Chilean Senate probes mining companies

By GONZALO BAEZA, UPI Business Correspondent  |  May 23, 2003 at 5:34 PM
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SANTIAGO, Chile, May 23 (UPI) -- In a move that has generated harsh criticism from the Chilean mining industry, Chile's Senate will investigate claims that mining companies are paying an insufficient amount of taxes.

The initiative comes in the wake of repeated accusations by Sen. Jorge Lavandero -- a member of the Christian Democrat party, part of the governing coalition -- that foreign mining operators are taking advantage of loopholes in Chilean legislation that allow them to avoid paying income taxes. Lavandero's call was heeded earlier this month by a cross-party group of both government and opposition senators who resolved May 8 to form a special committee to review the mining companies' tax regime.

The probe's reported aim is to verify whether mining companies are paying their taxes in accordance to law as well as if there is room for a tax raise should their payments be deemed insufficient.

The decision triggered immediate responses from industry representatives, who insisted that mining companies in Chile were subject to a zealous regulation and warned that an eventual tax increase could only discourage future investments.

According to Hernan Hochschild -- president of the National Mining Society, Sonami, which groups Chilean mining companies -- the initiative betrays a prejudiced attitude against the industry "due to a lack of knowledge and possibly bad faith from those who see mining as an industry that does not pay its taxes."

Hochschild nonetheless added that the mining industry had "nothing to hide" and that he hoped the Senate probe would "once and for all put an end to the existing disinformation" regarding the tax regime to which mining companies are subject.

The ongoing investigation on the Chilean mining industry --which accounts for nearly 10 percent of the country's gross domestic product -- has baffled company executives all the more due to the fact that the initiative was solidly backed up by Congressmen from the country's conservative opposition. A traditional enemy of excessive regulations and taxes for the mining industry, the Chilean right is nonetheless spearheading the current initiative.

Sen. Hernan Larrain -- a member of the conservative Independent Democratic Union, UDI, Chile's largest party -- justified this decision by pointing out how a number of mining companies were approached in the past by the Senate Mining Committee and asked for detailed information regarding both their profits and tax payments.

Larrain added that the companies never gave a "satisfactory answer" to these concerns.

Among the most frequent accusations against multinational mining companies operating in the country is the one holding that only a handful of them are presently paying income tax whereas the rest declare losses.

According to Lavandero -- who for many years had been unsuccessful in convincing even government Congressmen to support his idea to probe the industry -- Chilean law allows multinational mining companies to contract sizable loans from their foreign headquarters. Whereas tax rates for interest payments made abroad cancel a mere 4 percent tax, equity-generated profits transferred abroad pay a 35 percent tax. This way, Lavandero holds, the companies shelter themselves behind their indebtedness and avoid paying more taxes.

This is the case of Chile's Disputada copper mine, which was operated by Exxon Minerals for 25 years and never paid income taxes. When Disputada was sold last year to industry giant AngloAmerican, the mine became a flagship case for those holding that Chile's mining tax structure should be reviewed.

According to government estimates, Chile's ten largest mining operators have cancelled some $1.9 billion in taxes during the past decade. The companies are in addition expected to pay some $187 million in taxes during 2003.

The figures are nonetheless considered insufficient by Lavanderos and a number of other Congressmen who in addition to the Senate probe have proposed implementing a royalty tax to copper mining operators.

Considering how Chile owns an approximate 38 percent of the world's copper reserves and the commodity's exports amounted to 40 percent of the country's total shipments in 2002, Lavanderos feels the mineral holds a strategic value for the economy.

"Chile is the owner of the copper and has a right to charge" companies extracting it, Lavanderos said.

"This does not only take place in Chile. It also does, for example, in South Africa, where mining companies have never paid many taxes. In order to prevent this, that country implemented a royalty tax," he added.

Lavanderos' proposal would accordingly be modeled after an initiative made in March by the South African government in which mining companies would be charged a tax-deductible royalty where rates would vary according to the different commodities being operated.

The proposal was once again greeted with bitter criticism from industry lobbies, such as the Mining Council, which groups the country's 17 largest multinational mining companies.

Council general manager Eduardo Loyola complained that to suggest that the mining industry is not paying all its taxes was just a ploy "to justify the eventual implementation of a royalty."

His opinion was shared by Felipe Ruiz, representative of the Canadian mining company Placer Dome, who labeled the royalty fee a "tax on investment" adding that its likely effect would be "discouraging mining investments" in the country.

Placer Dome's domestic assets include the Zaldivar copper mine and the La Copia gold mine, both of which are located in northern Chile.

Although government authorities such as Mining Minister Alfonso Dulanto have praised the Senate's initiative, they have been unequivocal in rejecting the implementation of a royalty tax in the near future.

The controversy nonetheless prompted Chilean President Ricardo Lagos to reassure mining companies about potential tax raises. After meeting Thursday with a number of government Congressmen in order to discuss the issue, Lagos stated the government had "no intention to promote a change in the rules that regulate mining investments in our country."

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