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Metal Mining Companies: Planned Law Creates Windfall Profit Tax

7 Dec 2010

On 23 June 2010, a proposed law creating a Windfall Profit Tax ("WPT") was presented before the Peruvian Congress. The proposed WPT would levy the unexpected profits obtained by metal mining companies due to the extraordinary increase of the international price of minerals. Currently, mining companies' profits are subject to a 30% Income Tax rate and a 2% mining royalty rate. Should the Bill pass, the WPT would be in force since 1 January, 2011. Taxand Peru identifies the proposal of the new tax and what foreign investors should be aware of as a result.

According to the proposed regulations, the WPT would be applicable to the metal mining companies' profits. Specifically, the tax basis would be the company's net income after taxes corresponding to the percentage of the excess between the mineral's annual international average quotation and its base price. This base price of the mineral will be determined by the Finance Ministry and the Mining Ministry, taking into account the monthly and annual average price of the highest quotations of the minerals registered in the twenty years previous to the year in which the WPT would be applied.

The proposed tax rate is of 50%, with no deductions admitted on the tax basis. The WPT proposed is based on the fact that in the past years, mining companies have realised exceptional profits as a result of the increase in the price of minerals. However, and although the creation of the WPT would respond to an extraordinary issue, the proposed Bill does not establish if the WPT will be a temporary or permanent tax. This fact is of much relevance in order to determine the real impact of this proposed law for investors in mining activities carried on within Peru.

Finally, it is important to highlight that the WPT could not be applied to the mining companies that have entered into a tax regime stability contract. This tax proposal is yet to be discussed and voted on by the Peruvian Congress.


Taxand's Take

As background, it should be considered that in 2006 the Peruvian Congress refused two similar proposed taxes, which had lower rates and admitted deductions on the tax basis. The WPT is expected to be discussed and voted by the Congress on the November sessions.

Foreign investors must be aware of the discussions held by the Peruvian Congress on this issue. In case the WPT is approved, investors must consider an increase in their costs related to mining investments in Peru since the WPT will directly affect the mining companies' profits as from 1 January 2011, along with the regular Income Tax and the mining royalties in force.

Your Taxand contact for further queries is:
Rocio Liu
T. +511 610 4747

Taxand's Take Author