Executive Summary/Highlights:

• New laws  provide indigenous people consultation right with respect to investment in Peruvian natural resources, but not the veto investors feared; however, they could delay projects while regulations are worked out,
• New mining “windfall profit tax” expected by the Peruvian Government to raise the total tax and mandatory profit sharing costs in the mining industry to 46.5% of operating profit for companies with no pre-existing mining tax stability agreements and to 40.20% for companies with  tax stability agreements, which the Government believes remains competitive internationally. 

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In the past few weeks, the new Peruvian Government has passed two important pieces of legislation with respect to investments in natural resources in Peru: Law 29785, which regulates the right of indigenous and tribal peoples to prior consultation, and Laws 29788, 29789 and 29790, which create a “windfall profit” tax applicable to mining companies. These two matters were campaign promises of President Humala, who has been able to pass the legal reforms required to implement them with multi- partisan support and in an investor friendly manner.

Consultation to Indigenous and Tribal Populations

Law 29785, enacted on September 6, implements the right of indigenous and tribal peoples to prior consultation with respect to legislative or administrative measures which directly affect them set forth in the International Labor Organization 169 Convention (1989), which was ratified by Peru in 1993.

During the debate of the new law, the key issue was whether the approval of indigenous or tribal peoples would be necessary in order to implement government measures directly affecting those populations. This would in effect have granted the relevant populations a veto right over the development of many natural resource projects and infrastructure in Perú, including mining, oil and gas, roads, electricity generation and transport, etc.  In fact, a prior bill approved by Congress had been vetoed by the Executive in June 2011, before the change of Government, because it was not clear in stating that the Government had the final decision on whether a project should move forward.

With respect to the “veto right” issue, article 15 of the law states that “the final decision over the legislative or administrative measure corresponds to the relevant Government entity”. While this decision needs to be duly motivated and incorporate in its analysis the opinion of the relevant tribal and indigenous populations and evaluate the impact of the measure on their collective rights, the Government can still implement a measure notwithstanding opposition from the relevant tribal or aboriginal populations. Thus, article 15 also states that “The agreement between the Government and tribal or indigenous populations, as a result of the consultation process, is binding. In case no agreement is reached, Government entities shall adopt all measures which are required to guarantee the collective rights of tribal and aboriginal populations and the rights to life, integrity and full development”. This means that the Government may implement the measure, but needs to assure protection of relevant rights of the tribal or aboriginal communities.

There are several matters that still need to be defined and regulated before the law may be fully implemented. Key among them is the determination of which are the tribal or aboriginal populations that are required to be consulted and which their areas of influence. A delay in this process could directly affect many projects now in the pipeline.

Mining “Windfall Profit Tax”

On September 27, the President enacted laws 29788, 29789 and 29890, which establish a new “windfall tax” regime for the mining industry. Until the enactment of these laws, mining companies were subject to the general tax regime and in addition were subject to a special mining royalty established as a percentage of the value of sales of concentrate (1 to 3% depending of the value of annual sales). Companies with mining tax stability agreements (which are mainly multinationals with large operations) were exempt from the royalty, but many of them had entered into an agreement with the Government creating a voluntary contribution system.

The new regime is comprised of three similar taxes or contributions that are assessed over quarterly operating income (instead of annual sales as the prior royalty). Companies which are not party to mining tax stability agreements are subject to Law 28788 and to law 29789.  Law 29788 provides for a mandatory payment (called the “Mining Royalty”) which is applicable to mining companies extracting metallic or non metallic resources. The Mining Royalty base is quarterly operating profits and the rate slides from 1% for companies with operating margin of between 0% and 10% to 12% for companies with operating margin over 80%, with a minimum payment of 1% of sales.  Law 29789 establishes an additional tax (called a “Special Mining Tax”) applicable only to companies extracting metallic resources. Its base is the same as the Mining Royalty but the rate is different, sliding from 2% for an operating margin between 0 and 10% to 8.4% for an operating margin over 85%. Both the Mining Royalty and the Special Mining Tax are deductible as expenses for the purpose of calculating general income tax.

Companies with mining tax stability agreements are not subject to the Mining Royalty or to the Mining Special Tax.  Instead, law 29790 provides for a contribution (called “Gravamen”) which shall be applicable only to these companies, provided they voluntarily enter into an agreement with the Government. The Gravamen is not technically a tax, because companies need to accept the obligation to pay by entering into the agreement with the Government. However, its basis and form of calculation are similar to the Mining Royalty and to the Special Mining Tax.  In this case, the rate slides from 4% of quarterly operating profits for companies with operating margin between 0% and 10% to 13.12% of quarterly operating profits for companies with operating margin over 85%. The “Gravamen” is also a deductible expense for the purpose of determining income tax.

The new tax regime was proposed by the Executive to Congress after reaching an agreement with the mining industry. The Government expects to obtain revenues of approximately USD 1.1. billion per year with these new taxes.

According to the Government, with the new regime, the total tax and mandatory profit sharing costs in the mining industry are 46.5% of operating profit for companies with no mining tax stability agreements and to 40.20% for companies with such tax stability agreements, which remains competitive internationally. According to Reuters, the CEO of Barrick Gold, one of the main investors in Peru´s mining industry, recently said that the new tax was “something he could work with”.