Peruvian Mining Fiscal System

MineSouthAmerica Focus on PeruMarcial García

Toronto,Wednesday 5, October,2011

Peruvian Mining Fiscal SystemPage 2

Peruvian Mining Fiscal System at a Glance

Peruvian Mining Fiscal SystemPage 3

Peruvian Mining Fiscal System at a Glance

Corporate Income Tax Rate (%) 30 (a)

Capital Gains Tax Rate (%) 30

Branch Tax Rate (%) 30

Withholding Tax (%)

Dividends 4.1

Interest 4.99 or 30 (b) (c) (d)

Royalties 30 (d)

Technical Assistance 15

Branch Remittance Tax 4.1

Net Operating losses (years)

Carryback 0

Carryforward 4 years or Unlimited

a) If the taxpayer has elected to enter into a Stabilization Agreement under the Mining Law, the rate is increased by 2%.b) The reduced rate of 4.99% applies on certain interest payments to non-related parties.c) Interest on loans from related parties in excess of a 3.1 debt-to-equity ratio is not deductible.d) The Peru-Canada treaty rate is 15%.

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Peruvian Mining Fiscal System at a Glance (cont.)

VAT (%) 18

Asset Tax (%) 0.4

Mining Royalties (%) 1-3

Excess Profit Type Tax None

Import Duties (%) 0, 6, 11

Export Duties on Minerals None

Land Use Fee/Validity Tax US$ 3/ha/yr (e)

Workers Profit Sharing (%) 8

Transfer Pricing Rules Yes (f)

Tax Treaty with Canada Yes

e) Is calculated based on area of mining concession and is deductible. f) These rules are consistent with the OECD guidelines

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Peruvian Mineral Sector Fiscal Reform

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Tax climate – What are the hot issues today?

Mineral Sector Fiscal Reform

► June 5: Left-wing former army officer Ollanta Humala won Peru`s presidential election.

One of Humala´s key election promises was to make mining companies pay more taxes at a time of high prices for Peru´s major mineral products (such as copper, silver and gold) in the international market.

► August 25: Prime Minister, Salomon Lerner announced that the government had reached an agreement with mining companies to increase their contributions to the state by an extra US$ 1.1 billion. 

► 14 September: President Humala´s administration submitted three different bills to the Peruvian Congress for approval.  

► 19 September: Congress committees of (i) economy and (ii) energy and mines approved with minor changes proposed legislation. 

► 22 September: The full assembly of Peru´s Congress approved mineral sector fiscal reform.

► 29 September: Laws 29788, 29789 and 29790 approving the Modified Royalties, Special Mining Tax (SMT) and Special Mining Burden (SMB), respectively, were enacted and published in the official Gazette “El Peruano”. The regulations of the SMB were approved by Supreme Decree 173-2011 and also published.

► 1 October: Laws 29788, 29789 and 29790 became in force.

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New Mineral Sector Fiscal System

• Operating Profit Margin Ratio =

Operating Income x 100

Mining Operating Revenue

Where:

• Mining Operating Revenue = revenues generated from the sale of mineral resources with certain adjustments (e.g. final settlement payment adjustments to account for final weights, final essays and final metal quotations). 

• Operating Income = Mining Operating Revenue minus (i) cost of goods sold (“COGS”) and (ii) operating expenditures (including sales and administrative expenses) calculated under Peruvian GAAP, with the following exceptions:

• Exploration expenditures must be allocated on a pro-rata basis over the life of the mine.

• Interests are not deductible, regardless of whether they have been capitalized as part of COGS or treated as operating expenditures.  

SYSTEM

BASE

RATES BASED ON OPERATING MARGIN

MINIMUN PAYMENTS

TREATMENT FORINCOME TAX PURPOSES

RoyaltiesSpecial Mining

Tax (SMT)Special Mining Burden (SMB)

WITHOUT TAX STABILIZATION (*)With Tax

Stabilization

Substitutes Current

Royalties New New

CONCEPT

1% to 12% 2% to 8.4% 4% to 13.12%

Operating Income

Deductible

(*) Tax Stabilization agreement under the Mining Law General

1% of sales N/A N/A

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Existing Progressive Royalty

Scale based on value of sales Marginal Rates

Not over US$ 60 million: 1%

Over US$ 60 but not over US$ 120 million 2%

Over US$ 120 million 3%

Modified Royalties – The higher of a) or b)

(1) Rate considers upper limit of the scale

Without Tax Stabilization Agreement: Royalty Regime

Operating income

MarginalRate

EffectiveRate (1)

     Under 10 1,00% 1,00%

10 to 15 1,75% 1,25%

15 to 20 2,50% 1,56%

20 to 25 3,25% 1,90%

25 to 30 4,00% 2,25%

30 to 35 4,75% 2,61%

35 to 40 5,50% 2,97%

40 to 45 6,25% 3,33%

45 to 50 7,00% 3,70%

50 to 55 7,75% 4,07%

55 to 60 8,50% 4,44%

60 to 65 9,25% 4,81%

65 to 70 10,00% 5,18%

70 to 75 10,75% 5,55%

75 to 80 11,50% 5,92%

More than 80 12,00% 7,14%

a) Scale based on operating income

(b) Royalty of 1% of sales

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Without tax Stabilization Agreement: Special Mining Tax (SMT)

• The SMT will apply on operating profit derived from sales of metallic mineral resources, regardless of whether the mineral producer owns or leases the mining concession.  

• The tax liability will arise and will be payable on a quarterly basis.  

• It will be deductible for corporate income tax purposes.  

• Not applicable to non-metallic mining.

• Small miners are exempt.

(1) Rate considers upper limit of the scale

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Fiscal Regime with Tax Stabilization Agreement: Special Mining Burden (SMB)

• It will apply to mines with Tax Stabilization Agreements entered into under the General Mining Law.

• “Voluntary” payments are to be made on a quarterly basis according to individual agreements to be entered with the Peruvian government.

• The SMB is not a tax as determined by general legal principles given that it is not a compulsory payment imposed under Peru´s authority to levy taxes.

• Mining and contractual royalty payments, if applicable, are creditable against SMB payments.

(1) Rate considers upper limit of the scale

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Effective Tax Rate (ETR)

30

35

40

45

50

55

60

10% 20% 30% 40% 50% 60% 70% 80% 90%

Old System (Royalties)

New Systems (SMT) Modified royalties

Operating margin (operating income / sales)

Withouth Tax Stabilization

ETR Based on Profitabilty% of before tax income:

Source: Apoyo Consultoría

1) Assumes 70% of income is distributed as dividends2) includes income tax, workers profit sharing, royalties SMT and W/T dividendds

35

37

39

41

43

45

10% 20% 30% 40% 50% 60% 70% 80% 90%

Old System

New Systems (SMB)

With Tax Stabilization

ETR Based on Profitability

% of before tax income:

1/ Assumes 70% of income is distributed as dividends2/ includes income tax, workers profit sharing, royalties SMB and W/T dividends

Source: Apoyo Consultoría

Operating margin (operating income / sales)

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Effect on Tax Revenues

Royalty SMT SMB Total

Existing Projects 50 322 536 908

New Projects 50 32 61 143

Total 100 354 597 1,051

Without considering the effect of their deduction for income tax purposes

Source: MEF

Estimated additional Tax Revenues per year(US$ million)

Peruvian Mining Fiscal System

MineSouthAmerica Focus on PeruMarcial García

Toronto,Wednesday 5, October,2011