year, Peru’s fiscal deficit increased from 2.7 percent to 8.9 percent of GDP. Peru’s central bank has said it expects the country’s fiscal deficit to close this year at 4.5 percent due to higher export prices and the recovery of economic activity. In the mining sector, foreign direct investment represents 25 percent of total investments and has a significant contribution of income tax (12 percent in the last three years). It is not entirely accurate to say that an increase in taxes in the mining sector would not harm Peru’s competitiveness. According to a Fraser Institute Survey last year, Peru ranked 34th out of 77 of the most attractive territories for mining investment due to its political stability, excessive regulation and bureaucracy, and the tax system, among others. Raising taxes could bring revenues in the short term, but in the long term it would affect the potential $56 billion investment that is currently in the pipeline. Note that the tax burden of mining companies in Peru ranges from 47 percent to 52 percent, higher rates than Chile (40.7 percent), Canada (35.5 percent) and Australia (44.3 percent).

Roque Benavides, chairman of Compañía de Minas Buenaventura: Peru’s mining sector must focus on competitiveness. In that respect, we have to consider infrastructure, political and social stability, geological potential and taxation. If we compare Peru to other mining countries such as Canada, Australia, Mexico and Chile, we are more competitive in geological potential and taxation. Mining companies pay higher taxes in Peru than in those other countries. In terms of infrastructure and political and social stability, we rank well below them. Taxation is only one of the considerations, and in that respect, we are ranked higher than our competitors in attracting investment. Peru’s government must focus on efficiency, the use of taxes from the mining sector and promoting the development of the country’s mining projects portfolio, which amounts to $58 billion. It is in Peru’s interest to have valuable projects that generate employment in an efficient government environment. We should not increase taxes, but rather focus on overall competitiveness.

David Warthon, business tax advisory partner at EY Perú: The Peruvian mining industry’s tax burden is quite high as compared to other developed countries. It is higher than Chile’s and almost equal to that of Colombia and Mexico, Peru’s direct competitors in the region. The Peruvian mining sector’s tax burden is between 44 percent and 52 percent, averaging 48 percent. Most of the burdens are calculated in a progressive way, using operating profit as the parameter. In the end, for every $100 of income, the government takes $50. Hence, Peru does not need a tax increase or the creation of new taxes on the mining industry.

This could affect the country’s competitiveness and foreign investment. Because of the post-Covid situation, prices are higher than at other times, but this is not permanent. It happened in the past when then-President Ollanta Humala’s government passed new taxes in 2011, after which the mining industry had the lowest international prices in years. Notwithstanding, all the taxes remain, disregarding the volatility of the prices, a situation that any economic policy can control.

Not only does President Pedro Castillo lack a majority in Congress, but he also does not have the consensus or alliances to have an important number of parties pass new taxes, unlike former governments. Peru’s reserves are at their highest level in history. The government does not need to raise taxes on the mining industry if it responsibly controls macroeconomic factors.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

 

 

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