MINING ROYALTIES AND FISCAL STABILITY
| Jurisdiction | Derecho Internacional |
(Apr 2005)
MINING ROYALTIES AND FISCAL STABILITY *
Barrick Exploraciones Argentinas S.A.
Buenos Aires, Argentina
Federico Palavecino is Regional Tax Director for South America of a leading gold mining company.
He is a lawyer, graduated with honors from the University of Buenos Aires in 1993, with a double minor in Business Law and Administrative Law and postgraduate degrees on Business Law and on Tax Law, as well as from the Catholic University of Argentina on Negotiation.
He is co-author of four books, among them Mining Royalties (1997) and Current Issues on Mining Law (2000), and more that 40 notes on tax and mining issues.
1. Introduction
During last 2004, the matter of mining royalties raised its international profile due to the successive projects aimed at establishing them in Chile 1 and to their actual establishment in Peru. 2 One of the issues that drew most of the attention was if such royalties would be applied only to new projects or also to the projects currently under development or exploitation. The mining sector publicly stated that to attempt the application of royalties to ongoing projects implies a change in the rules, generating the loss of confidence in the country by investors, and the resulting withdrawal of investments. Furthermore, it was declared that the application of royalties turned the exploitation of an important number of minerals economically unfeasible, causing the loss of significant reserves in several projects under review, which would become unfeasible or delayed.
Actually, to apply royalties to future projects is an economic policy decision that we can or cannot share, but to apply them to ongoing projects is a matter of law, since such decision might affect vested rights of holders who were granted with a fiscal stability benefit, existing in both countries. 3
As it happens with all matters of law, the answer as to whether mining royalties can or cannot be applied to ongoing projects that have fiscal stability depends on the body of laws of the country where such answer is to be given.
Anticipating our criterion, one of the keys to this answer is to determine who the owner of the mine is. If the mine is owned by the investor, any amount that such investor is required to pay for the extraction of minerals belonging to the same must be regarded as a tax, since the investor does not receive anything in exchange for such payment. Consequently, any royalty established under these conditions would be protected by fiscal stability.
On the other hand, if the mine is owned by the State and the investor is entrusted with its exploitation under an agreement, the royalty to be established will have a contractual base and therefore it would not be under the scope of fiscal stability. This does not mean, however, that the State can apply royalties to ongoing projects, since this would imply an unilateral change of a material condition of the agreement: the value of the consideration.
Due to labor circumstances, I had the chance to follow the process closely and to analyze the matter both in Chile and Peru. Considering, however, that I have no broad training in the law of those countries, I think that my participation must be restricted to analyzing the matter under the legal environment that I know, which is the Argentine one. In my opinion, this election is not sterile, it may rather -by means of comparison- enhance the discussion in both countries, since Argentina has been applying royalties at least during the last sixty years and its legal system has many similarities with those of these countries.
2. Legal Framework
Argentina is a country with a federal organization, which in some respects is similar to the system of the United States of America. There exist a Federal State, twenty-three Provinces and the City of Buenos Aires, which has its peculiar statute. The Federal State or Nation received its powers through the delegation made by the Provinces in the Federal Constitution, and the provincial States keep their non-delegated powers, so that the same be exercised at their discretion.
The Nation was delegated, among others, the power to institute a Mining Code and to impose direct taxes in certain circumstances and for a definite time, as well as indirect taxes concurrently with the Provinces (section 75, subsections 2 and 12).
Among the powers retained by the provincial States we find the remaining tax powers that enable the Provinces to establish mining royalties. This power was voluntarily limited by those Provinces that adhered to the regulations of Mining Investment Law # 24,196, whereby they accepted that a cap be placed on the collection of mining royalties payable by the beneficiaries of the mining investment regulations, which was fixed in 3% (three percent) of the mine-head value of the extracted mineral. Several provinces, but not all of them, have currently established mining royalties.
3. Definition
It is necessary to define the notion of mining royalties in order to avoid misunderstandings with respect to the scope of this analysis. In the Argentine legal system, the term mining royalties refers to a contribution created by a State under a law, which is imposed on the owner and/or operator of a mine located in the territory of said State and which is implemented by creating an obligation to deliver to the tax authority a portion of the minerals extracted, or to pay an amount of money proportional to the value of said mineral.
The immediate historical origins of the mining royalties are found in the colonial law, in the Fifth Part payable to the Spanish Crown for the exploitation of minerals, 4 and in the redevance proportionnelle under French Law of 1810, 5 sources of our mining regulations.
Said contribution was characterized, whenever it was established, by several elements: (i) its application to the mineral extraction activity regulated by the Mining Code, (ii) its alleged justification as consideration for the depletion of minerals owned by the State, (iii) its calculation in proportion to the extracted mineral, and (iv) its payment in kind or in cash based on the valuation of the extracted mineral at mine-head value.
All these features give an idea of the generic and historical setting of mining royalties, which will not cease to be such even if they were given another name or if any of those features were changed by any State, save for one which is essential: the fact that they are applicable to the mineral extraction activity.
A subspecies of these royalties is the contribution on crude oil and gas, also called oil royalty, which was imposed by the national State through Laws 12,161 (as section 401 of the Mining Code, today section 29 of the Annex to the revised text of 1998), 14,337 and 17,319, where it committed itself to deliver the proceeds of its collection to the Province where the well that caused its payment is located, as a kind of compensation for the powers that the Nation assumed in connection with this provincial natural resource. 6
The term royalties was also widely used with regard to the consideration agreed by contract which a party commits itself to pay to another in exchange for the transfer of ownership rights, the use or enjoyment of a certain material (e.g., a mine) or immaterial property (patents, copyrights), which is characterized by (i) its periodicity and (ii) its variable amount to be determined in proportion to the activity or output of the person compelled to pay.
In this sense, the royalties are variable considerations of a contractual origin payable to the owner of a property and as compensation for allowing its exploitation, and differ from a partnership relationship in that the parties, although they may distribute among themselves the proceeds of the exploitation, do not share the losses, which are to be borne by the operator of the property and payer of the royalty. This is the meaning regularly ascribed to the term royalties in contractual law, 7 and it is understood in this manner by...
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