Background of the bill1
On 12 September 2018, four deputies presented a bill or motion that sought to implement a mining royalty for the mining exploitation of copper and lithium in Chile. The royalty would be different from the Specific Mining Tax in force in the country. According to the proposed bill, the need for this ‘new’ royalty is due mainly to the poor participation of the Specific Mining Tax in Chile’s gross domestic product in contrast with the large profits for those in the mining industry.
Hence, by means of a mining royalty bill, it is sought that the state has the right to charge — for the mere extraction of its nonrenewable natural resources — a certain sum based on the compensation that individuals should pay to the state for benefiting from a nonrenewable resource owned by the state. Thus, the collection of the royalty would be forged upon the right to exploit a nonrenewable resource owned by the state, and therefore its collection would constitute a right of the state and not a tax.2
The original version of the bill contemplated a single article, which established a compensation in favor of the state for the exploitation of copper and lithium mining,3 equivalent to 3% of the nominal value of the extracted minerals — compensation that would be destined to the development of projects in the communes where the exploited deposits are located, aiming to mitigate the environmental effects or impact of the mining activity in the area.
However, this proposition has been deeply debated, questioning the nature of the bill and its constitutionality; the mineral or minerals on which it should be levied; the basis on which the amount to be paid should be calculated (profits, sales, volume of extraction, etc.); which should be the destination of the funds collected; and above all, the effect that the approval of this bill would have on Chilean and foreign investment in mining.
First Constitutional Procedure
The original version of the project was widely discussed in the Chamber of Deputies and finally approved on 24 March 2021, when it was sent to the Senate. Several different figures participated in the discussion, such as the biminister of Chilean Energy and Mining, Juan Carlos Jobet Eluchans, who stated in his intervention the importance of recognizing that the tax collection system that Chile has today (modified in 2011) already has a tax mechanism that allows to collect more resources for the treasury when the price of copper rises.
In order to answer the question of how Chile would be taxed compared to other copper-producing countries, a projection of the tax burden of this project was made, comparing it with that of Peru, Mexico, British Columbia and South Australia, based on simplified assumptions, to project the total tax burden on mining production. In this exercise, if the bill were to be approved as originally presented to the Chamber of Deputies, Chile would have a total tax burden of 82.3%, while other countries in the analysis would have tax burdens of between 40% and 45% approximately, i.e., Chile would have a tax burden at least 37% higher than the other countries.
On the other hand, the chairperson of the committee (Deputy Núñez) said that regardless of the costs that the mining companies may have, it is outrageous that the industry captures enormous profits from a natural resource owned by the state, considering that the collection capacity of the tax currently in force is insufficient. He alluded to the difference in the regulation of lithium, referring to the leasing contracts of mining properties between the state and the large companies that have been previously modified. As in the case of the Corporation for Production Development and as a result of the pressure from Congress to achieve a greater collection associated with the increase in the price of lithium, the modification was in order to circumvent the problems implied by the validity of these contracts for the imposition of the royalty under discussion regarding this mineral.
Procedure for the enactment of laws in Chile
Now, the bill is still being processed three years after it was presented, and its discussion has caused great commotion at the national and international level due to the consequences that its application would have for Chile’s main economic activity.
The process for the creation of a law in Chile consists of several stages. First, a bill must be submitted to one of the two chambers of Congress,4 either the Chamber of Deputies (as in this case) or the Senate. The chamber where the bill is submitted is called the Chamber of Origin, while the other is called the Revising Chamber.
Then, the following stages or procedures can be observed:
- First Constitutional Procedure: The bill is reviewed in general by a commission, which then reports to the Chamber of Origin that proceeds to discuss the bill in general, to then approve or reject the idea of legislating in general on the matter. Secondly, each article is discussed in particular. If approved, in its entirety or with modifications, the bill is passed on to the Revising Chamber. In case it is rejected, the procedure is over.
- Second Constitutional Procedure: The Revising Chamber proceeds in the same manner as the Chamber of Origin. In this case, there are different possibilities: (a) that the bill is approved in its entirety, in which case it is sent to the president of the republic for approval and enactment; (b) that the bill undergoes modifications in the Revising Chamber, in which case it returns to the Chamber of Origin to proceed to the discussion and vote on the indications (as in this case); or (c) the bill is rejected by the Revising Chamber, in which case a commission is formed with members of both Chambers, aiming to resolve the disagreement between them.
- Third Constitutional Procedure: This occurs only in cases (b) and (c) above. In the first case, the bill returns to the Chamber of Origin, which must discuss and vote on the indications proposed by the Revising Chamber. In case of their approval, the bill goes to the president of the republic, otherwise, the bill goes to a mixed commission. The Third Constitutional Procedure in the mixed commission ends with a report, which must be approved by the commission. If approved, in part or in its entirety, the report is integrated into the approved bill, which is then sent to the president of the republic for his approval and promulgation.
Legal office of the bill from the Chamber of Deputies
By means of Official Letter No. 16.588, dated 6 May 2021, the Chilean Chamber of Deputies approved the bill in question, with a consolidated text, which includes a single article and a transitory article. The bill came out of the Chamber of Deputies deeply reformed, extending the object of the royalty to “the mining of copper, lithium and all concessionable substances,” setting a rate equivalent to 3% of the extracted minerals’ ad valorem5 value.
It also established that 25% of the funds collected from the compensation should be destined to a Regional Convergence Fund, and the remaining 75% to finance projects that contemplate repair, mitigation or compensation measures for the impacts caused by mining activity to the municipalities where the respective deposits are located, works for the development of critical and digital infrastructure, as well as investment in infrastructure and research programs in state universities whose head office and rector’s office are located in the mining regions.
Among the most relevant changes made to the bill at the end of the First Constitutional Procedure are the following:
- The establishment of a progressive compensation rate associated to the annual price of copper,6 which for copper is 15% for the additional part of the price between USD 2 and 2.5, up to 75% for the additional part of the price higher than USD 4 per pound
- The allocation of part of the compensation to finance a basic and universal emergency income given by the already repealed constitutional state of emergency due to the COVID-19 pandemic
- A reduction in the marginal rates of each tranche with respect to those mining operators that demonstrate a level of processing according to certain criteria (blister copper, copper anodes and refined ore), to the extent that it is accredited by the Chilean Copper Commission
- Finally, a transitory article that established that:
The compensation established in the first paragraph of the sole article will only be applied in the sale of lithium and non-concessionable minerals if such compensation is greater than that established in the respective leasing and exploitation contracts in force, established between the state of Chile through CORFO and private mining operators.
Last observations to the bill: Second constitutional procedure
After the first report of the Mining and Energy Commission in the second constitutional proceeding was prepared on 21 September 2021, and the text submitted by the Senate was approved in its entirety last 20 December, the Bulletin with indications to the bill was issued. These indications were presented by Senators Guido Girardi and Yasna Provoste, who proposed new segments for the calculation of the interest rate to be paid on sales, in addition to modifying the proposed way of allocating the funds collected to certain purposes.
Yasna Provoste (Senator for the ‘Democracia Cristiana’ political party)
Senator Provoste made changes of form and substance to the bill. Regarding the structure, she divided the sole article into three. Regarding the substance, she proposed to reformulate and substantially modify the bill sent from the Chamber of Deputies, seeking to collect a compensation of 3% on annual sales from all mining operators; and in the event that the price of copper on the London Metal Exchange exceeds USD 3.5 per pound, the collection rate would be increased as follows:
- If the average annual copper price were to be between USD 3.5 and USD 4 per pound, the rate would be 4% of the annual sale.
- If the average annual copper price were to be between USD 4.01 and USD 4.5 per pound, the rate would be equivalent to 5%.
- If the average annual copper price is higher than USD 4.5 per pound, the compensation rate would be equivalent to 6% of the annual sale of mining products.
Regarding the destination of the incomes obtained from the royalty, the senator proposes that 25% of the resources go to a Regional Convergence Fund (constituted only by the communes that belong to regions where there are mining operations), while the remaining 75% would go directly to financing projects that aim to repair, mitigate or compensate measures for the same activity. This would only apply to those mining operators whose annual sales exceed the equivalent value of 12,000 metric tons of fine copper.
Guido Girardi (Senator for the ‘Partido por la Democracia’ political party)
Senator Girardi, on the other hand, proposed changing the base compensation percentage from 3% of the extracted minerals’ ad valorem value to 1%, and proposed that the funds collected be divided between:
- A Regional Innovation Fund, the purposes of which followed the same ideas of what was proposed by the Chamber of Deputies to the Senate
- A National Development and Innovation Fund, aimed at promoting research and innovation in the development of productive enterprises. In his proposition, he establishes that at least 10% of the fund must be prioritized for projects related to green hydrogen, and 2% for green mining projects.
Regarding the progressive compensation collection rate of the bill proposed by the Chamber of Deputies, the senator proposes instead to modify the current Income Law, in the part related to the Specific Tax on Mining, modifying the payment rates of fine copper according to its price in dollars for mining operators whose annual sales exceed the equivalent of 50,000 metric tons.
Finally, the senator proposes to grant a tax benefit to companies that voluntarily contribute to the consortiums when the amount of the contribution is higher than the royalty.
This bill, still under discussion, has aroused national and international concern due to the impact it may have on the competitiveness of Chilean copper in international markets, and also due to the questioning of its constitutional compliance. The future of the mining royalty bill is still unknown. It could take some time to be enforceable and it could even be rejected. Nevertheless, it is certainly an issue to consider when thinking about investing in mining projects in Chile.
The consolidated text of this Chilean bill still needs to be amended in view of the observations made (pending to be voted on), in order to continue with the Third Constitutional Procedure of the approval process of bills in Chile. It is important to mention that, to date, the bill does not have urgency for discussion, so its progress will depend on the Chilean Congress’s own legislative agenda.
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2 According to those who presented the project, this would imply that the charge should be related to the extraction of the material, and not to the profit obtained.
3 The compensation in the original project would not be required from mining operators that extract, in the case of copper, annual amounts up to 12,000 metric tons of fine copper, and in the case of lithium, 50,000 tons of lithium metal.
4 Chile has a bicameral system, so the Congress is composed of a Chamber of Deputies and a Senate.
5 That is, on the transaction value of the minerals extracted.
6 According to the quotation of minerals on the London Metal Exchange.