Chile’s New Mining Royalty Tax Lacks Clarity That Investors Need

The bureaucracy and red tape surrounding investment projects in Chile—the world’s largest producer of copper and second largest producer of lithium—has been at the forefront of recent domestic political debates. Across the political spectrum, there’s agreement that the delays caused by regulatory and environmental compliance standards in Chile are hindering both domestic and foreign investment.

The leftist government, led by President Gabriel Boric, has asserted through Finance Minister Mario Marcel that reducing red tape has become a priority, and that current standards are worrying and exasperating the administration. Chile’s three major tax reforms—in 2014, 2018, and 2020—have had the same effect.

Companies rely on whether a country has a stable and clear regulatory framework when deciding where to make a large investment, and Chile is in competition with other countries for domestic and foreign capital with projects. For this reason, the Boric administration fast-tracked the legislative process of Law 21,591, known as the Mining Royalty Law, which will come into force on Jan. 1, 2024.

The new law establishes a two-part mining royalty tax. The first is an ad valorem component, which is a 1% tax on gross sales of copper that’s applied to the top line of the financial statement of large copper mining entities. For practical purposes, a copper mining entity can view this tax as an additional supplier.

The second is a mining margin component, which can have marginal rates of up to 26% for copper mining entities and varies depending on the operating margin of the company.

Tax experts and investors are questioning exactly how the new tax will affect the bottom line, particularly of copper mining projects in Chile. This has made it difficult to evaluate projects until the Servicio de Impuestos Internos—the Chilean IRS—releases official instructions detailing how to apply the new tax.

Creating Contradictions

The law states that the ad valorem portion of the tax will be reduced by the amount of the tax loss stemming from mining revenues (what the law calls adjusted taxable income from mining operations, or RIOMA, for its acronym in Spanish). So if a mining entity sells $1 million of copper, it must pay $10,000 in tax because of the ad valorem component.

However, if that same mining entity has an operating loss of $2,000 for tax purposes, they could subtract the $2,000 loss from the ad valorem amount payable and would pay only $8,000. This is notwithstanding that, for tax purposes, the entity has a loss. In other words, the law seems to have recognized that a mining entity with operating losses shouldn’t be treated like one with operating profits.

But the law also limits the total tax burden applicable to the mining entity. This limit will be 45.5% or 46.5% of taxable income, depending on whether the sales of mining products are less than or greater than the equivalent of 80,000 metric tons of fine copper, respectively. Any percentage of a negative amount is zero. So when there’s an operating loss for tax purposes, the maximum amount of tax applicable to the mining entity should be zero.

As a result, it could be interpreted that if an entity has an operating tax loss under the new law, no mining royalty tax (and therefore no ad valorem component) would be due—creating a contradiction in the same law. This is a direct result of the fast-tracked negotiations between the Boric administration and the opposition.

Other questions persist about the tax treatment applicable to the closing of mines and post-ops phase, as well as how the mining royalty tax will interact with the corporate tax. There’s also uncertainty about the treatment that will apply to lithium mining entities under the National Lithium Strategy, which hasn’t yet been finalized.

Notwithstanding the good intentions of the Boric administration in trying to help the Chilean mining industry, there are still relevant questions about the application of the new tax. They likely will be clarified before the end of 2023 through a new general ruling from Chilean Tax Authority.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Diego Garcia is a partner and head of the tax group at CMS Carey & Allende in Chile. His practice focuses on tax planning and restructuring of local and foreign companies.

Juan Francisco Gutiérrez is an associate who is part of the tax group at CMS Carey & Allende in Chile. He focuses his practice on international and domestic taxation.

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