New study on tax incentives points to lack of transparency in the mining sector

9 September 2017

The hugely generous tax benefits granted to individual large mining projects are questioned by a new study by a team from Oxfam, Propuesta Ciudadana and Cooperacción. The study, entitled ‘Recaudación fiscal y beneficios tributarios en el sector minero’ is written by César Flores Unzaga, Carlos Quiñones Huayna, Epifanio Baca Tupayachi, and José De Echave Cáceres.

Through a meticulous study of two major enterprises, Las Bambas and Cerro Verde, the team is able to show that, for example, Las Bambas (on plausible assumptions about price trends) will only begin to pay income tax in its sixth or seventh year of operation as a result of a whole complex of special arrangements, including accounting practices.

The methodology is based on simulations that seek to estimate the amount of income tax the two companies will pay over the next few years. The report is impressive in its detail and careful analysis, and worrying in the conclusions it draws.

The study identifies the often-injudicious use of incentives as a major reason why the mining sector contributed 51 % of income tax revenue in 2007 but only some 5% today, and 25% of total revenues in 2007 but 5% now (pp24-25). The rate today is similar to what it was in the late 1990s, before the rise in mineral prices; consequently the rise in tax revenues paid by the mining sector in 2002 and 2007 was simply the result of the price bonanza, nothing more structural. Mining companies, of course, pay other taxes and royalties.

More generally, the whole exercise reveals how non-transparent the companies are allowed to be. The team was forced to rely in part on proxies to complete the simulations. The report argues that while it is good that Peru has signed up to the EITI initiative on transparency, the rules need to go further. For example, we now know what tax companies have paid but not what they should have paid (p114). Certainly adherence by particular companies should not be voluntary (both of their subjects of study have signed, but for example Chinalco, the company developing Toromocho, has not). Further, we can see from the work the team had to do, how lack of transparency is also a result of complicated and overlapping concessions and regulations.

The report is available at:
http://propuestaciudadana.org.pe/wp-content/uploads/2017/08/Recaudaci%C3%B3n-Fiscal-y-Beneficios-Tributarios-en-el-sector-minero.pdf

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