Peru Moves To Reduce Mining Incentives

Peru Moves To Reduce Mining Incentives

September 01, 2000

New legislation took effect in early September that could increase the cost of mining operations in Peru. Companies with existing stabilization agreements are not affected. The new legislation will have a significant effect on the international mining and project finance communities.

Tax Exemption Scrapped

Mining companies were previously exempted from Peruvian income taxes on 80% of their earnings for as long as the earnings were not distributed to shareholders and the companies presented investment plans for approval by the government showing how the tax savings would be reinvested. Under the new legislation, mining companies will be fully taxed on earnings whether or not they are distributed.

Holding Rights

The new legislation also increases the price for holding mining rights, or Derecho de Vigencia, for large-scale operations from US$2 an hectare to US$5 an hectare. The price for small-scale operations remains the same at US$1 an hectare.

Non-Producing Concessions

Mining companies holding concessions must begin production within seven years after obtaining the concession. If the concession holder fails to meet the 7-year deadline, penalties begin to accrue at the start of the seventh year. Penalties for large-scale operations amount to US$6 an hectare per year. Penalties for small-scale operations amount to US$3 an hectare per year. Penalties are increased if the concession holder has not begun operations by the 12th year from the date of the concession.

Stabilization Agreements

The new legislation amends the standard terms for tax stabilization agreements that mining companies might sign in the future with the government. A tax stabilization agreement is a promise by the government not to change the taxes that would apply to a mining company for a period of years. These are given to induce companies to invest. Under the new legislation, tax stabilization agreements can still be entered into, but on a limited basis. New stabilization agreements will guarantee tax stability for 10 or 15 years — depending on the amount invested — with respect to the tax on revenues, or Impuesto a la Renta, the general sales tax, or Impuesto General a las Ventas, and the selective tax on consumption, or Impuesto Selectivo al Consumo. The tax on revenues will be set at the rate existing on the date the contract is signed plus a 2% premium. The minimum investment required for mining companies to enter into a tax stabilization agreement is US$10 million.

The new legislation significantly alters the consequences for companies that withdraw from tax stabilization agreements. In the past, a company could withdraw from such an agreement entirely or partially. For example, a company would withdraw from the tax on revenues but not from the general sales tax. Moreover, if regular tax treatment presented conditions more favorable than those under the stabilization agreement, a company had the ability to choose the regular tax treatment and make this regime its new stabilization regime. Under the new legislation, companies that withdraw from stabilization agreements cannot do so partially, only entirely.

The new legislation is not retroactive. Thus, mining companies that have signed tax stabilization agreements with the Peruvian government are protected under the old legal regime. Companies that had merely applied for tax stabilization agreements when the new law took effect will still be able to enter into agreements under the old rules, but only through 2003.

The new legislation will test the appetite of the international mining community for Peruvian mining projects. As a country rich in mineral resources, especially gold, copper, silver, lead and zinc, Peru has been a key country for many international mining companies. In the last decade, several high-profile projects, including the expansion of the Cuajone mine, and the Cerro Verde, Yanacocha and Antamina projects, successfully achieved financial closing. Although some industry observers have indicated that large projects with existing concessions are likely to continue – they are protected under stabilization agreements – it is now up to private investors to determine whether new projects will be considered under the new legislation. Among the large scale projects pending in Peru are La Granja (copper), Quellaveco (copper), La Quinua (gold - an expansion of Yana-cocha), Tambogrande (gold, silver, copper and zinc) and Bayóvar (phosphates).