Chile | New mining royalty is approved and ready to become law

• A new mining royalty in Chile considers an ad-valorem component (1%) and an operating margin component (8%-26% for big mining companies), according to their level of sales and the minerals exploited.
  
  
• Mining projects that currently have tax invariability will be governed by the provisions in force as of 1 January 2022 for the time between the entry into force of the Mining Royalty and the date on which the tax stability ends.
  
  
• Although the bill does not incorporate a new tax stability regime, the approved law incorporates a "maximum potential tax burden" that applies to the combined taxation of the mining royalty, Corporate Income Tax (CIT) and final taxes. This overall tax burden is set at 46.5%, while the limit for producers of less than 80,000 metric tons of fine copper ("MTFC") is 45.5%.
  
  
• Mining companies subject to the royalty will be obligated to report their financials to the Chilean Financial Market Commission.
  
  
• One-third of the US$1.35 billion that is expected to be collected shall be distributed directly to promote the productive development of the regions and communes throughout the country.
  
  
• After publication in the Official Gazette, most of the provisions of this new tax will come into force from 1 January 2024.
   

On 17 May 2023, the Chamber of Deputies of Chile approved a mining royalty bill that had been under discussion for several years in Parliament. Several substantial modifications have been made to the original bill.

Some provisions of the bill still need to pass a constitutional review by the Constitutional Court, after which the bill will be ready for promulgation by the President.

In general terms, the approved bill establishes that mining operators will be subject to an ad-valorem component and an operating-margin component, based on their level of sales and the type of minerals exploited. The sum of these components will correspond to the mining royalty, for which mining exploiters may be liable, subject to a maximum taxation limit that considers the royalty, corporate income taxes, and final taxes.

A summary of the bill's main provisions, as approved by the Chilean parliament, follows.

1. Taxpayers covered

The bill defines that both components of the mining royalty will apply on mining exploiters, defined as "any person, natural or legal, who extracts mineral substances subject to a mining concession, and sales them in any production stage the substances may be in."

2. Ad-valorem component

A 1% ad-valorem component will apply to mining exploiters whose annual sales of copper are higher than the equivalent of 50,000 metric tons of fine copper (MTFC). This component will apply only to income arising from the sale of copper.

On the other hand, if an entity's "Adjusted Mining Operational Taxable Income" (RIOMA) is negative, the ad-valorem component to be paid will be calculated by subtracting the negative amount of the RIOMA from the ad-valorem component.

3. Operating-margin component

The operating-margin component will vary depending on the sales volumes of the mining exploiter, along with whether more than 50% of its annual production is copper, as follows:

(a) Mining exploiters with more than 50% of income coming from copper, producing more than 50,000 MTFC, will pay a tax rate ranging from 8% to 26%. The rate will be determined based on the mining operating margin (MOM).

The MOM is defined as the quotient resulting from dividing the RIOMA over the mining operational income of the taxpayer, multiplied by 100.

However, this component will not apply if the RIOMA is negative in a given tax year.

(b) Mining operators with less than 50% of their income from copper sales (or with 50% or more, yet producing 50,000 MTFC or less), will be subject to the following tax rates based on the equivalent of their annual sales of MTFC:

• Less than the equivalent of 12,000 MTFC: Exempt
  
  
• More than the equivalent of 12,000 but less than 50,000 MTFC: The marginal tax rates to fluctuate from 0.4% to 4.4% depending on the levels of production

• More than the equivalent of 50,000 MTFC: Progressive tax rates ranging from 5% to 14% depending on the operating margin

Taxable base

Mining exploiters must apply the respective tax rates on the RIOMA, which considers the taxable base of the corporate income tax subject to the following adjustments:

Additions:

• Mining royalty (only the margin component)
  
  
• Expenses and costs linked to income from sources other than the sale of mining products; if these expenses and costs can be linked to both sources of income, they will be considered attributed on a pro rata basis (i.e., in the same proportion that each type of income represents over total income)
  
  
• Interest as stated in No.1 of article 31 of the Chilean Income Tax Law (ITL)
  
  
• Carryforward losses
  
  
• Deductions resulting from accelerated depreciation
  
  
• The difference, if it exists, between organization and start-up expenses (as in article 31 No. 9 ITL) deducted in a period shorter than six years, and the proportion that would have otherwise been deducted if the expenses were deducted linearly over six years
  
  
• Payments made as a result of the sale of minerals, leases or usufruct of mining properties, any agreement arising from enabling a third party to exploit a mining site, any portion of the purchase price of a mining property determined as a percentage of the sale of mining products or the buyer's profits.

Deductions:

• All income not derived directly from exploitation of mining products
  
  
• Annual depreciation that would have been deducted if the taxpayer had not opted for accelerated depreciation

Calculation of sales

For the purposes of either component of the mining royalty, sales will be considered the average of annual sales of the last six commercial years, for which purpose taxpayers will have to comprise the total sales value of mining products, including from related parties (if the related parties can also be considered "mining exploiters"). Related parties shall be understood to be those referred to in No. 17 of article 8 of the Chilean ITL.

If the taxpayer registers sales for less than six years, the average will be calculated considering the years starting from the first year the taxpayer registers actual sales.

4. Maximum potential tax burden

The bill limits the maximum taxation of mining royalty taxpayers (called the "maximum potential tax burden"), taking into consideration the income tax, royalty, and final taxes (i.e., Global Complementary or Additional Tax) to which their owners will be subject upon profit distributions.

Specifically, when the sum of the First Category tax (CIT), mining royalty (both components), and the final tax that the owners would pay if profits were fully distributed exceeds 46.5% of the operational profitability (as defined in section 3(a), above) then the royalty will be adjusted so it does not exceed 46.5% (for mining exploiters with sales below the equivalent to 80,000 MTFC, the cap is lowered to 45.5%). For this purpose, the final tax of shareholders will be calculated as 35% of the company's net taxable income, less the CIT paid in the same year the royalty is being declared and paid.

5. Provisional Monthly Payments

The bill introduces Provisional Monthly Payments (PPM), which taxpayers must make toward the annual royalty to be filed and paid in April after the end of the respective commercial year.

PPMs are calculated as a percentage of the taxpayer's gross monthly income (perceived or accrued) derived from the sale of mining products. This percentage will depend on the variation of the ratio between the royalty effectively paid the prior year and the PPMs made during the current year (which may increase or decrease the PPM). Whenever the foregoing cannot be determined (because of a negative operating margin, absence of sales the prior year, or other cause) the PPM is set to 0.3%. Moreover, the PPM rates are to be adjusted quarterly based on the variation of copper prices and under a methodology set forth in the bill.

6. Obligation to report financials

Mining exploiters shall also be bound to report their annual financial statements (both individual and consolidated) to the Chilean Financial Market Commission (equivalent to the US Securities and Exchange Commission). The financial statements must be audited by a regulated auditing company and contain a note regarding the ownership of the mining entity. Quarterly financials must also be reported.

7. Destination of resources

According to the bill's approved text, US$450 million (approximately one-third of the US$1.35 billion that is expected to be collected nationally) shall be distributed directly to promote the productive development of the regions and communes throughout the country.

Accordingly, the bill assigns the mining royalty resources to various destinations, as summarized in the following chart:

Please note that the provisions regulating the distribution and destination of the resources generated by the mining royalty were one of the Government's main motivations in obtaining favorable commitments from congressmen and obtaining the approval of Parliament (e.g., high approval ratings evident during the voting session in the Parliament).

8. Tax Stability

Based on the bill, mining projects that currently have tax stability will be governed by the provisions in force as of 1 January 2022, for the time between the entry into force of the mining royalty and the date on which the tax stability ends.

9. Transitory provisions

The mining royalty will enter into force as of 1 January 2024. As a result, the current tax on the mining activity set forth in the ITL will be effectively repealed on that date.

For additional information with respect to this Alert, please contact the following:

EY Chile, Santiago
 

• Javiera Contreras, EY Chile Tax Leader
  
  
• Alicia Dominguez, EY Chile Energy & Mining Leader
  
  
• Victor Fenner
  
  
• Matías Moroso

Ernst & Young LLP (United States), Latin American Business Center, New York
 

• Lucas Moreno
  
  
• Pablo Wejcman
  
  
• Benjamin Mosella, Chile Tax Desk
  
  
• Ana Mingramm

Ernst & Young LLP (United Kingdom), Latin American Business Center, London
 

• Lourdes Libreros
  
  
• Sofía Hernández, Chile Tax Desk

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific
 

• Raul Moreno, Tokyo
  
  
• Luis Coronado, Singapore
  
  
• Patricio Velasco, Hong Kong, Chile Tax Desk

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.