TAX INCENTIVES FOR MINING INVESTMENT IN PERU

• Jurisdiction: Derecho Internacional

International Mining Law and Investment in Latin America and the Caribbean
(Apr 2005)
CHAPTER 5D
TAX INCENTIVES FOR MINING INVESTMENT IN PERU
C§sar Castro Salinas
Estudio Grau, Abogados
Lima, Per§

C´cmb;esar Castro Salinas is a native of Lima, Peru. He studied Law at Pontificia Universidad Catolica del Peru, and was admitted to the Lima Bar Association in February 1982. He is Partner with Estudio Grau, Abogados since 1989 and has led the Tax Area since 1994.

He has worked on the tax aspects of the mining industry as well as on foreign investment and tax stability agreements with the State. Between 1996 and 1999 he was heavily involved in the design and proposal for the tax and legal framework required for mega projects in hydrocarbons and mining, as well as drafting the required regulations in order to make the financing feasible for mining projects. His expertise was enhanced while being Tax Advisor to the Minister of Economy and Finance in 1992. He is actively involved in structuring tax-efficient foreign investment schemes and identifying tax obstacles to the development of natural resources projects.

C´cmb;esar Castro has been Member of the Tax Committee of the Lima Bar Association in 1986-1987 and 2002-03, Board member of the Peruvian Tax Law Institute 1999-2002.

INTRODUCTION

In the last year, investors have been receiving some worrying news from Peru in connection with the mining industry of which the enactment of the Mining Royalty Law in June, 2004, has probably been the most significant.

Although Peru is, from a purely mineral perspective, one of the most appealing jurisdictions in the world for investment in mineral exploration, according to the annual survey conducted by the Fraser Institute on the world ranking on the "most attractive policies for investing in mineral exploration", Peru was only ranked 15%gth%g in 2002/2003, dropping to 20%gth%g in 2003/2004 and 39%gth%g in 2004/2005. And the news from Peru, especially with respect to political instability, has not helped to change this trend.

However, there have been some new legislative initiatives on the tax front that favor investment in mineral exploration in Peru. Among them, the recovery of IGV in mineral exploration should be highlighted as well as the new option for compensation of tax losses carried forward.

Recovery of IGV in mineral exploration

The problem

Mining companies engaged in exploration activities everywhere face the same problems in connection with the VAT applicable to inputs on exploration. In Peru that is the Impuesto General a las Ventas - IGV. Currently 19% ¹ on imports and acquisitions of goods and services, IGV represents somewhere between 10% and 15% of the total amount of investment in exploration. This is at least a financial problem because it cannot be recovered until the mining company enters into production. At that point in time the company had already spent much more IGV in construction and the IGV to be reimbursed at the rate of 18% of the FOB value of exports will take a long time. This has a financial cost. But worse, it will entail a total loss if the exploration is unsuccessful and the company is not engaged in other activities. ²

Therefore a piece of legislation was needed in order to reimburse IGV paid on mineral exploration in Peru in order to be more competitive in the attraction of the necessary risk capital for exploration. ³

Precedents of the Law

In December 2001, two IGV early recovery systems were in place in Peru and continue to be in force:

(i) The General Advanced Recovery Regime granted by the IGV Law is practically useless for mineral exploration because of its requirements and limitations.

(ii) The IGV Special Early Recovery System for the development of a mine, established by Legislative Decree 818, allows mining projects with construction periods of between 2 and 4 years to request, on a monthly basis, the early refund of the IGV paid on acquisition or import of new capital goods, or intermediate goods, services and construction contracts used in the performance of the investment program approved for the construction of the mine.

This is not a definitive recovery system, however. Thus, if production is not finally achieved, the IGV recovered shall be refunded to the State.

This regime was set up for companies that had already completed feasibility studies and entered into a Mining Stability Agreement in order to develop a large mining project (called "mega projects"), such as Antamina, which is the only project that has resorted to it. It is not useful for exploration activities.

Until January 2002, there was no IGV recovery mechanism available for exploration activities.

Law 27623

In order to promote mineral exploration in Peru, a bill of law was submitted in October 2001 by the Executive Power to the Congress, it was quickly approved and enacted on January 2002. ⁴

Law N%go%g 27623, enacted in January 2002, grants the right to a refund on a final basis, on the IGV paid on acquisitions or imports of goods, services and construction contracts. Unlike the IGV Special Recovery Regime for the development of the mine, should production not be achieved due to exploration not being successful, the company would not be compelled to refund the IGV already recovered.

There are two concurrent requirements:

(i) That the goods and services acquired are used "directly" to perform mineral exploration activities; and

(ii) That this occurs during the exploration stage. ⁵

•Beneficiaries

(i) Titleholders of mining concessions,

(ii) Lessees of mining concessions. Since Article 166 of the General Mining Law states that by virtue of the mining lease agreement ("contrato de cesi´cmb;on minera"), the lessee takes on all the rights and obligations held by the concession holder, the lessee of a mining concession may also be the beneficiary of this regime.

(iii) The contracting parties to a joint venture or other collaboration agreements. ⁶ Article 9 of the regulations to the Law acknowledges their right to resort to the benefit. Paragraphs (c) and (d) of Article 10 of the Regulations contain certain paperwork requirements applicable to joint venture or other business collaboration agreements. ⁷

The contracting parties to joint ventures or other business collaboration agreements are entitled to resort to the benefit, even if they are not titleholders or mining lessees of the mining concessions where the exploration investment will be...