TAX STABILIZATION AGREEMENTS AND COUNTRY RISK ASSESSMENT CONSIDERATIONS: THE ARGENTINE CASE

• Jurisdiction: Derecho Internacional

International Mining Law and Investment in Latin America and the Caribbean
(Apr 2005)
CHAPTER 6C
TAX STABILIZATION AGREEMENTS AND COUNTRY RISK ASSESSMENT CONSIDERATIONS: THE ARGENTINE CASE
Silvia Elena Bauni
Law Office of Silvia Bauni
Buenos Aires, Argentina

Silvia E. Bauni is a native of Buenos Aires, Argentina. At present she is an external mining consultant. Her professional experience includes acting in the private and the public mining sector.

She has served as Senior Legal Counsel to the Highest Mining National Authorities of Argentina and Executive Secretary of the Administration Commission of the Argentine-Chilean Mining Treaty- Argentine Section. Ms. Bauni was Responsible of the Legal Commission- Mining Working Group- MERCOSUR and member of the Bilateral Working Group for the enforcement of the Twentieth and Twenty-third Protocols of the Economic Complementation Agreement No. 16 ALADI (Latin American Integration Association). She has participated in the drafting of the Mining Updating Law, regulations of the Mining Investments Law, the Environmental Protection for Mining Activities Law, the reorganized text of the Mining Code and the Uniform Mining Procedure Code.

Ms. Bauni has a law degree from the Universidad de Belgrano obtained in 1983. She completed several specialized post graduate courses, including the "Program of Instruction for Lawyers" at Harvard Law School and "International Business" at the Universidad Cat´cmb;olica Argentina.

Ms. Bauni has been speaker at several international conferences and seminars, including: PDAC 2004, Toronto, Canada; Seminars 2000, 2001 and 2002 at CEPMLP, University of Dundee, Scotland, United Kingdom; Seminar EXPONOR 2001, Antofagasta, Chile; Seminar 2000, Rocky Mountain Mineral Law Foundation, Chile; and Workshop 1999 Bogot´cmb;a, Colombia.

Ms. Bauni has also published articles and has been a contributor to the Mining Compendium: "International and Comparative Mineral Law and Policy: Trends and Prospects" published by Kluwer Law International (2005) "The Challenges of Mining Integration" Journal of Energy and Natural Resources Law, International Bar Association (2004); "The Integration and Complementation Treaty between Argentina and Chile" (Bauni, Tassile and Heredia) Rocky Mountain Mineral Law Foundation (2001); contributor to the chapter on mining integration in "Perspectivas y Desaf´cmb;ios del Proceso de Integraci´cmb;on Argentino-Chileno a Diez A&tildecmb;nos del ACE 16", published by IADB-INTAL, Buenos Aires (2002).

Ms. Bauni is a member of the Buenos Aires Bar Association, the Latin American Mining Lawyers, the International Mining Professional Society and FUNDAMIN (Foundation for the Development of Argentina Mining).

"If the government proportions its fortune to that of individuals, the ease and convenience of the latter will soon make its fortune rise. The whole depends upon a critical moment: shall the State begin with impoverishing the subjects to enrich itself? Or had it better wait to be enriched by its subjects? Is it more advisable for it to have the former or the latter advantage? Which shall it choose, to begin or to end with opulence?"

Montesquieu, "The Spirit of Laws"

ABSTRACT

This paper shall discuss the topics related to the Argentine fiscal stabilization arrangements. The impact of the mining tax incentives regime will be examined in order to consider the effect on investment and economic growth. Then, country risks and safeguards will be evaluated according to the possible government responses even during a crisis. Finally, the paper shall approach the equation mining taxation policies-sustainable development.

I. INTRODUCTION

This paper aims to deliver:

1. An informative outlook on how the mining incentives regime operates in Argentina; the regulatory norms that embody the system, the different jurisdictional levels at which it works and their interaction.

2. A descriptive view of the state of affairs that derived in a touchstone of the strengths and weaknesses of the fiscal stabilization system and the legal effects produced by those circumstances.

3. A proposal of issues approaching the relation mining taxation policies- sustainable development to be discussed in the forthcoming mining agenda.

II. MINING TAX INCENTIVES

OVERVIEW

During the last decade the Argentine macroeconomics following a neo liberal model set up an open market economy which main features were a currency board system based on the Convertibility Law passed in 1991, which stated that one peso was equal one US dollar, freedom to keep off-shore accounts and a free exchange regime. The overall rule was market freedom.

Throughout that period, mining law in Argentina, as well as in other Latin American countries, began a new stage. The new mining legal framework was based on the needs of investment in order to start a big scale mining as well as to develop small and medium mining projects. Considering that mining activities are performed in isolated and economically depressed regions, investments are considered to be the necessary vehicles to attain economic growth and development. In order to accomplish this goal, the creation of new legal instruments was necessary. Mining tax incentives were considered a key issue, together with a code updating and new forms of regionalism, such as the Mining Integration Treaty between Argentina and Chile.

Argentina has a federal political structure. This new legal framework was crystallized by an agreement between the provincial governments and the national government.

The Mining Federal Agreement ¹ was the document that designed the outlines of the mining policy to be carried out by the provinces. It evidenced the political will to act in a consistent and coherent system in order to attract national and foreign investments for the developing of a mining industry all over the country.

The Mining Code ² and the basic legal framework governing mining rights have been enacted by the National Congress. Procedural regulations are passed by each provincial legislature.

Regulations related to taxation are enacted either by the National Congress, the provincial legislatures or the municipalities depending upon whether the pertinent tax is imposed by the national, provincial or municipal government.

The Mining Code provides for a five year exemption of all federal, provincial and municipal taxes on mines property and over their products, facilities, machinery and equipment used for such exploitation. The five year period starts as of the date of the registration of the concession. Development fees, utility charges and local stamp taxes are excluded. ³ The benefit derived from this provision has been, in practice, minimum since the registration usually takes place more than five years before the starting of the operations.

The main mining incentive program has been passed by federal laws and subsequent amendments. This regime is applicable in those provinces and municipalities that have adhered to this promotion system and to individuals and companies engaged in mining activities, which are incorporated in Argentina or if abroad, authorized to do business in the country.

Mining services companies may also register under the mining incentive scheme, in order to be granted the tariff exemption on importation of capital goods. ⁴

Prospection, exploration, development and extraction of minerals are the activities under the scope of the regime. Crushing, milling, pelleting, sintering, briquetting primary elaboration, calcinations, melting, refining, sawing, carving, polishing and burnishing processes of the extracted minerals, and the resulting products, are included if they are performed by the same economic unit ⁵ and are regionally integrated ⁶ into the activities above mentioned.

The mining incentive scheme does not apply to oil and gas, cement obtained from calcinations process, ceramics elaboration, and sand and stone used in the construction industry.

Incentives under the Mining Investment Regime, according to Law 24,196 ⁷ and further regulations ⁸ pursuant to this scheme, comprise:

i) Fiscal stability.

ii) Income tax benefits such as double deduction benefit due to expenses incurred in prospection and exploration activities. In the event of new projects or extensions of existing mining units, the deduction may be performed for a maximum term of five years, as from the date of the beginning of the production process.

iii) Accelerated depreciation. Investments in infrastructure may be depreciated: 60% of them over the year in which the mining investor obtains the authorization, and the remaining 40% in equal parts during the following two fiscal periods. Investments in equipment may be depreciated in a three years term. Such goods must remain in the patrimony of the beneficiary for its entire lifetime or until the end of the production process and they must be used in the mining activities. Investors may choose to apply this accelerated depreciation procedure or the general depreciation regime established by the Income Tax Law.

iv) Net Operating Losses may be carried forward up to 5 years.

v) Income tax exemption from income derived from capital contribution of mines and mining rights as payment for the subscription of shares of registered beneficiary companies.

vi) Income tax deductions up to a 5% for funds allocated to guarantee the preservation of the environment;

vii) Exemption from all import duties and other charges related to capital goods, machinery, spare parts and other goods as determined by the enforcement authority;

viii) Royalties ⁹ up to 3% pit head value, among others.

In order to be entitled to these benefits companies must submit the applications before the Registry of Mining Investments, the official record book kept by the National Mining Authority, the Enforcement Authority of the regime, and comply with all the rules and regulations in force.

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