Peru: the mint with a gigantic hole

Published by MAC on 2010-02-15
Source: IPS

Mining Co's Making a Mint, Tax Free

By Milagros Salazar, IPS

1 February 2010

LIMA,  (IPS) - Experts and activists in Peru complain that while mining corporations are cashing in on soaring metals prices, they continue to enjoy exemption from royalties and corporate taxes, if they reinvest their profits.

Legal stability contracts that locked in the tax status of nearly two dozen mining companies were signed under the administration of Alberto Fujimori (1990-2000) with the aim of promoting investment.

One example of the losses that such contracts represent for government coffers was the 270 million dollars in taxes and royalties that Antamina SA - a joint venture between Swiss-British mining company Xstrata, Anglo-Australian BHP Billiton, Canada's Teck Cominco Limited and Japan's Mitsubishi Corporation - will not have to pay this year.

The government of Alan García recently approved Antamina's new expansion plan, allowing it to reinvest 900 million dollars in profits tax-free under a legal stability contract, which was signed in 1998, went into effect in 2001 and expires in 2015, according to the Ministry of Energy and Mines.

The Compañía Minera Antamina SA was established in 1996 to mine zinc, copper, silver and molybdenum in the northwestern Andean department (province) of Ancash.

Economist Humberto Campodónico estimates that the company, which operates the world’s largest combined copper and zinc mine, took in earnings of over six billion dollars in the 2006-2009 period.

Since the boom in metals prices began in 2004, the profits of mining companies operating in Peru have skyrocketed. "Top 10,000 Mining Companies in Peru", put out by the country's leading bilingual publishing company, Peru: Top Publications, reported that Antamina's earnings doubled from nearly 837 million dollars in 2005 to 1.6 billion dollars in 2007.

The publication points out that Peru is now the world’s leading producer of silver and tellurium; second in zinc; third in copper, tin and bismuth; fourth in lead, molybdenum and arsenic; sixth in gold and selenium; seventh in indium; thirteenth in cadmium; and seventeenth in iron

"These tax incentives should not be offered any more because times have changed in Peru, where there is newfound stability, level of economic growth and high revenue levels for mining companies," Campodónico, who criticised the tax exemptions in his weekly column in the local paper La República, told IPS.

"The government should sit down and renegotiate the contracts with the companies," he maintained.

When the Fujimori administration signed the tax stability contracts with the largest mining companies operating here, Peru was plagued by hyperinflation and an armed conflict between government forces and the Maoist Shining Path rebels and smaller MRTA that did not come to an end until 2000.

Around half of the contracts, which froze the tax regime in force at signing for a fixed term, have already expired. But 11 are still in force, benefiting the biggest mining corporations in Peru, including Xstrata, Teck Cominco, the U.S.-based Newmont Mining, and Canada's Barrick Gold.

One of the mines that still enjoys legal stability contracts is Yanacocha, the largest gold mine in Latin America and second largest in the world, operated by Newmont.

The law enabling mining companies to sign contracts allowing them to reinvest up to 800 percent of their profits tax-free was modified in 2000. But the existing legal stability contracts remained in place, allowing 10 companies to retain their privileged tax-free reinvestment status.

Tax stability contracts signed since that year only exempt companies from paying royalties, and do not give them the option of reinvesting earnings tax-free.

During the administration of Alejandro Toledo (2001-2006), another five stability contracts were signed.

"The country ties its hands legally with these contracts signed with mining companies," said Campodónico, who pointed out that the constitution stipulates that business contracts can only be modified through mutual agreement, not unilaterally by the government.

"This is not the case in any other Latin American country, and it infringes on our sovereignty," he added.

Campodónico said Antamina, which hoped to recoup its initial investment of 2.2 billion dollars in 10 to 15 years, already did so in its first three years of operation.

Antamina's corporate affairs manager Gonzalo Quijandría acknowledged to IPS that mining companies with tax stability contracts are "in a privileged position," but pointed out that "the benefit is legally binding."

Quijandría differed with the view that there is a climate of stability for business in Peru, arguing that protests and social unrest in mining regions continue to make it difficult to draw investors interested in developing the mining industry, the motor of the Peruvian economy.

He argued that an arrangement for tax-free reinvestment of earnings should be seen as "profitable for everyone." To back up his argument, he noted that his company foresees a threefold increase in the "canon minero" funds to go to the provincial and local governments in the department of Ancash as of 2014.

The canon minero is the direct economic compensation received by areas where non-renewable resources like minerals, natural gas and oil are extracted. Under Peru’s current legislation, 50 percent of the taxes and royalties taken in by the state from the extractive industries must be transferred to the provinces, to be used for social spending, public works and infrastructure.

That means it is Ancash that will lose half of the 270 million dollars in taxes that Antamina will not pay, as a result of the firm's agreement with the García administration.

Protests in Ancash over the loss of 135 million dollars in tax revenue prompted the company and provincial authorities to reach an agreement for a 24 million dollar payment by Antamina this year, described by the firm as a measure aimed at mitigating possible impacts from the drop in taxes.

But social organisations have opposed the agreement, complaining that they were not consulted.

"There is political responsibility here on the part of the authorities, and even aspects of questionable legality, because the agreement was superficial and vague about the mining company's commitments," Esteban Cacha Salazar, the head of the Frente de Defensa del Santa (Defence Front of Santa, a province in the department of Ancash), told IPS.

But Quijandría said the system of compensation for Ancash "is still in the rough draft stage," and it is not clear just how much each provincial and local government in the department will receive, nor how much the company will pay in taxes until the legal stability contract expires in 2015, because that will depend on the company's earnings.

But he said the firm was negotiating with local and provincial authorities in each area, and that in the case of the 20 provinces into which Ancash is divided, the most likely scenario is that Antamina will directly implement social spending projects, while the funds will be transferred to the 128 districts encompassed by the 20 provinces.

"How can Antamina be allowed to directly negotiate with authorities in the department, and just write out checks to them; it's as if there were no state," said Campodónico. "That only happens in the case of a government in a banana republic."

In the view of mining affairs expert José Luis López with CARE Peru, a non-profit organisation, it is as important to demand the taxes that Antamina will be exempted from paying as it is to ensure that Ancash properly invests and spends the huge funds it does receive by means of the canon minero [mining law].

"I don't think more money is any guarantee if the conditions do not exist for proper spending and investment; money and development are not the same thing if the capacity to make wise use of expenditures is lacking," said López.

Ancash receives the largest canon minero funds in Peru. In 2007, the provincial government received 567 million dollars, the next year 459 million, and in 2009 only 297 million, according to estimates by the Grupo Propuesta Ciudadana, which links non-governmental organisations working at the provincial and national levels.

Nevertheless, according to the governmental National Fund for Social Development (FONCODES), 42.5 percent of the population of Ancash was living in poverty in 2008. (END)