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Mining Companies to Pay a Higher Rate of Effective Tax

19 Jan 2011

On 21 October 2010, the Chilean Official Gazette Law introduced amendments to the royalty applicable on mining activity. The referred legal amendment incorporates progressive tax rates which range from 5% to 14%, replacing the single tax rate of 5%. This amendment applies on mining projects with annual sales over 50,000 metric tons of fine copper. Taxand Chile examines the amendments to mining royalty and what this means to multinationals operating in this industry.

Currently in Chile, mining companies, in addition to income tax, must pay a royalty for the extraction of non-renewable resources. The royalty is levied on the margin of profits obtained on sales of mining products and will be in force until 31 December 2010 at a rate of 5% (or 4% when a royalty fix rate was agreed in a Foreign Investment Contract subscribed with the Chilean government before 1 December 2004).

The legal amendment introduced to the Royalty creates a progressive tax, with an effective tax rate between 5% and 14%, which replaces the single rate of 5%.

The tax base is the mining operational income and the tax rate is determined according with the operational mining margin (according to the rates provided in Law).

Mining companies that have signed a Foreign Investment Contract with the Chilean government agreeing a fix rate royalty before 31 August 2010 may choose to join the new legal regime before 17 January 2011. Mining companies that make this election will be subject to a royalty rate between 4% and 9% from 2010 to 2012. From 2013 until the end of the term agreed in the Foreign Investment Contract, these companies will return to the original fixed tax rate scheme. This is a royalty rate of 5% (or 4% when the fix tax rate was agreed in a Foreign Investment Contract entered into before 1 December 2004). Likewise, these mining companies have the right to extend the fixed rate term for a period of 6 years from the expiration of the original Royalty fixed rate term agreed, discounting years 2010 to 2012. This new invariability term of 6 years will be subject to the provisions of the new Royalty Law described herein.

Your Taxand contact for further queries is:
Carola Trucco
T. +562 378 8933

Taxand's Take

The amendment on the mining royalty implies an increase on the effective tax that will be paid by mining multinational companies. Foreign investors in this industry will be affected and in particular should review the changes in legislation to minimise the impact.

Taxand's Take Author

Carola Trucco