May 30, 2023
Chile | New mining royalty is approved and ready to become law
On 17 May 2023, the Chamber of Deputies of Chile approved a mining royalty bill that had been under discussion for several years in Parliament. Several substantial modifications have been made to the original bill.
Some provisions of the bill still need to pass a constitutional review by the Constitutional Court, after which the bill will be ready for promulgation by the President.
In general terms, the approved bill establishes that mining operators will be subject to an ad-valorem component and an operating-margin component, based on their level of sales and the type of minerals exploited. The sum of these components will correspond to the mining royalty, which for which mining exploiters may be liable, subject to a maximum taxation limit that considers the royalty, corporate income taxes, and final taxes.
A summary of the bill's main provisions, as approved by the Chilean parliament, follows.
1. Taxpayers covered
The bill defines that both components of the mining royalty will apply on mining exploiters, defined as "any person, natural or legal, who extracts mineral substances subject to a mining concession, and sales them in any production stage the substances may be in."
2. Ad-valorem component
A 1% ad-valorem component will apply to mining exploiters whose annual sales of copper are higher than the equivalent of 50,000 metric tons of fine copper (MTFC). This component will apply only to income arising from the sale of copper.
On the other hand, if an entity's "Adjusted Mining Operational Taxable Income" (RIOMA) is negative, the ad-valorem component to be paid will be calculated by subtracting the negative amount of the RIOMA from the ad-valorem component.
3. Operating-margin component
The operating-margin component will vary depending on the sales volumes of the mining exploiter, along with whether more than 50% of its annual production is copper, as follows:
(a) Mining exploiters with more than 50% of income coming from copper, producing more than 50,000 MTFC, will pay a tax rate ranging from 8% to 26%. The rate will be determined based on the mining operating margin (MOM).
The MOM is defined as the quotient resulting from dividing the RIOMA over the mining operational income of the taxpayer, multiplied by 100.
However, this component will not apply if the RIOMA is negative in a given tax year.
(b) Mining operators with less than 50% of their income from copper sales (or with 50% or more, yet producing 50,000 MTFC or less), will be subject to the following tax rates based on the equivalent of their annual sales of MTFC:
Mining exploiters must apply the respective tax rates on the RIOMA, which considers the taxable base of the corporate income tax subject to the following adjustments:
Calculation of sales
For the purposes of either component of the mining royalty, sales will be considered the average of annual sales of the last six commercial years, for which purpose taxpayers will have to comprise the total sales value of mining products, including from related parties (if the related parties can also be considered "mining exploiters"). Related parties shall be understood to be those referred to in No. 17 of article 8 of the Chilean ITL.
If the taxpayer registers sales for less than six years, the average will be calculated considering the years starting from the first year the taxpayer registers actual sales.
4. Maximum potential tax burden
The bill limits the maximum taxation of mining royalty taxpayers (called the "maximum potential tax burden"), taking into consideration the 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 (CIT), mining royalty (both components), and the final tax that the owners would pay if profits were fully distributed exceeds 46.5% of the operational profitability (as defined in section 3(a), above) then the royalty will be adjusted so it does not exceed 46.5% (for mining exploiters with sales below the equivalent to 80,000 MTFC, the cap is lowered to 45.5%). For this purpose, the final tax of shareholders will be calculated as 35% of the company's net taxable income, less the CIT paid in the same year the royalty is being declared and paid.
5. Provisional Monthly Payments
The bill introduces Provisional Monthly Payments (PPM), which taxpayers must make toward the annual royalty to be filed and paid in April after the end of the respective commercial year.
PPMs are calculated as a percentage of the taxpayer's gross monthly income (perceived or accrued) derived from the sale of mining products. This percentage will depend on the variation of the ratio between the royalty effectively paid the prior year and the PPMs made during the current year (which may increase or decrease the PPM). Whenever the foregoing cannot be determined (because of a negative operating margin, absence of sales the prior year, or other cause) the PPM is set to 0.3%. Moreover, the PPM rates are to be adjusted quarterly based on the variation of copper prices and under a methodology set forth in the bill.
6. Obligation to report financials
Mining exploiters shall also be bound to report their annual financial statements (both individual and consolidated) to the Chilean Financial Market Commission (equivalent to the US Securities and Exchange Commission). The financial statements must be audited by a regulated auditing company and contain a note regarding the ownership of the mining entity. Quarterly financials must also be reported.
7. Destination of resources
According to the bill's approved text, US$450 million (approximately one-third of the US$1.35 billion that is expected to be collected nationally) shall be distributed directly to promote the productive development of the regions and communes throughout the country.
Accordingly, the bill assigns the mining royalty resources to various destinations, as summarized in the following chart:
Please note that the provisions regulating the distribution and destination of the resources generated by the mining royalty were one of the Government's main motivations in obtaining favorable commitments from congressmen and obtaining the approval of Parliament (e.g., high approval ratings evident during the voting session in the Parliament).
8. Tax Stability
Based on the bill, mining projects that currently have tax stability will be governed by the provisions in force as of 1 January 2022, for the time between the entry into force of the mining royalty and the date on which the tax stability ends.
9. Transitory provisions
The mining royalty will enter into force as of 1 January 2024. As a result, the current tax on the mining activity set forth in the ITL will be effectively repealed on that date.
For additional information with respect to this Alert, please contact the following:
EY Chile, Santiago
Ernst & Young LLP (United States), Latin American Business Center, New York
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor