On 22 September Peru’s unicameral congress approved tax reforms for the mining sector. The new laws will increase tax revenues by about US$5.5bn over the five year term of the Humala government.
President Humala said “This will allow the state to have more resources to be used primarily for infrastructure in the poorest areas of the country, in order to bring about social inclusion.” The new legislation creates a new mining tax, modifies the law on mineral royalties and establishes a new legal framework for the industry.
The powerful mining sector agreed to the measures in August and congress passed the measures without substantial amendment from either the radical left or pro business right.
Mining is central to the Peruvian economy, accounting for 60% of exports. The Sociedad Nacional de Minería (SNM) which represents mining companies, says private firms paid US$646m in royalties last year.
The three new measures: Impuesto Especial a la Minería (IEM), a modification of the Ley de Regalías Mineras (Royalty) and Gravamen Especial a la Minería (GEM), passed with a comfortable majority of 87, 84 and 83 respectively of a possible 130 votes. This reinforces the government’s position in congress and shows it is able to get cross -congressional support on specific issues. Assuming 2010’s profit figures, the total increase realised by the government in new taxes skimmed will be roughly 40% of 2010’s mining tax revenues. The point of the changes is to increase government revenue. The new tax is now levied on operating profits, not net profits and international metal prices. The combined taxes are expected to increase revenues by NS$3bn (US$1bn) in a year.
Mining companies will have to submit their own royalty, IEM or GEM figures and accounts, and pay up on a quarterly basis in arrears. This self assessment will minimise the cost to the government in terms of information collection. The calculations will then be processed and audited by the government’s tax body, Sunat. The law sets out the equation for the calculations, so companies will be able to anticipate how much they are likely to have to pay in advance.
All new contracts will have to pay a minimum 1% royalty regardless of how much or how little in the way of minerals they extract and process. The maximum will be set at 12%. Economy Minister Luis Castilla said last week that this modification will involve changing from a royalty of 1% to 3%, paid on sales, to a 1% to 12% tax on operational profits. The IEM’s progressive and cumulative rate will be between 2% and 8.4%, and the GEM’s between 4% and 13.2% - although these latter rates are not included in the legislation.
The two new taxes and the royalty modification will not affect the regional governments’ separate royalties.
The law does not outline how this revenue will be spent or distributed – the memo from congress states that it will go towards anti-poverty policies and national infrastructure, but gave no details.
Credit rating: On 30 August Standard & Poor’s, the credit rating agency which downgraded the US from AAA to AA+, upgraded Peru to BBB, above Brazil (BBB-) and on a par with Mexico. The upgrade is the first international round of applause for President Ollanta Humala’s government, which has been in office for little over a month. S&P said that it expects Humala’s government to run a mix of economic policies that will deliver strong growth as well as improve social inclusion.
S&P’s upgrade puts Peru at the top of the second division among Latin American sovereign risks behind Chile, which is the unquestioned best credit in the region with an A+ rating.
It is worth noting that S&P rates Panama as BBB-, the same as Brazil.
S&P expects that under Humala, Peru’s government debt as a proportion of GDP will decline over the next three years. The agency said that it was minded to upgrade Peru’s credit further if GDP growth became broader-based and the Nuevo Sol became a more dominant currency in financial transactions: currently, 45% of bank assets in the country are in the form of dollars.
