The effect of changes in Peru's mining tax

The following analysis is an abstract of S&P Global Market Intelligence's Peruvian Mining Tax Report which examines the impact of profit, rather than revenue-based royalties on mining companies operating in Peru for the past five years.

Francesca Rey | 14 April 2017

In 2011, Peru updated its mining laws and introduced profit- rather than revenue-based royalties. This was designed to collect more tax from the most profitable operations and to derisk the government's revenue stream through the commodity super-cycle. The collection of tax from Peru's mining industry has fallen over the intervening five years, but our analysis shows that this decline was the result of lower commodity prices rather than as a consequence of the new royalty regime.

In October 2011, the Humala administration introduced three profit-based taxes: a Mining Royalty (Law 29788), a Special Mining Tax (Law 29790) and a Special Mining Contribution (Law 29789), the latter being paid in addition to the mining royalty.

The revised policy in Peru was well received within the industry, with a survey by the Fraser Institute concluding that the new tax regime was a lesser deterrent to investment, and the country closed the investor-perception gap with Chile.

Our analysis demonstrates that the impact of the new royalty regime on a mine's mineral rent has neither damaged margins nor penalized low-production, low-cost mines. However, significant impact is observed on mines still operating under a revenue-based royalty and on mines with negative margins.

Royalties paid by Peruvian copper mines averaged less than 16.3% of mineral rent in 2016, allowing sufficient returns to continue sustaining capital investments. Mines paying above the average included Cerro Lindo and Antamina, both of which are still operating under a revenue-based system and so pay the Special Mining Contribution; Cerro Corona and El Porvenir, which have low levels of copper production; and five other mines on negative to marginal returns. Constancia is an outlier since displayed royalties include a third-party 0.5% NSR payable to Compañia Minera Katanga. Five years after implementation of the new regime, the government has collected a cumulative US$2.72 billion (see chart). Of this amount, only US$229.0 million (8.4%) has come from the old revenue-based royalties, with US$1.03 billion (37.9%) coming from the Special Mining Contribution, US$880.5 million (32.3%) from the profit-based royalties and US$580.3 million (21.3%) from the Special Mining Tax. Excluding corporate income tax and employee taxation, mining taxation comprised only 1.2% of Peru's total tax revenue last year, compared with the 2.3% tax take in 2012.

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