SANTIAGO, Chile, July 9 (UPI) -- Mining companies are once again feeling the heat in Chile over their alleged abuse of legal loopholes in the country's mining regulations, reportedly avoiding decades of tax payments. The conservative Independent Democratic Union, UDI -- the country's largest party -- is preparing a set of legal reforms to ensure that foreign companies pay their full taxes.
This marks the first time an influential party such as UDI has intervened in the situation, until now only denounced by a handful of congressmen. The new scenario could lead to a comprehensive industry reform, as the ongoing probe into the mining companies' tax practices acquires unprecedented strength.
Although Sen. Jorge Lavandero -- a member of the Christian Democrat Party -- was the first to ring the alarm bells last year over the alleged irregularity, his claims had until now fallen on deaf ears.
Lavandero denounced in October how after more than two decades of operating in the country, Exxon Minerals International Inc. had reportedly made no payments to government in income taxes. Not only that, but the company was selling its copper mining asset, Disputada de Las Condes, which was finally acquired in May by South Africa's Anglo American for $1.3 billion.
Chilean law allows subsidiaries of companies to take sizable foreign loans from their headquarters, often based in tax-free havens such as the Bahamas or Bermuda, so they can avoid, at least on paper, making a profit. This is advantageous for the companies, as tax rates for interest payments made abroad are substantially lower than taxes paid on profits.
Companies in the country may be financed either by their equity or by debt. If a company is financed by loans, the interest payments that are sent abroad pay a 4 percent tax, whereas equity-generated profits transferred abroad pay a 35 percent tax.
A UDI investigative committee has already held three meetings with Lavandero to analyze the situation. UDI President Pablo Longueira stated last week that his party is studying "three concrete measures" to reform the tax-collecting system for mining companies.
Among these are putting an end to transfer prices, a mechanism which was allegedly used by multinational companies to transfer minerals such as copper from the subsidiary to the headquarters for less than 30 percent of the international price. This way, the local subsidiary could claim it did not have enough profits and thus be subject to fewer income taxes or even no payments at all.
The second proposal seeks to put an end to speculation on future prices between a given company's headquarters and its subsidiaries. According to Lavandero, mining companies regularly use future sales as a means of speculating between two sister companies in a way that generates "profits for a subsidiary abroad and losses for the one located in Chile."
Finally, the reform intends to regulate the credit flows from company headquarters to local subsidiaries.
"We've had meetings with Sen. Lavandero's technical team. They handed us several proposals which are now being studied by members of our party," Longueira told to financial newspaper El Diario.
Lavandero claims that because of the lack of appropriate industry regulations, Chile has lost some $90 billion in tax revenues during the last two decades. Lavandero added that of the 47 mining companies currently operating in Chile, 44 declare losses.
Whereas the state-owned National Copper Company, Codelco, produces nearly 33 percent of the country's total copper output -- granting significant revenues to the Chilean government -- the "companies that produce the remaining 67 percent of the mineral in our country only generate losses," Lavandero said.
Along with the Disputada case --which Lavandero has made the flagship of his crusade against foreign mining operators -- figures the peculiar history of the El Indio gold mine in Chile. Owned by Barrick Gold, El Indio has operated in Chile for 16 years, always declaring losses and thus not being subject to income tax payments. Last year, Barrick announced that during 2002 El Indio would be closing operations for good.
Although Exxon's management of Disputada has been harshly questioned by several congressmen, few have analyzed its complex acquisition process by Anglo American.
The company bought Disputada in May through its Chilean subsidiary Mantos Blancos, when copper was at an international value of 93 cents per pound. Mantos Blancos subsequently sold the mine to another Barrick subsidiary, quoting a copper value of a mere 55 cents per pound. Although the company still had $48 million dollars in profits, the company resorted to the future sales system to sell it at a lower price.
According to Lavandero, the company then proceeded to reacquire the mine at a higher price "in order to generate losses that would allow for the practical disappearance of those $48 million in profits."
With Lavandero securing the support of a powerful party such as the UDI -- support he could not get from the government coalition of which his own party is a member -- the attack on foreign mining profits in Chile should escalate to unprecedented levels.
