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Policy Responses across Space and Time

Tax Reforms in Hydrocarbons and Mining in Chile, Colombia and Peru 2021–2023

Réformes fiscales dans le secteur des hydrocarbures et de l'exploitation minière au Chili, en Colombie et au Pérou - 2021-2023
Reformas fiscales en hidrocarburos y minería en Chile, Colombia y Perú - 2021-2023
Humberto Campodónico and Armando Mendoza

Abstracts

The objective of this chapter is to analyse the impact of recent tax reforms implemented by newly elected governments in Chile, Colombia and Peru, with special emphasis on the extractive industries. We focus on the need to improve the domestic capacity of tax and other revenue collection if the United Nations Sustainable Development Goals are to be achieved.

Tax reform projects are an important tool for natural-resource-rich countries as they allow them to promote tax progressivity by levying wealth and capital income, as stated at the First Latin American Summit for an Inclusive, Sustainable and Equitable Global Tax Order, held in Cartagena, Colombia in July 2023.

This chapter analyses the results of the various policies, the difficulties encountered, the need to reach a consensus for tax reforms to be approved, the link between tax reforms and international proposals, and the extent of the changes needed to increase tax collection in order to meet outstanding social and environmental challenges.

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1. Introduction

1The economies of Latin America experienced significant economic growth from 2004 to 2013 due to the super-cycle of high commodity prices driven by the industrialisation of China. This period of high growth in the region was complemented by significant social progress, including a substantial reduction in poverty rates.

2When the super-cycle ended GDP growth decreased dramatically, and from 2014 to 2019 the annual average was 0.3 per cent. Consequently, poverty rates increased, while inequality reduction—as measured by the Gini index—slowed.

3In 2020 there was, due to the COVID-19 pandemic, negative growth of -6.8 per cent. According to the Economic Commission for Latin America and the Caribbean (ECLAC), the period 2014–2023 can be considered the second lost decade for the region (Salazar-Xirinachs, 2023): GDP growth was -0.8 per cent on average. The pandemic caused a major global recession due to the closure of economies. In Chile GDP fell by 6.8 per cent. In Colombia the figure was 7 per cent and in Peru, 10.5 per cent.

4In this scenario, Chile, Colombia and Peru saw their respective economies shrink, while government spending grew significantly as a consequence of the increased demands on healthcare and of social programmes and transfers, all driving a serious fiscal deficit and forcing public debt to rise. Consequently, the need to increase fiscal revenues rose high on the agenda. Tax-to-GDP ratios in Colombia, Chile and Peru are very low in comparison to OECD standards (see Figure 8.1).

Figure 8.1 Tax-to-GDP ratios in Latin America and the Caribbean (LAC), 2021; total tax revenues as a percentage of GDP.

Figure 8.1 Tax-to-GDP ratios in Latin America and the Caribbean (LAC), 2021; total tax revenues as a percentage of GDP.

Source: OECD, Global Revenue Statistics Database, https://www.oecd.org/​tax/​tax-policy/​global-revenue-statistics-database.htm (accessed on 30 January 2024).

  • 1 ‘In addition, since the end of 2019, citizens of several countries had expressed their discomfort, (...)

5Furthermore, the entire region—including Chile (massive popular protests in 2019), Peru (six presidents since 2016), and Colombia (where matters were aggravated by drug trafficking and corruption)—experienced social and political unrest.1

6Consequently, at the beginning of the current decade radical alternatives emerged in response to the citizenship’s demands for structural reforms, driving political platforms aimed at fostering fiscal justice and equality. In 2021 and 2022 there were general elections in Peru, Colombia and Chile. The newly elected governments proposed ambitious tax reforms, including measures to increase tax collection from extractive industries but also to raise taxation from high-income sectors, to finance environmental sustainability and healthcare.

7This is the context in which the text of this chapter developed. In it, we analyse these tax reform proposals in Colombia, Chile and Peru, with an emphasis on natural resources, the obstacles encountered, and the results achieved.

8In Section 1 we describe the measures included in recent tax reform proposals in each of the three countries studied and their impacts on their respective economies. Our main objective is to describe in detail the measures aimed at increasing revenue generated from the extractive industries in each country.

9Section 2 discusses the ‘government take’, or tax burden, in the mining industries of Peru and Chile, which are mostly focusing on the IMF model referred to as the Fiscal Analysis of Resource Industries (FARI), which involves a comparative analysis of the tax burden in different countries in order to evaluate competitiveness. For Colombia, we discuss the effective corporate tax rate (Tasa Efectiva de Tributación) commonly used in the country, which lay at the heart of discussions between the government and business sector organisations.

10Section 3 is focused on assessing the impact of tax reform. We evaluate the increase in the government take, and consider how it was defined and determined with regard to each country’s competitiveness and attractiveness vis-à-vis investment in the extractive industries (EEII) sector. We also briefly discuss the issue of illicit financial flows and taxation issues related to the EEII sector in each country.

11In Section 4, we evaluate the outcomes of the various tax reforms developed, focusing on the results with regard to the increase in tax collection and assessing opposition from business associations to this incremental tax burden. We also assess the allocation and use of the additional fiscal revenues generated by the tax reforms.

12Section 5 develops the conclusions of this chapter. We underline the overall achievements of the various proposals, the difficulties encountered, the need for consensus building if tax reforms are to win approval in Congress, the link between tax reforms and international proposals, and the magnitude of the changes needed to increase tax collection in order to address pending social and environmental challenges.

1.1 International Initiatives for Domestic Revenue Mobilisation

13The need to increase non-tax and tax revenues does not stem solely from the region’s economic woes. A place in the international community requires that commitments regarding climate change made at the Conference of the Parties (COP) 15 be fulfilled and that the Sustainable Development Goals (SDGs) be achieved. In particular, we have SDG Target 17.1: ‘Strengthen domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection’ (United Nations, 2015).

14Domestic revenue mobilisation (DRM) refers to the generation of government revenue from domestic tax or non-tax sources. Improving the DRM of developing countries is a crucial factor in sustainable development because it provides governments with the ability to fund key sectors, foster economic growth and reduce poverty. DRM can be pursued in a number of ways, including by increasing direct and indirect taxes, taking measures to combat evasion and elusion, and addressing trade mispricing for the purpose of tax evasion and avoidance, which are considered illicit financial flows.

15In Latin America, most countries—including Colombia, Chile and Peru—have implemented laws to address transfer pricing, within the structures of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Likewise, most countries have adhered to other OECD initiatives, such as the exchange of information requirements provided by the Convention on Mutual Administrative Assistance in Tax Matters (MAAC), and the Multilateral Competent Authority Agreement (MCAA), a mechanism that facilitates the automatic exchange of information.

16Although these transparency and international tax cooperation initiatives have delivered progress and a significant number of Latin American countries have joined them, they have not been sufficient to stop the diversion of profits, the erosion of tax bases, and international tax competition—problems that are exacerbated by the rapid expansion of the digital economy and the generation of greater opportunities for elusive practices.

17This is why Colombian Finance Minister José Antonio Ocampo called for a Latin American regional tax plan that goes further, saying that the OECD’s plan is ‘too limited’. (Latin American Advisor, 2023). In July 2023, Treasury, Economy, and Finance ministers and high-level officials from 16 countries gathered in Colombia for the First Latin American Summit for an Inclusive, Sustainable and Equitable Global Tax Order, and signed the Cartagena Declaration, in which they pledge to support a new forum for dialogue and exchange (Plataforma Regional de Cooperación Tributaria para América Latina y el Caribe, 2023). The Declaration establishes a cooperative platform that facilitates an inclusive and transparent discourse on issues related to the following matters:

– the creation and reinforcement of coordination mechanisms to address the negotiation of global and multilateral tax measures, such as implementing OECD Pillars 1 and 2 and achieving more significant equity in the global tax system;

– the promotion of tax progressivity by levying on wealth and capital income to foster economic equality;

– the fight against tax havens and illicit financial flows;

– the promotion of fiscal policies that establish ecological taxes and using fossil fuels to mitigate carbon emissions.

18In this chapter, we focus on the need to improve domestic capacity for tax and other revenue collection (SDG Target 17.1). We analyse tax reform projects in Colombia, Chile and Peru and their role as an important tool with which natural-resource-rich countries may promote tax progressivity by levying on wealth and capital income. This analysis complements the main issue of this thematic volume: illicit financial flows.

1.2 The Importance of the Extractive Industries in Colombia, Chile and Peru

19In all three countries, the extractive industries (EEII) play a key role in the structure of the economy, fuelling growth, creating jobs and providing a significant share of fiscal revenues. The importance of EEII has grown further in the aftermath of the COVID-19 pandemic, among efforts to reignite economic growth and development.

20Colombia has an abundance of two natural resources, oil and coal, and is the third largest oil producer in Latin America. The premier oil producing company in Colombia is Ecopetrol, the national oil company. Colombia is the leading producer of coal in Latin America, especially thermal coal, 88 per cent of which is destined for export. In 2022, oil and coal exports amounted to 55 per cent of total Colombian exports.

21Chile is one of the region’s leading economies, measured by total GDP, by per capita GDP, and by volume of exports in 2022. One of the pillars of Chile’s economy is the exploitation of its natural resources, particularly copper, of which Chile is currently the world’s largest producer and contributes around a quarter of total worldwide copper production, in addition to having the largest proven copper reserves. The Chilean state is directly involved in the exploitation of copper, through Codelco, which in 2022 contributed 29 per cent of national copper production.

22In the last 20 years, economic growth continued in Chile, albeit at lesser rates and with levels of inequality maintained. The massive popular protests of 2019 and the subsequent political and social crisis called into question the effectiveness and sustainability of the model, evidencing its limitations and deficiencies and the need for reforms addressing economic and social inequality.

23Peru is a medium-sized country with an abundance of natural resources in the form of various minerals. Peru is the world’s second largest producer of copper and silver, the third largest of zinc, the fourth of lead and tin, and the eighth of gold. Peru also has the fourth largest gold reserve in the world. All mining production is carried out by private companies as there is no state mining company. Peru is also the fifth largest producer of natural gas in South America. Its oil production, meanwhile, is small and declining.

2. Overall Tax Reform Proposal

24In this section we analyse the integral tax reforms proposed, respectively, by the governments of Chile, Colombia and Peru, including the tax reform measures proposed with regard to the extractive sector. An important issue in this analysis is the existence of tax stability contracts (see Box 1).

25In order to enact their proposals, elected governments need parliamentary majorities. In the three countries in question, no winner of a presidential election subsequently managed to secure a parliamentary majority. Thus, to be able to pass laws in Congress the president of each country was obliged to forge alliances with other parties. In Chile and Colombia, alliances were made in Congress. In Peru meanwhile, no alliance was formed.

Tax stability contracts and the extractive industries

Frequently, a major issue impacting on the implementation of tax reforms in developing countries is the existence of tax stability contracts between the government and foreign companies. Stability contracts are specific commitments by the host state not to alter the terms of its tax legislation without the consent of the counterparty. These stability agreements can be contractual, legislative, or treaty-based. Treaty-based instruments signed by the states—including bilateral investment treaties (BITs) and free trade agreements (FTAs), among others—contain explicit clauses regarding tax stability contracts.

Chile, Colombia and Peru have signed BITs and FTAs with their most important investment and trading partners.

In Colombia, legislation on tax stability contracts is defined by Decree 1157 of 2020. It states that ‘projects related to the evaluation, exploration and exploitation of non-renewable natural resources, such as the exploration, development and construction of mines and oil deposits, may not request qualification to the tax regime in the income tax for mega investments’. There is therefore no tax stability in Colombia for EEII projects.

In Chile, tax stability was formally abolished by Law No. 20.780 of 2014 (Congreso de Chile, 2014). Which states that conditions have changed, and that Chile is now a stable and trustworthy partner for international investors, and a member of the OECD. Chile does not therefore require tax stability laws.

Such stability contracts will thus no longer be signed, although all contracts signed before January 1, 2016 will be respected until the agreed stabilisation expiry dates. For mining projects this term was extended until 2023 (Reporte Minero Energético, 2023).

In Peru, tax and legal stability is enshrined in the 1993 Constitution, which states that these ‘contrato-ley’ (contract laws) cannot be modified by the government or Congress (Congreso del Perú, 1993). Contract law has a duration of 15 years and can only be modified by agreement between all parties, which provides a measure of constitutional shielding that does not exist in any other Latin American country.

Currently in Peru only two such contracts remain. As a result, 74 per cent of copper exports no longer enjoy tax stability. In the case of hydrocarbons and gas, tax and legal stability is granted for the term of the contract: 30 years for hydrocarbons and 40 for natural gas. New hydrocarbon and mining investment projects can continue to create new stability contracts.

2.1 The Colombian Tax Reform Proposals

26The bill presented to Congress in August 2022 states that the tax reform project has two objectives. First, to reduce the inequitable exemptions enjoyed by higher-income individuals and some companies, as well as to close pathways to tax evasion and avoidance. Second, to ensure that sufficient resources are secured to finance the strengthening of the social protection system. This is achieved through adjustments to the tax system, which allow progress in terms of progressivity, equity, justice, simplicity and efficiency. The bill was approved by Congress in December 2022.

27The expected revenue generation of the tax reform (see Table 8.1) for 2023 is 20.3 trillion Colombian pesos (COP) (USD 4.8 billion), or 1.39 per cent of GDP.

Table 8.1 Colombia (2023), estimated collection power of the tax reform in COP billions and as a percentage of GDP.

 Category

Amount

% of total

% of GDP

1 Taxes on natural persons

2,249

11.1%

0.15%

Income tax

612

3.0%

0.04%

Wealth tax Patrimonio

1,637

8.1%

0.11%

2 Taxes on enterprises (2a+2b)

15,709

77.5%

1.08%

2a Extractive industries

12,233

60.4%

0.84%

CIT Surcharge

8,846

43.6%

0.61%

Non-deductible royalties

3,387

16.7%

0.23%

2b Non-Extractive Industries

3,476

17.2%

0.24%

3 Healthy and environmental taxes

88

0.4%

0.01%

4 Other

2,220

11.0%

0.15%

Total (1+2+3+4)

20,266

100%

1.39%

Source: Comité Autónomo de la Regla Fiscal (2022).

28Taxes on the extractive industries are the most important source of collection. They include a surcharge on corporate income tax and constitute 60.4 per cent of the total projected tax generation power and 0.84 per cent ​​of GDP. We analyse these figure in detail below.

29Taxes on non-extractive industries are the second most important source, and represent 17.2 per cent of the total and 0.24 per cent of GDP. The corporate income tax rate of 35 per cent is not modified for non-extractive industries. The proposed tax measures on non extractive industries included the reduction of tax exemptions and an increase of 10% in the dividend tax to foreign companies.

30Taxes on natural persons and environmental and health taxes make lower contributions. In the case of environmental taxes, coal is included on the list of fossil fuels, and the consumption tax on gasoline and diesel is increased, among other measures.

2.1.1 Taxes on the Extractive Industries

31There is a permanent surcharge on the corporate income tax (CIT) levied on companies in the hydrocarbons and mining sectors. Also, the reform eliminates the deduction of royalties for the calculation of the payment of CIT (Congreso de Colombia 2022, 12). These calculations do not relate to the IMF or other multilateral organisations. They were drawn up by the Colombian public sector and discussed in Congress.

2.1.2 The Permanent CIT Surcharge for Oil and Coal

32The CIT surcharge depends on a calculation that incorporates the average price of a mineral/oil during the ten years prior to the year in which the calculation is made. The application for oil is shown in Table 8.2.

Table 8.2 Oil: Application of the permanent CIT surcharge.

Average price of Brent Oil

CIT rate

CIT surcharge

Total rate

Below 30% over the last 10 years

35%

0%

35%

Between 30 and 45% over the last 10 years

35%

5%

40%

Between 30 and 45% over the last 10 years

35%

10%

45%

Over 65% over the last 10 years

35%

15%

50%

Source: Congress of Colombia (2022).

33The application for coal is shown in Table 8.3.

Table 8.3 Coal: Application of the permanent CIT surcharge.

Average price of hard coal and lignite coal

CIT rate

CIT surcharge

Total rate

Below 65% over the last 10 years

35%

0%

35%

Between 65 and 75% over the last 10 years

35%

5%

40%

Over 75% over the last 10 years

35%

10%

45%

Source: Congreso de Colombia (2022).

2.1.3 Non-deductible Royalty for Oil and Coal

34Colombia operates an ad valorem royalty that is calculated as a percentage of the value of oil and coal and is the most common approach used among all world governments. Its value can be determined based on the volume of the oil or the mineral present at the ‘well head’.

35The oil royalty varies, according to the quantity of oil produced, from 8 per cent to a maximum of 25 per cent. The royalty for minerals is fixed at a certain percentage, being 5 per cent for volumes of less than 3 million tons per year and 10 per cent for volumes that exceed 3 million tons per year.

36Until the Tax Reform Act of 2022, oil and coal royalties could be deducted for income tax purposes. After the Act, contributions paid as a royalty for the exploitation of non-renewable resources (oil, gas and minerals, including coal) were not deductible for income tax purposes.

37Note: In November 2023, the Constitutional Court of Colombia recognised the deductibility of royalties in the payment of income tax for extractive companies. This ruling has opened a considerable fiscal gap that will complicate budget execution—which already presents enormous difficulties—in the coming years.

38In December 2023, the government requested the opening of a Fiscal Impact Incident on Sentence C-489 -2023 (Ministerio de Hacienda y Crédito Público, 2023). The request states that the government is in a very difficult position because it will have to reimburse COP 3.4 trillion (USD 800 million) already collected in 2023. The government expected to collect COP 3.2 trillion (USDS 760 million in 2024).

39The ruling of the High Court is expected in 2024.

2.1.4 Total Tax Reform Amounts Raised from the Extractive Industries in Colombia

40The desegregated amount to be collected comes mostly from the CIT surcharge on oil companies (see Table 8.4), mostly Ecopetrol, which is responsible for 60 per cent of the oil produced in Colombia. In the case of non-deductible royalties, coal companies pay the most, because of high coal prices in 2022.

Table 8.4 Colombia (2023), estimated collection from the extractive industries in COP billions and as a percentage of GDP.

Category

Amount

% of total

% of GDP

1. CIT surcharge

8,846

72.3%

0.61%%

Oil companies

6,790

55.5%

0,47%

Coal companies

2,056

16.8%

0,14%

2. Non-deductible royalties

3,387

27.7%

0.23%

Oil companies

1,454

11.9%

0,10%

Coal companies

1,934

15.8%

0.13%

Total extractive industries (1 + 2)

12,233

100%

0.84%

Source: Comité Autónomo de la Regla Fiscal (2022).

2.2 The Chilean Tax Reform Proposals

41In July 2022, the Chilean government presented its reform proposal to Congress. It justified the reform by the relatively low level of the tax burden in Chile compared to international standards, especially withing the OECD (Ministerio de Hacienda Chile, 2022a). The tax reform project established as its central objectives to advance tax justice, avoid abuse, and seek growth with justice (Ministerio de Hacienda Chile, 2022b).

42The government proposed four major lines of action in the tax field (see Table 8.5):

(i) The restructuring of the income tax regime.

(ii) The rationalisation of tax exemptions, thus reducing the scope for tax avoidance and evasion and promoting tax compliance.

(iii) The introduction of environmental and health taxes.

(iv) The establishment of a new mining royalty—in place of the Impuesto Especial a la Actividad Minera (IEAM, a special tax on mining activity)— in order to increase the state´s share in the revenues from copper projects. This income will be mostly allocated to regional governments.

Table 8.5 Chile’s Tax Collection Reform Act of 2022 (percentage of GDP).

2023

2024

2025

2026

Corporate income tax

0.2

0.6

0.9

1.2

Natural persons wealth tax

0

0.4

0.5

0.5

Mining royalty

0

0.1

0.5

0.5

Reduction of exemptions

0

0.1

0.1

0.2

Evasion and elusion

0.4

0.8

1.2

1.6

Corrective taxes

0

0

0.1

0.3

Gross increase of collection

0.6

2

3.3

4.3

Decrease of revenue collection

-0.01

-0.04

-0.04

-0.2

Net increase of collection

0.6

1.9

3.2

4.1

Source: Ministerio de Hacienda, Chile (2022a)

43The IMF, in its article IV Report for Chile (IMF, 2023), indicates that the tax reform project was ambitious and comprehensive, and praises the proposed objectives of making the tax system more progressive and efficient. It also, however, recommends prudence regarding increases in spending, conditioned to the performance of tax collection and fiscal strengthening. Likewise, the Fund expresses doubts that the measures aimed at taxing wealth and improving the administration of the tax system would have a significant impact.

44In March 2023, the government presented the bill to Congress for discussion and approval. However, the project did not obtain a majority of votes and was rejected.

2.2.1 The Mining Royalty—Chile

  • 2 Currently, the IEAM applies a progressive scale with tax rates between 5 per cent and 14 per cent.

45The search for an adequate level of tax collection from the mining sector has been a long-standing issue on the Chilean national agenda, at least since 2004 when the first tax or royalty, the IEAM, was introduced (Gamboni and Molinare, 2022). The IEAM was modified in 2011 with the aim of raising the levels of taxes collected by the state.2

46In 2018, a bill was presented to Congress with the aim of replacing the IEAM with a new mining royalty. In 2022, the Boric government incorporated this bill into its reform proposal. Although the overall tax reform proposal was not approved in March 2023, as explained above, the bill to replace the IEAM continued its way through Congress and was approved the following month.

47The initial expectation was that the new royalty would collect an additional amount in taxes equivalent to 1 per cent of GDP. In fact, the royalty approved by Congress will lead to the collection of an estimated 0.45‬ per cent of the GDP (Ministerio de Hacienda, Chile, 2023).

48This new royalty would apply exclusively to large-scale mining, defined as that with a production of more than 50,000 metric tons of fine copper per year. The new royalty includes two components: (i) an ad valorem component, with a fixed 1 per cent rate, for large-scale copper mining, applicable to sales, and (ii) a component applied to mining operational taxable income (RIOMA, Renta Imponible Operacional Minera Ajustada) with variable rates according to the operating margin (Ministerio de Hacienda, Chile, 2023). These rates can range from 8 to 26 per cent.

49The tax base would be the RIOMA, excluding the costs of depreciation and the amortisation of intangibles. Using historical parameters on copper prices, the government estimated that collection from the mining sector would gradually increase, reaching an additional net fiscal revenue close to 0.45 per cent of GDP, equivalent to USD 1.35 billion per year (see Table 8.6).

Table 8.6 Chile—expected tax collection from the new mining royalty (percentage of GDP).

2024

2025

2026

Expected Permanent Impact

Increase of collection - new royalty

0.08

0.27

0.27

0.30

Increase of collection - new production

0.15

0.22

0.22

0.22

Lower collection due to cost increase

-0.08

-0.07

-0.07

- 0.07

Net increase in tax collection, private mining companies

0.15

0.42

0.42

0.45

Source: Ministerio de Hacienda, Chile (2022a).

50The proceeds from the new royalty would go to three funds for communities and regional development: (i) the Regional Fund for Productivity and Development, (ii) the Mining Communes Fund, and (iii) the Support Fund for Territorial Equity. The additional sums allocated to regions and communes via these funds would initially amount to some US 450 million.

2.2.2 The Lithium Situation

51A pending issue in relation to the new mining royalty is whether it is applicable to lithium, the trade in which has developed significantly as reflected in the growth in its export volumes. Lithium’s strategic importance worldwide represents an opportunity for growth and development for the Chilean economy.

52For this reason, lithium has been declared of national interest, and consequently it is not concessible, resulting in its exploitation being carried out through contracts negotiated between the state and private companies.

53These contracts establish specific royalties, unlike the rest of mining contracts (García Bernal, 2021). And the introduction of the new mining royalty raises questions regarding the lithium tax regime (Diario Financiero, 2023). At present, lithium producers do not—as it is not a concessible mineral—pay the IEAM. Concern has, however, been expressed regarding whether this exemption will continue when the new royalty comes into force, given the ambiguity of legal interpretations regarding whether lithium is or is not concessible, and also considering that royalties are already fixed by direct negotiation between the state and the companies (Jorrat, 2022).

2.3 The Peruvian Tax Reform Proposals

54Unlike Chile and Colombia, the route adopted by the Peruvian government for its tax reform was to request a delegation of powers to allow it to legislate via decree. In October 2021, this request was formally presented to Congress (Government of Peru, 2021).

55The request was based on the need to strengthen fiscal and tax policy and to generate resources to finance greater social investment, and focused on increasing collection rates, reducing distortions and deficiencies in the tax system, and strengthening equity in the distribution of tax burdens, among other objectives. Thus, the proposed measures included the revision of the income tax regime as applicable to high incomes from movable and immovable property, as well as of the case of high labour income. Rationalisation of the regimes for small and medium-sized enterprises was also considered, with the aim of simplifying the regimes and making compliance and control more transparent.

56The most controversial measure of the entire package was the reform of the mining tax regime. The proposal was to increase the minimum floor of the mining royalty (which was then 1 per cent), increase the royalty rates and the Special Mining Tax for the highest profit brackets, and review the determination of the taxable base and the elimination of the royalty’s deductibility from operating profits (as in Colombia).

57The government stated that it would consult on the proposed reforms to the mining regime with multilateral organisations such as the IMF and the World Bank. In December 2021, Congress agreed to grant the government legislative powers (Congreso del Perú, 2021). However, this agreement covered only 20 per cent of the measures contained in the government’s project. The remaining 80 per cent, meanwhile, included the tax reform proposal for the mining sector.

3. Impact of the Reforms: Government Take versus Revenue Competitiveness with Other Countries

58There is an ongoing discussion about how higher taxes on extractive industries affect competitiveness. The two variables in this discussion are the tax burden, or government take, and the country’s ability to avoid applying an excessive burden that discourages investment (foreign or national) in comparison with other countries where the tax burden is lower.

59Government take is defined as the part of the profits that goes to the government after the deduction of operating and administrative costs and royalties (if they exist). The company, meanwhile, takes the profit.

60The public availability of the data used for calculating government take is very important because it supports transparency. There are several open data models for designing and evaluating oil and mining deals in resource-rich countries. This too is very important because the availability of open data on extractives and the presence of a growing community of users of such models is an important step towards improving public scrutiny and the understanding of resource deals and revenue flows (NRGI, 2015).

61For Peru and Chile, we will discuss the tax burden in mining industries, mostly focusing on the IMF model referred to as the Fiscal Analysis of Resource Industries (FARI), which compares the tax burden in different countries in order to evaluate competitiveness. In Colombia, we will discuss the effective corporate tax rate (Tasa Efectiva de Tributación), which was at the centre of discussions between the government and business organisations and is commonly used in the country.

3.1 Calculating the Government Take in Mining

62A crucial element in the tax reform discussion is the determination of the tax burden and an assessment of the impact that possible changes in the taxation regime might have on the attractiveness and competitiveness of mining projects. This assessment should be as accurate and as transparent as possible.

63FARI was developed to check how the tax regime affects the profitability of a project, and allows comparisons between different types of tax instruments and between countries. FARI focuses on the average effective tax rate (AETR), the marginal effective tax rate (METR), and the progressivity of the tax regime (IMF, 2022). FARI evaluates the tax regime while assuming that other key factors—such as the size and quality of the deposits or the degree of development and stability of the economy—remain constant. FARI also assumes that the tax regime works efficiently, and without major leaks or losses.

64In Chile, a variation of the FARI model has been developed by Michel Jorrat. His methodology is based on the effective tax rate, defined as the total in annual tax divided by financial profits before taxes (Jorrat, 2021). This methodology also considers how factors such as sociopolitical instability or foreign capital’s uncertainty about the tax regime add to the perception of risk and are reflected in a project’s discount rate (Jorrat, Peters and Lagos, 2021). Other factors are also included in the evaluation, such as the grade and depth of the deposits, the cost and productivity of labour, and the cost of supplying water and energy.

65The Jorrat method played a central role in the Chilean discussion of tax reform. The Ministry of Finance used an adjusted variation of the Jorrat method to calculate the tax burden on copper mining before and after the adoption of a new mining royalty, analysing how Chile’s competitiveness would be affected vis-à-vis other leading mining countries (Ministerio de Hacienda Chile, 2023).

66In Peru, meanwhile, the Ministry of Economy and Finance requested the IMF evaluate the tax reform proposals using the FARI model, also focusing on how to increase collection from the mining sector without losing competitiveness (IMF, 2022).

3.2 The Government Take of Chile and the Jorrat Method

67In Chile, the government take (tax burden) comprises the CIT plus an additional tax on dividends plus the mining royalty. The bill presented to Congress in 2018 proposed the establishment of a new mining royalty to replace the old IEAM and increase the tax burden. It is important to note that this bill did not propose the modification of the CIT rate nor that of dividends.

68Consequently, the level of the new royalty was the key element upon which an agreement had to be reached in Congress. The discussions between the government and business associations have led to a wide divergence in estimates of the expected tax burden. After lengthy negotiations, the government proposed a maximum tax burden of 48 per cent while the opposition requested that it should not exceed 44 per cent with the aim of ensuring continued competitive with other countries.

69Finally, a consensus was reached. The tax burden for large-scale mining would be set at a maximum of 46.5 per cent and for medium-scale mining the figure would be 45.5 per cent (Ministerio de Hacienda Chile, 2023). These figures are enshrined in the new mining law.

3.3 The Government Take of Peru and the FARI Model

70In Peru, the government had requested the delegation of legislative powers to enable a comprehensive tax reform that included as one of its axes the modification of the mining tax regime. The main proposals were increasing the minimum royalty floor, increasing marginal royalty rates, and reviewing the deductibility of royalties for the purposes of income tax payment (Government of Peru, 2021).

  • 3 The government take is the sum of the fiscal burden, the participation of workers in profits and th (...)

71To this end, the Peruvian government requested the IMF estimate the impact of the aforementioned measures on both the tax burden and the competitiveness of the sector (IMF, 2022). The resulting report estimated that Peru’s government take was 43.1 per cent according to the FARI model.3 The IMF also concluded that there was moderate scope to increase tax collection in the sector without affecting competitiveness. The Peruvian Congress did not, however, grant the government legislative powers to make legal modifications to the mining regime.

3.4 The Government Take of Colombia: The Effective Tax Rate

72Within the framework of its tax reform, the Colombian government introduced legal modifications to the calculation of the tax burden analysed above. Law 2277 of 2022 states that the royalty is not considered an operating cost and therefore that it is not deductible in the calculation of income tax payments.

73For Colombia, the government take is defined as the effective tax rate (TET, Tasa Efectiva de Tributación). The TET is calculated based on the amounts actually paid by companies, with data obtained from the tax administration.

74The Ministry of Finance calculates the TET for hydrocarbons assuming different tax rates of 0 per cent, 5 per cent, 10 per cent and 15 per cent. It is composed of the following elements:

75– The CIT effective rate plus the CIT surcharge;

– plus the non-deductibility of the royalty;

– plus the increase from 10 to 20 per cent of the dividend tax.

76The TET obtained by the government is equivalent to 46.8 per cent when it applies the maximum CIT surcharge of 15 per cent. This rate represents a TET increase of 15.3 per cent compared to the previous legal regime. The government argues that this figure does not affect competitiveness because it is progressive (it will only be applied when prices are 65 per cent higher than the average of the last ten years).

77Various business associations and research institutes, including Fedesarrollo (Fedesarrollo, 2022), object to such a calculation. Objections focus mainly on the fact that Law 2277 establishes the non-deductibility of the royalty, which substantially increases the government take. In addition, Fedesarrollo includes in its calculations certain costs that are not taken into consideration by the Ministry of Finance.

78The TET calculated by Fedesarrollo is 70.5 per cent, considerably higher than the 46.8 per cent calculated by the Ministry. Thus, for Fedesarrollo this increase in the TET would endanger the competitiveness of the Colombian oil sector. Similar opinions are held by the Colombian Petroleum Association (APC, 2022) and the Colombian Mining Association (Asociación Colombiana de Minería, 2022), whose TET calculation figures are close to those of Fedesarrollo.

79For its part, the Ministry of Finance objects to these counter-calculations because, it says, they do not take into account the real costs incurred by the industry.

Illicit Financial Flows and Taxation Issues in EEII.

Although it has not been the central theme of this paper, it is very important to mention that anti-tax-evasion measures were contemplated in the Colombian Tax Reform Act, in the Chilean tax reform project, and in the Peruvian proposal. The main objectives were to confront the different modalities of tax avoidance, considering that in these three countries non-compliance with regard to the collection of income tax and value added tax (VAT) is considerable (see Table 8.7).

Table 8.7 Estimated tax non-compliance levels as a percentage of potential revenue collection.

Country (year)

Sales tax

Corporate income tax

Peru (2020)

38.1

49.5

Peru (2014)

28.7

44.1

Chile (2017)

20.0

31.0

Colombia (2015)

20.1

34.4

Source: Ministerio de Economía y Finanzas, Peru (2021).

The Colombian law also introduced an OECD Pillar Two–inspired domestic minimum 15 per cent effective tax rate, aiming to compute financial profits and to top up tax due, similar to Pillar Two’s Model Rules at the domestic level. This 15 per cent tax limits de facto exempted income, itemised tax deductions, and other tax incentives (Fernandez, 2023).

The issue of illicit financial flows is part of the fight against tax avoidance, particularly in relation to EEII projects. Thus, the linkage between such flows and mining activities in the Andean region has been well documented. It has been estimated that between 2000 and 2014 the annual gross outflow of illicit financial flows related to mining exports from Andean countries (Bolivia, Colombia, Ecuador and Peru) grew sevenfold. The accumulated total was USD 5.5 billion, equivalent to approximately 2 per cent of the total value of mining exports, mainly gold and copper (Hanni and Podesta, 2016).

The United States and Switzerland have been identified as the main destinations of illicit financial flows from illegal mining operations, mainly for the following reasons: aggressive tax planning including the use of transfer price mechanisms, outright fraudulent invoicing, and the laundering of illegal and smuggled mining production, particularly gold.

In Colombia, recent studies have enquired regarding the discrepancies between the volumes of gold officially produced and those effectively exported. The unexplained gap of approximately 20 per cent between the two figures is attributed to informal and illegal mining activities (CEDETRABAJO and GFI, 2019).

One of the vulnerable aspects of copper ore taxation, especially when it is exported as a concentrate, is its valuation. The issue of inspection of mining production is a key element to consider when evaluating opportunities to increase the sector’s contribution. These challenges have been taken into consideration in the formulation of the mining tax burden calculation methodologies analysed in this chapter.

Thus, Jorrat (2021) indicates that the correct valuation of exported mining products is crucial, particularly considering the risks of under-invoicing of both prices and quantities. Thus, Jorrat recognises the importance of strengthening tax control in critical areas, such as the analysis of transfer prices and the verification, by laboratories, of exported mineral contents.

Recent studies provide mixed evidence regarding the possible problems of an under-invoicing of concentrate exports in Chile and Peru. It has been estimated that in little more than a decade the under-invoicing of copper exports from Chile has amounted to in excess of USD 6.8 billion, and in the case of Peru the figure is over USD1.4 billion (Hanni and Podesta, 2019). A similar study analysing exports of copper concentrate in Peru finds signs of asymmetries in export prices that require further analysis (Rojas, 2020). Analysis of the exporting of zinc concentrates from Peru found slight indications of a possible undervaluation, although periods were identified where the levels of undervaluation require further investigation (Campodónico et al., 2021).

4. Assessing the Tax Reforms of 2021 and 2022

80In Colombia, Chile and Peru, the proposed tax reforms addressed the question of how to increase revenue drawn from the extractive industries. This is reasonable considering the weight that these sectors—mining and hydrocarbons—have as generators of tax revenue, particularly during booms in international prices.

81It would, however, be wrong to say that the tax reform processes in these three countries were limited to proposing changes to the tax regimes governing the extractive industries. On the contrary, in each country, within the framework of the reform, a range of diverse proposals were deployed to substantially transform the tax system and address certain of its structural elements (see Table 8.8).

82In Chile, the tax reform proposal included not only the establishment of a new mining royalty, but also measures to restructure income tax for high incomes, create a specific tax on large fortunes, and rationalise tax exemptions and combat evasion and avoidance, as well as measures for the introduction of environmental taxes (Ministerio de Hacienda, Chile, 2022b). In this sense, it should be noted that the greatest expectation with regard to tax collection did not fall on the new mining royalty, which would generate 0.45 per cent of GDP, but rather on other measures, which together would lead to the collection of the equivalent of 3.6 per cent of GDP—that is, seven times more than would the new mining royalty.

Table 8.8 Tax act proposals: Changes in the tax regime.

Colombia

Chile

Peru (*)

Corporate income tax (CIT)

No

No

No

CIT surcharge

Yes

No

No

Royalty

No

Yes

Yes

Non-deductible royalty

Yes

No

Yes

Tax on dividends

Yes

No

No

* The proposed mining tax reform was not approved by Congress.

Sources: Government of Peru (2021); Congreso de Colombia (2022); Congreso de Chile (2023).

83In Colombia, the measures to increase tax collection from the extractive industries, and particularly the oil sector, do have considerable weight. Thus, measures such as a surtax on the industries’ income or the non-deductibility of royalties would generate estimated additional revenues amounting to 0.84 per cent of GDP, compared to the 0.55 per cent generated by the rest of the proposed measures, including modifications to the income tax regime for natural persons and the introduction of a wealth tax and environmental taxes (Ministerio de Hacienda y Crédito Público, 2022a).

84Most of the money will come from Ecopetrol, the country’s main oil producer. The tax reform proposal is part of the Petro government’s energy transition policy, which seeks to reduce dependence on fossil fuels.

85It is, however, difficult to estimate the increase in tax collected compared to previous years, since this depends on the volumes produced and the international prices of oil, coal and copper. Preliminary estimates put the figure at 52 per cent for oil and 90 per cent for coal. In Chile, meanwhile, the figure is 17 per cent if we include the mining royalty.

86In Peru, the aim was to generate additional revenues equivalent to 1.5 per cent of GDP. And as we have seen, one of the axes of the proposals was reform of the tax system for mining, but they also included an extensive package of measures on capital income, high incomes, and the regime for small and micro businesses, as well as on the fight against tax evasion and avoidance.

87In Colombia, Chile and Peru, critical arguments against the reform were led by mining and oil associations. In Colombia, the Asociación Colombiana de Minería (ACP) (Asociación Colombiana de Minería, 2022) expressed strong criticism of the changes that would be introduced by the reform, focusing on (i) the non-deductibility of royalties paid for tax credit purposes, and (ii) the CIT surcharge levelled on coal. ACP states that the new tax regime might render current coal projects unsustainable and that new projects would be economically unfeasible. ACP has also lent its support to a Constitutional Court review of several lawsuits brought against the reform.

As mentioned before, the discussion in Colombia regarding taxation and the extractive industries is still far from solved, especially because Gustavo Petro’s government has made energy transition a major goal, aiming to gradually replace fossil fuels with alternative energy sources, even although oil is a key source of fiscal resources for Colombia.

88In Chile, the Consejo Minero (Mining Council) and the Sociedad Nacional Minera (SONAMI, the national mining company) were the main opponents of the effort to establish the new mining royalty, voicing their concerns regarding the impact an increased tax burden would have on Chile’s competitiveness as a preferred destination for investments in new mining projects (Consejo Minero, 2022). The Consejo Minero went as far as commissioning studies comparing how the mining sector’s tax burden would, given the new royalty, compare to that of other countries where mining is prevalent (Ernst and Young, 2020).

89Chilean mining business associations, meanwhile, recognised the benefit of a new legal framework with clear rules, and requested that the government ensure that this new framework is tax invariant. Consequently, a balance would have been achieved between greater revenue and the preservation of competitiveness—a critical issue given that production costs have been gradually increasing and many current mining operations are already at a mature stage, with ore grades diminishing (Wood Mackenzie, 2021).

90The scenario was different in Peru, where the mining sector was united in its total opposition to any change to the current regime, rejecting dialogue and negotiation. The Sociedad Nacional de Minería, Petroleo y Energia (SNMPE, a national mining, oil and energy NGO) attacked the government’s tax reform proposal head on, claiming that changes to the mining regime would affect competitiveness and lead to the cancellation of mining projects with overall estimated investments of more than USD 50 billion (Rumbo Minero, 2021).

91In each country the tax reform proposal considered not only income generation but also where these new revenues would go. Indeed, support for the reforms has not only been based on their capacity to generate greater collection with transparency and progressivity, but also on the equitable and legitimate distribution and use of said monies.

92In Chile the proposal was made as part of a Fiscal Pact for development and social justice aimed at allocating the bulk of the resources thus generated to financing social rights such as improved pensions, access to healthcare, investment in education and the construction of social housing (Presidencia de Chile, 2022). Likewise, an agenda for fiscal decentralisation was proposed, involving the creation of various investment funds in favour of subnational governments.

93In Colombia the tax reform was part of a comprehensive drive for equality and social justice, and the largest part of the resources generated would be applied mainly to the so-called historical social debt. In this way, the tax reform would reduce exclusion and inequality through various channels, including the financing of poverty reduction programmes and the redistribution of tax burdens, thus reducing income and wealth gaps.

94In Peru the proposal included an explicit commitment that the majority of resources generated would be used with transparency and legitimacy and exclusively to finance the closing of social gaps. There would be greater investment in education, healthcare, access to drinking water, connectivity and agricultural development. The proposal also established the government’s obligation to periodically inform Congress and the people with regard to the use of said resources and what had been achieved with regard to the closing of these social gaps.

5. Conclusions

95In the few years that have followed the crisis of the pandemic, several Latin American countries have faced a difficult economic, social and political context that has fuelled demands for greater spending with the aim of supporting economic and social recovery. Furthermore, the recent boom in international commodity prices—which has been particularly strong in the mining sector—has encouraged efforts to expand government participation in the extraordinary incomes generated by the exploitation of natural resources, the goal being to return to macroeconomic equilibrium.

96Consequently, the need to increase fiscal revenues was high on the agenda in the presidential elections of 2021 and 2022 in Colombia, Chile and Peru. This coincided with, and was legitimised by, the United Nations Sustainable Development Goals, unveiled in 2015.

97In overall terms, tax reform projects proposed in Colombia, Chile and Peru were expected to generate 1.39, 3.2 and 1.55 per cent of GDP, respectively. These reforms encompassed taxes on the corporate sector and natural persons and healthcare and environmental taxes. Most importantly, new taxes on EEII took a leading role. The revenues involved were significant given the scale of the social and economic crisis. But while they would constitute a step forward in efforts to ameliorate each country’s tax-to-GDP ratio, much still needs to be done to approach parity with OECD member states.

98In Colombia the tax reform proposal was approved in its entirety. In Chile only the mining royalty (0.5 per cent of GDP) was approved. In Peru, the most important proposals were not approved by Congress, including tax reform in the extractive industries.

99The tax regime for EEII, mining, and hydrocarbons was at the heart of reform efforts in each country. In this regard, these efforts were successful in the cases of Chile, with the establishment of the new mining royalty, and Colombia, with the establishment of a CIT surcharge and non-deductible royalties for the extractive industries. In the case of Peru, however, Congress withheld the legislative powers that the government had requested in order to modify the tax regime for the mining sector.

100These tax reform efforts were also aligned with the positions advanced on fiscal matters by key multilaterals organisations such as the OECD, IMF and the Interamerican Development Bank (IDB). In particular, the OECD has proactively promoted increased progressiveness in tax systems, and has made specific recommendations for Chile and Colombia, which are OECD member states.

101Certainly, a critical issue in the proposed reform of the tax regime for EEII was the determination of the effective tax burden, with comparative analyses across countries being regarded as crucial if competitiveness were to be maintained. This is a controversial issue and is subject to interpretation, and multiple methodologies can be applied to estimate said tax burden.

102In Chile, the final stage of discussions between the government and the mining companies regarding the new royalty focused on how the increase in the tax burden would affect the competitiveness and sustainability of the Chilean mining sector. Both sides, regardless of their differences, vowed to ensure Chile would continue to be an attractive destination for mining investments.

103In Colombia’s tax reform the scenario was quite different. The government’s stated goal regarding EEII was growing the government take of the revenues generated by the oil and coal sectors, and issues of competitiveness and sustainability played only a secondary role. This reflects how the overall national development strategy undertaken by the Petro government includes, as a key component, the transformation of the energy matrix and a diminishing role for the oil and coal sectors.

104With regard to the IMF, national reports for these three countries have highlighted the need for improved fiscal sustainability and efficiency. In Peru, in response to an official request, the Fund evaluated several key proposals for tax reform, including the proposed changes to the tax regime for the mining sector, formulating recommendations on how to increase revenues without affecting competitiveness.

105The impact of these tax reform initiatives in terms of increased collection from EEII is, although significant, not exceptional. In Colombia, the sums that would be generated, considering tax and non-tax revenues (royalties), have been estimated to be 0.57 per cent of GDP for oil plus 0.34 per cent of GDP for coal. In Chile, the estimated figure is 0.50 per cent of GDP from revenues collected from the mining sector.

106These three countries are still a long way from equitable levels of tax collection and relevant international benchmarks, including OECD standards, and the expected result of tax reforms would be only a marginal increase in existing tax collection levels.

107Evidence indicates that tax reform projects need a favourable correlation of forces, which implies a process of negotiation and consensus building in the political and social sectors with the aim of guaranteeing the feasibility and legitimacy of the reform. In two of the countries analysed in this chapter, Chile and Colombia, it was possible to build such a political consensus. This was not the case for Peru.

108Consensus building could, however, also translate into the moderation of proposed changes to the current tax system. And in the three tax reform processes studied here there was clearly a need for ongoing fine-tuning and adjustment of the initial, often excessively optimistic proposals, correcting collection estimates based on more realistic and viable criteria.

109In each country, opposition to tax reform was led by business associations linked to the mining and oil sectors. These associations based their arguments against reform mainly on the perceived loss of competitiveness and sustainability caused by an increased tax burden. In Colombia and Chile, reform of the EEII tax regime went ahead successfully regardless of this opposition. While in Peru the drive to reform the mining tax regime was stopped in its tracks.

110Tax stability is, generally, another consideration in tax reform initiatives given its potential to become a major obstacle to the implementation of such reform measures, particularly in the case of the extractive industries. It must be noted, however, that in the countries analysed tax stability played a comparatively minor role, if any role at all, in discussion of the reforms. In Colombia, this was because tax stability does not apply to the country’s EEII, and in Chile because the tax stability route is no longer available. Further, in Chile and Peru many tax stability contracts have already run their course and, currently, most mining production is not protected by tax stability agreements.

111Although the increase in tax collected as a result of these reform initiatives is relatively small in quantitative terms, the reforms’ importance and legitimacy are enhanced by the fact that the additional resources thus generated would be funnelled to critical areas such as social expenditure and productive investment, particularly at the regional and local levels.

112In each of the three countries the tax reform initiative was linked to global initiatives to combat international tax fraud, such as the OECD/G20 BEPS framework, the aim being to reinforce each government’s monitoring capacity, particularly in the field of EEII, with a focus on abusive transfer pricing, the undervaluation of mineral exports, and illicit financial flows affecting the extractive industries. As a consequence of the process analysed in this chapter, an important initiative regarding domestic resource mobilisation and transparency was launched in July 2023 in Cartagena: the collaborative platform the First Latin American Summit for an Inclusive, Sustainable and Equitable Global Tax Order.

113We consider this chapter a contribution to the discussion of how to increase and make transparent tax collection from the extractive industries—a critical issue for countries rich in natural resources.

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Notes

1 ‘In addition, since the end of 2019, citizens of several countries had expressed their discomfort, discontent and dissatisfaction with the political system and its actors in large protest demonstrations demanding greater social justice’ (CEPAL, 2020, 14).

2 Currently, the IEAM applies a progressive scale with tax rates between 5 per cent and 14 per cent.

3 The government take is the sum of the fiscal burden, the participation of workers in profits and the fees for the stability contract (IMF, 2022, 21)

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List of illustrations

Title Figure 8.1 Tax-to-GDP ratios in Latin America and the Caribbean (LAC), 2021; total tax revenues as a percentage of GDP.
Credits Source: OECD, Global Revenue Statistics Database, https://www.oecd.org/​tax/​tax-policy/​global-revenue-statistics-database.htm (accessed on 30 January 2024).
URL http://journals.openedition.org/poldev/docannexe/image/6615/img-1.png
File image/png, 29k
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Cite this article

Electronic reference

Humberto Campodónico and Armando Mendoza, Tax Reforms in Hydrocarbons and Mining in Chile, Colombia and Peru 2021–2023International Development Policy | Revue internationale de politique de développement [Online], 17 | 2024, Online since 27 May 2024, connection on 16 June 2024. URL: http://journals.openedition.org/poldev/6615; DOI: https://doi.org/10.4000/11q9c

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About the authors

Humberto Campodónico

Humberto Campodónico is a professor at the Faculty of Economics of the Universidad Nacional Mayor de San Marcos at Lima, Peru. He has been regional adviser on natural resources at the Economic Commission for Latin America and the Caribbean (ECLAC, United Nations, Santiago) and is a former president of Petroperú, the national oil company.

By this author

Armando Mendoza

Armando Mendoza is a professor at the Faculty of Business Administration of the Universidad Nacional Mayor de San Marcos at Lima, Peru. He has worked for Peru’s Ministry of Economics and Finance and for the Economic Commission for Latin America and the Caribbean (ECLAC).

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