TAX STABILITY UNDER CHILEAN RULES AND THE BILLS OF LAW INITIATIVES
| Jurisdiction | Derecho Internacional |
(Apr 2005)
TAX STABILITY UNDER CHILEAN RULES AND THE BILLS OF LAW INITIATIVES
Attorney-at-law, MBA
Vice President, Corporate Affairs, South America Aur Resources Inc.
Andr´cmb;es Verdugo is a graduate of the Universidad de Chile, holds a law degree and a MBA degree from Loyola College in Maryland, USA.
Mr. Verdugo is the Vice-President, Corporate Affairs, South America, of Aur Resources Inc., a public company based in Toronto, Canada, which, among others, controls and operates two copper mines in Chile, the Quebrada Blanca and the Andacollo mines. He is the President of Aur Argentina S.A., doing exploration in Argentina and the General Manager of Aur Resources Chile Limitada, providing services and doing exploration in Chile.
Mr. Verdugo between 1998 and mid 2003, was the former General Counsel of Empresa Nacional de Mineria, Enami, a Chilean Government owned company; between 1994 and January 1998 was the Director of Legal Affairs-Andes, for Cambior Inc., and its subsidiaries in Peru, Ecuador, Argentina and Chile. He was also the former Chief Legal Counsel for the Foreign Investment Committee - Chile and a senior partner of the law firm "Manterola & Asociados".
Mr. Verdugo was a speaker at RMMLF at the Special Institute on Mineral Development in Latin America, which took place in Santiago, Chile, on November 3-4, 1997, and presented a paper titled "Trans-boundary mining projects", specifically the Pachon project.
Andr´cmb;es Verdugo, abogado, licenciado en la Escuela de Derecho de la Universidad de Chile, y MBA del Loyola College de Maryland, USA.
El Sr. Verdugo se desempe&tildecmb;na actualmente como Vicepresidente de Asuntos Corporativos, Sudam´cmb;erica de Aur Resources Inc., empresa con casa matriz en Toronto, Canad´cmb;a, que entre otras controla y opera dos minas de cobre en Chile, Quebrada Blanca y Carmen de Andacollo. Tambi´cmb;en es el Presidente de Aur Argentina S.A. empresa que est´cmb;a desarrollando actividades de exploraci´cmb;on en Argentina y Gerente General de Aur Resources Chile Ltda., empresa que provee servicios y realiza exploraciones en Chile.
El Sr. Verdugo, entre 1998 y 2003 se desempe&tildecmb;n´cmb;o como Fiscal de Empresa Nacional de Miner´cmb;ia, ENAMI, empresa estatal y entre 1994 y enero de 1998 fue Director de Asuntos Legales - Andes, de Cambio Inc. y sus filiales en Per´cmb;u, Ecuador, Argentina y Chile. Con anterioridad a esto, tambi´cmb;en se desempe&tildecmb;n´cmb;o en el cargo de Asesor Legal Jefe del Comit´cmb;e de Inversiones Extranjeras de Chile y como socio del Estudio de abogados "Manterola y Asoc."
El Sr. Verdugo fue orador en RMMLF en el "Special Institute on Mineral Development in Latin America", que tuvo lugar en Santiago de Chile el 3 y 4 de Noviembre de 1997 con una presentaci´cmb;on titulada "Trans-boundary mining projects", especificamente sobre el proyecto El Pach´cmb;on.
1 Introduction
Heads of state and legislators of the traditional or potential mining countries have progressively tried, over the last three decades, to establish laws, regulations and incentives to attract foreign capital for investment in exploration, development and exploitation of mineral resources.
More than incentives, what the mining investor seeks when reviewing the conditions to invest in a country, are guarantees, protections and security that, in the long term, there will be zero risk of losing the investment or that the risks are reduced to the minimum possible.
Although the review the investor makes of the democratic system of the country in which the investment is intended to be made, its political and legal system, for instance its constitution, its general, particular and sector laws, and treaties, together with other legal and regulatory bodies having security and protection required, is justifiably important. Also the manner in which these legal and regulatory instruments are generated, how the leaders and legislators are elected and, finally, whether the judicial mechanisms provide an effective protection of each and every one of the granted rights. Such a decision is also notably influenced by the track record of foreign investment in the country, as well as how the constitution, treaties, laws and regulations are applied, and complied with and enforced by the corresponding mechanisms.
The so-called Foreign Investment Statute in Chile, and especially the articles in it related to tax stability, is a security tool that is critical when it comes to making the decision to invest in Chile, especially in the mining sector, other extractive or industrial sectors.
This benefit related to tax stability is now being reviewed and questioned by some, while others hope for its elimination. This, as I see it, should become a change to the law, extending, amending or replacing all or part of the regime of fiscal stability of the mentioned legal statute currently in force, probably, and hopefully, without affecting the rights of the current foreign investors who subject to the current legal text. As of the date of this article, there was a bill of law approved by the House of Representatives of Chile, pending approval in the Senate of the country, which was presented by the President of the Republic on December 14, 2004, establishing a Specific Tax on the mining industry, thus modifying the Income Tax Law and the Decree-Law Nr. 600 or Foreign Investment Statute.
This article seeks to inform and give a professional opinion, objective (I hope), by one who was for some years, during the first democratic administration of the current coalition in power, the Chief Attorney and official of the Foreign Investments Committee of Chile, an organism that promoted (and continues to promote) foreign investment in the country. The author was in charge of negotiating and drafting on behalf of the State of Chile at the time, foreign investment contracts with important mining investor groups, granting them in such contracts the rights and guarantees of the law, including those benefits of the well-known articles 7 and 11 bis of Decree-Law 600, among which is that of the tax stability; and now, from another point of view, as a representative and officer of a foreign mining company, expressing concern for the uncertainty that, for two years or more, has existed in the country due to the law initiatives proposed and the opinions expressed against the mining sector, both by public opinion and at the level of the Congress.
Countries are sovereign to promote changes of policies, to modify or amend their direction and to legislate one way or the other. Certainty is a key word in the decision making process to invest in the long term. Uncertainty only discourages the wish to do so.
2 The rules in force
2.1 The First Category income tax.
According to the Income Tax Law, in its Article 3, the common and ordinary tax regime for persons with domicile or residence in Chile is defined, establishing that they are subject to a tax on the incomes from any origin. However, those that do not reside in Chile will be subject to taxes on the profits whose source is in the country.
In general terms, the income generated by the entrepreneurial activities and capital are subject to the First Category Tax (Article 20, Income Tax Law) which is applied on the income accrued, once the necessary expenses for its attainment have been deducted, the rate of which is usually 17%.
2.2 The Additional Tax.
In the case of the distribution of dividends or remittances to those who have domicile abroad, the income is charged with a special tax contained in the Income Tax Law (Articles 58, 60 and 63), called the Additional Tax, which amounts to 35%, and which receives a credit equivalent to the First Category Tax.
2.3 Tax Stability of Article 7%gth%g of DL 600.
The Decree-Law Nr. 600 of 1974 ("DL 600") called "Foreign Investment Statute" ("Statute"), the merged, coordinated and systematized text of which was published in the Official Gazette of Chile on December 16, 1993, establishes in its Article 7%gth%g that foreign investors subject to DL 600, in the contract executed with the State of Chile ("Contract") and for a term of 10 years, accounted from the start up of the corresponding company, have a special right to have invariability ("stability") of the 42% rate as a total effective tax burden on the income to which investors are subject, considering for this purpose the taxes of the Income Law that are to be applied according to the legal rules in force as of the date of the execution of the Contract.
The law defines the concept of "Start Up" as the beginning of the operation corresponding to the project financed with foreign investment, once the revenues corresponding to the business line are generated, if the developed activity consists on a new project; or, if applicable, the calendar month after the entrance to the country of any part of the investment, in the case of investments in functioning activities.
The total effective tax burden of the 42% rate, adds the norm, will be calculated applying on the First Category net taxable income, determined according to the norms on Income Tax, the rate of such category established by such law, which currently is 17%. This means, a 17% rate is considered as a credit against the 42% rate. This way, the rate difference remaining to complete the assured total effective tax burden of 42% will be applied on the corresponding taxable base, in accordance with the rules of the Income Tax Law, adding to such base an amount of the First Category tax (17%) that had affected the income included in the taxable base.
2.4 Tax stability of Article 11 bis of DL 600.
For investments of an amount equal to or greater than US$ 50 millions, intended for the development of industrial or extractive projects, including the mining ones, according to Article...
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