By Jay Leary
The Chilean government have announced the introduction of a tax reform bill that will introduce a new royalty system payable by copper miners. This bill contains a variable royalty rate, dependent on the quantity of copper sold. Rates could increase to as high as 32% depending on the price of copper. Given Chile is the world’s largest copper producer, the amendment of the royalty rates will have an outsized impact on copper supply and prices worldwide.
The Copper Regime in Chile
The Current Regime
Currently, Chile utilises a specific mining tax to tax mining activities, as opposed to a royalty scheme. Chile’s specific mining tax, Impuesto Especifico a la Actividad Minera (IEAM), is regulated through Articles 64-bis and 64-ter of the Chilean Income Tax Law. The law was introduced on January 1, 2006, through Law No. 20026, and was later amended in 2010 through Law No. 20469. Under this law, tax payable will depend on the amount of fine copper sold in metric tonnes. One metric tonne of fine copper is ascertained on the basis of the average spot price of Grade A copper for the corresponding fiscal year on the London Metal Exchange. The Chilean Copper Commission, Cochilco, publishes the price within the first 30 days of the year. This price is then valid for the remainder of the relevant year. The applicable tax rates under the law are as follows:
|Mining operations size||Sales of fine copper (metric tonnes)||Royalty rate|
|Medium-sized||>12,000 and </=50,000||0.5-1.93%|
The New Regime
The new royalty bill originated in the lower house of congress in 2018, and gained traction after Chile’s social protests in 2019 in the context of COVID-19. The original draft would have applied an additional royalty on sales of 15-75% depending on the copper price. Having been widely criticised by both analysts and the industry this proposal was abandoned. After relevant modifications were made, the text was approved by the senate’s mining and energy committee, resulting in the ad valorem regime the Treasury recently announced.
The new regime will apply to those companies undertaking ‘large copper mining’. Specifically, those producing more than 50,000 metric tonnes of fine copper. The royalty reform will be comprised of two components, both of which vary based on the copper price. Firstly, an ad valorem component, which contains an effective rate of between 1% and 2% for companies that produce between 50,000 and 200,000 tonnes of fine copper per year, and a rate between 1% and 4% for those that produce more than 200,000. The ad valorem component will be payable on the amount of copper produced over a given period. The second component is a rate between 2% and 32% on operational profitability for copper prices between USD$2 and USD$5 per pound. Under this component, the 2% rate is a floor, and the rate will fluctuate depending on the price of copper on the London Metals Exchange. Smaller copper producers will continue to operate under the existing system. The royalty regime places emphasis on the ad valorem tax without considering company profitability.
Comparisons with the Regimes in Western Australia and Queensland
Western Australia’s Copper Royalty Regime
In Western Australia (WA), copper royalties are collected under a value-based rate of royalty. In most cases, the rate is that prescribed by the Mineral Regulations 1981 (WA). Akin to the proposed reform in Chile, this system considers the fluctuations in price, and the material grades. The “royalty value” is essentially the gross invoice value of the mineral as sold, less any allowable deductions. The system used in WA is not too dissimilar to the reform proposed in Chile. However, the WA rates are far lower, and vary based on the form in which the copper is sold, rather than the number of metric tonnes produced. These regulations prescribe the royalty applicable to copper as follows:
|Copper (form as sold):||Percentage of “royalty value”|
|If sold as crushed or screened material||7.5%|
|If sold as a concentrate||5%|
|If sold as a nickel by-product or in metallic form||2.5%|
Queensland’s Copper Royalty Regime
Similar to WA, Queensland (Qld) charges a far more conservative royalty rate for copper than Chile. The royalty for copper is prescribed by the Mineral Resources Regulation 2013 (Qld) and is a percentage of the value of the copper. The percentage varies for each return period between 2.5% and 5% (varying in 0.2% increments) depending on an average market price relative to reference pricing prescribed by the regulations. The Qld Government publishes the average market price (for copper, this is based on London Metals Exchange daily spot prices) and percentage rate for each return period.
The value is the “gross value” of the copper less certain allowable deductions. Often the gross value is the amount for which the commodity is sold. However, this is not always the case. For example, the gross value may be a listed price (or average listed price) or it may be determined by decision of the Qld Commissioner of State Revenue. The Qld Commissioner of State Revenue Public Ruling MRA002.1 provides guidance on the calculation of royalty for copper and certain other minerals (including in concentrate form). A royalty-free threshold and processing discounts may also be available in respect of copper royalties.
 Alternatively, if there is a State Agreement Act in place for a project (a contract between the State of WA and the project which has been ratified by WA legislation) the rate may be prescribed under that legislation.
 An alternative “royalty value” applies in the case of copper sold as a nickel by-product.