Chile Fiscal Regime: Considerations for the mining industry

A) TAXATION SYSTEM

Mining activity in Chile is subjected to the standard tax regime that is applicable to all midsize and large businesses. In addition, mining companies are subjected to a specific taxation over profits from mine operations. The public office that is responsible for the implementation and control of all internal taxes in Chile is the Servicios de Impuestos Internos (equivalent to the IRS), also known by its acronym SII. This institution depends on the Ministry of Finance. It has a Regional Office in each Region and five in the Metropolitan Region of Santiago, a Directorate of Large Taxpayers and the respective National Directorate.

 Francisco Acuña

Francisco Acuña

 

A.1) Corporate Income Tax

Corporate Income Tax applies unanimously to all business with commercial activities. On September 2014, Chile enacted a tax reform (Law No. 20.780), which has become effective in stages starting in October 2014 until it is fully in force by 2018.

 

During 2016, Corporate Income Tax rate sets at 24% and is annually paid during April of the following year. This tax is applied to accrued income on a yearly basis. It is paid on profit after acquittal of the specific mining tax. An additional tax of 35% is applied to income that is withdrawn, distributed as dividends or remitted abroad by non-resident individuals or legal entities. However, the legal entity receives a tax credit for the tax paid as corporate tax. If the partners or shareholders of the entity distributing profits are individuals resident in Chile, then the global aggregate tax is assessable at progressive rates ranging from 0% to 40%.

 

The tax base in Chile allows for deduction of accelerated depreciation and cumulative losses as well as interest payments in the total tax bill. Since the mining industry uses expensive capital inputs, the accelerated depreciation deduction is significant. This deduction allows capital intensive enterprises to recoup a portion of their equipment costs by claiming large depreciation deductions in the early years of the life of the expected life of the equipment. Allowing deductions for interest payments gives firms the incentive to finance projects with debt rather than equity. These regulations are particularly significant for the capital-intensive mining industry.

 

According to the revised bill, Chile will change to a dual tax system starting from 2017, where the tax system should be chosen during the second semester of 2016.

  • Attributed Income System: Shareholders would be taxed on an accrual basis, with a first category income tax rate of 25% imposed at the level of the operating entity, plus global complementary tax at progressive rates for resident individuals or an additional withholding income tax of 35% for nonresident shareholders (the first category income tax being 100% creditable), resulting in an overall income tax charge of 35% for nonresidents. Under this system, profits would be required to be attributed to the owners or shareholders, irrespective of whether a distribution actually is made.
  • Semi-Integrated System: Shareholders would be taxed on a cash basis (when profits are distributed), but at a first category income tax rate of 25.5% for 2017 (and 27% as from 2018). This corporate tax still would be creditable against the 35% additional withholding income tax under that system, but 35% of the credit would have to be paid to the Treasury, so, in practice, only 65% of the corporate tax would be creditable. Thus, taxpayers would pay for the ability to defer shareholder taxation until profits actually are distributed with a higher overall income tax rate than under the attributed income system. Note that if shareholders are domiciled in countries which have a Tax Treaty in force with Chile may use 100% of the first category tax as credit (this provision is known as the “Chile clause”).

 

In respect to tax losses, from 1 January 2017, only loss carryforward will be available. Loss carryback will no longer exist. The right to offset losses at the level of a holding company to dividends distributed by subsidiaries (with the corresponding right to obtain a refund) will still be available.

 

Other taxes and considerations:

  • According to the SII (Chilean IRS equivalent), exploration and appraisal cost or expenditure must always be considered as organization and start-up expenses, which may be amortized in up to six years starting from the date expenses were incurred or when the company earns income from its main activity, if later. An exemption applicable to such disbursements incurred at the phases prior to the commercial operation of the mine, which will be part of the mine infrastructure once the exploitation phase has commenced.6 These disbursements should be treated as an investment in fixed assets subject to depreciation according to the rules contained in Section 31 No. 5 of the Income Tax Law.
  • New rules would apply as from 1 January 2015 that would impose a special tax on interest on debt that exceeds a debt-to-equity ratio of 3:1, which would be calculated annually (also known as thin cap rules or excess of indebtedness rules). The new provision would affect interest and any other expenses relevant to financing, such as commissions, services and expense reimbursements. Although any type of loan would be considered for purposes of the calculation of the total indebtedness, only interest paid on financing deemed related and subject to the reduced additional withholding income tax rate of 4%, or not subject to it, actually would be subject to the special tax (the 4% reduced additional withholding income tax rate is available for loans granted from abroad by foreign banks or financial institutions and under some other circumstances).
  • Royalties are 30% or 15%, depending on the type of royalty relationship between the parties and the domicile of the renderer. Under the double tax treaties signed by Chile, the rate for royalties is 15% regardless of the relationship between the parties.
  • Stamp Tax: to documents associated to cash credit, and is an allowed expense for income tax purposes. The tax on loans would be increased from 0.033% and 0.4% rates to 0.066% for each month or fraction thereof, capped at 0.8%. For credits collectable on demand or without a maturity date, the applicable rate would be increased from 0.166% to 0.332%. The rate on extensions or renewals also would increase.
  • Municipal Tax: calculated on the taxpayer’s equity, determined by each municipality and is an allowed expense for income tax purposes.
  • Property Tax: Real estate is taxed at 1.0% or 1.4% on a yearly basis, depending on the property’s qualification as agricultural or nonagricultural. This rate is calculated on the fiscal appraisal of the property. This appraisal is adjusted twice a year in order to reflect inflation. 

 

A.2) Mining Tax

The mining tax, locally referred as the “mining royalty” tax, was enacted in 2006 and modified in 2010. It applies to commercialization of metallic and non-metallic resources. It is important to highlight that it is not an actual royalty, but rather a progressive tax instrument paid on operating income. The tax is between 0 and 14% depending on the firm’s profit. Small mining firms do not pay this tax. The size of firms is defined as follows:

       Small mining firms: sales equivalent to 12,000 tons of refined copper per year or less.

       Medium sized firms: sales equivalent to between 12 000 and 50,000 tons per year.

       Large firms: sales equivalent to 50,000 tons of refined copper per year.

 

The minimum threshold for imposition of the mining tax is a yearly output of 12,000 tons. It is progressive, ranging from 0.5 to 4.5%, up to an output level of 50,000 tons. For firms producing 50,000 tons of refined metal equivalent or more, i.e. large firms, the tax rate is 5% if their operating margin is less than or equal to 35% according to the mining tax law passed in 2010. The tax is applied in a progressive fashion with a maximum tax rate of 14% for firms where the operating margins are higher than 85%. Under a previous version of the mining tax law, which was in place from 2006 to 2010, the tax rate varied from 4 to 9% depending on the firm’s profit share. When the new amendment to the mining tax law was passed in 2010, firms were allowed to continue with the previous tax rate for eight years. If they chose to apply the new tax rates immediately, however, they would pay the higher tax rate of 5% (in the lower profit margin bracket) for three years, and then revert to the previous sliding scale of 4-9% for the following eight years. The invariability clause is related to foreign investment statute (DL-600 to be reviewed in the next section) that under certain conditions guarantee an invariability of tax conditions for foreign investors engaging on mining projects in Chile.

 

B) FOREIGN INVESTMENT LEGISLATION

 

B.1) The Statute DL-600

The Decree Law 600 (DL 600) has been in force since the 1970s and ensures non-discriminatory treatment and tax invariability, through a contract between the foreign investor and the State of Chile. This investment regime has been seen as a guarantee of stability for foreign investors and one of the reasons Chile has been a leader in attracting foreign investment, including in the mining sector.

 

Holders of a Foreign Investment Contract as of 1 December 2004 were protected by a general tax stability and/or a stability pact under Article 11 ter of the Foreign Investment Statute or DL 600 are not affected by the specific mining tax (“royalty”) for as long as their stability lasts (usually 20 years). However, holders of a foreign investment contract as of 30 November 2004 were given the option to waive their general tax stability and the stability regime of Article 11 bis and elect for the stability regime contained in Article 11 ter of the DL 600. In this case, the special tax on mining activity would apply at a 4% flat rate for a period of 12 years. The election had to be made before 30 November 2005. Foreign investment contract holders whose contracts were in effect after 1 December 2004 were also given the option to choose the stability regime under Article 11 ter, but in this case the tax on mining activity would apply at a 5% rate and for a period of 15 years. The election had to be made before 30 November 2005. Most major mining companies that had Article 11 bis stability regimes chose to waive this right and elect for the Article 11 ter stability and become subject to the special tax on mining activity at a 4% rate for 12 years.

 

Due to the modifications introduced by Law No. 20.469, holders of any stability regime reflected above have been given the option to waive that stability regime and elect a new one that will imply a higher specific tax rate for 2010-12 (rates ranging from 4% to 9%) but will provide for an extended stability period of six years under the new rates (5%–14%) from the moment that the original stability regime would have been considered ended. Other stability regimes are set forth for taxpayers in different situations. These companies’ decisions to elect one of these new stability regimes had to be made by 17 January 2011. This modification was introduced as a mean to collect funds to finance the country’s reconstruction plan after the devastating earthquake and tsunami that affected the country on February 2010.

 

Tax Reform Law 20.780, enacted in 2014 (the Tax Reform Act), repealed the DL 600 effective 1 January 2016. In its place, the Direct Foreign Investment Framework Act (IED Act) was approved and enacted on June 2015, creating the new foreign investment framework under the above-mentioned 2014 Tax Reform Act. Although the latter expressly repealed DL 600, foreign investments may request a DL-600 foreign investment authorization for the next four years after the IED Act becomes effective (until June 2019). Investors must sign the respective foreign investment agreement in the same period.

 

B.2) Direct Foreign Investment Act

Chilean Law Bill 20.848 enacted on June 2015, defines the new framework for foreign investment in Chile. The Direct Foreign Investment Act (IED) sets direct foreign investment as the transfer of foreign capital or assets, owned or controlled by a foreign investor, to Chile for a value greater than or equal to US$5 million or the equivalent in another foreign currency. A qualified foreign investor may request a certificate from the Foreign Investment Promotion Agency, which will authorize the investor’s access to the direct foreign investment regime. Under the direct foreign investment regime, an investor will have the right to remit the capital invested and profits earned on investments once the relevant taxes have been paid and access the official foreign- exchange market to convert foreign currency or make remittances.

 

An investor also will be eligible for an exemption from Value Added Tax (VAT) on the import of capital goods. The IED Act amended Article 12.B.10 of the VAT Law establishing the VAT exemption on imports of capital goods by foreign investors provided the investment is US$5 million or more. Goods allocated to investment projects that generate taxable income, non-taxable income or income exempt from VAT also will be exempt from VAT for at least 12 months after clearance through customs or acquisition in Chile. The Act also amends the way in which this exemption is granted. The Ministry of Finance must now make a decision on exemptions within 60 days after the exemption request.

 

Additionally, the IED Act provides that foreign investors will not be discriminated against, but it does not provide an administrative procedure to ensure that foreign investors are protected.

 

B.3) Chapter XIV

Strictly speaking, Chapter XIV is not a foreign investment statute as such because its field of operation is strictly restricted to a currency exchange scope. The entry and remittance of currency is regulated by the standards of Chapter XIV of the Compendium of Foreign Exchange Regulations of the Central Bank of Chile. Chapter XIV is a simplified means of bringing financial capital into the country, which must be carried out, through the Formal Exchange Market (FEM) if the amount involved in the operation is over US$10,000.

 

The FEM comprises commercial banks and exchange houses authorized to operate in this market. It allows: i) foreign exchange currencies, giving access to the formal exchange market; ii) to remit capital abroad immediately, provided that the investor has sold its shares, interests or assets before the transfer; iii) remitting profits abroad at any time after the capital has entered Chile.

 

B.4) International agreements

During the 2009-2014 period, Chile continued and intensified its open trade strategy based on concluding trade agreements. Indeed, Chile is one of the countries with the most agreements and trading partners. The four more relevant trading partners concerning foreign investment in the mining sector are Australia, Canada, Japan and United States. The most notably element concerning mining foreign investment in these treaties is a tax agreement that allows to use first category tax as credit (reviewed in the Fiscal Regime section).