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April 25, 2023
2023-0760

Chilean government introduces amendments to the Mining Royalty bill

  • The Chilean government has introduced amendments to a bill the Senate is considering on taxation of mining royalties.
  • The changes would (i) require financial statements to be reported; (ii) include start-up and organization expenses in the taxable base of the margin component of the royalty; and (iii) cap the taxation of mining royalties at 48%.

On 11 April 2023, the government of Chilean President Gabriel Boric introduced amendments to the Mining Royalty bill (Bulletin No. 12093-08), currently under discussion in the Senate, in an effort to achieve sufficient consensus for its approval.

The amendments include three fundamentals:

1) Maintaining the obligation to report financial statements to the Financial Market Commission (CMF)

Currently, mining companies subject to tax stability (under the now-repealed Decree Law 600) are required to report their audited financial statements to the CMF on a quarterly basis. However, these obligations also expire when the respective agreements do (there are several agreements under Decree Law 600, which, according to the Ministry of Finance, actually conclude in 2023). Considering that the information historically reported to the CMF through audited financial statements has been deemed useful for the design of public policies, the amendments apply this duty to report (also on a quarterly basis) to taxpayers in the mining industry generally.

2) Reinstating organization and start-up expenses as a cost for calculating the taxable base of the margin component of the royalty

In the project approved by the Chamber of Deputies, the taxable base of the margin component of the royalty, called "RIOMA" (Adjusted Mining Operational Income), does not consider start-up and operation expenses to be deductible (unlike the specific tax on mining currently in force). The amendments allow these types of expenses to be amortized over a six-year period, which is the maximum period established for income tax purposes. Therefore, if amortization for income tax purposes was accomplished in a period of less than six years, the RIOMA will have to be adjusted so that a six-year amortization is reflected.

3) Establishing a 48% maximum potential tax burden

The amendments cap the maximum taxation applicable to mining royalty taxpayers (called the "maximum potential tax burden"), including 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, mining royalty and final tax that the owners would pay (assuming they distribute 100% of profits) exceeds 48% of the operational profitability — defined as RIOMA before taxes — the royalty will be adjusted so that it does not exceed 48%.

Final taxes, assuming 100% distribution, are calculated considering a tax burden of 35% on the net taxable income for income tax purposes, including the corporate tax. With this formula, the government seeks to ensure that during high-copper cycles, the ad valorem and operational component do not result in disproportionate taxation, while ensuring revenue in normal or low cycles.

Finally, in explaining the basis of the amendments to the Senate, the government announced that it planned to introduce tax stability measures for the sector but offered no further details. This issue was not included in the amendments, however.

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

EY Chile, Santiago

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

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

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

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

 

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