Interview: PwC’s Edelstein on Argentina’s new tax regime

BUENOS AIRES, ARGENTINA — Since his election to office last November, Argentina’s President Mauricio Macri has eliminated export duties of between 5% and 10% on precious and base metals and lifted similar export taxes on industrial and agricultural products. The Northern Miner and special advisor to The Northern Miner in Argentina, Elena Mayer, sat down with Andres Edelstein, a partner and tax expert at PwC Argentina in Buenos Aires, to talk about the details of the current tax regime.

The Northern Miner: The corporate tax rate in Argentina is 35%. How does that stack up against other countries in the region?

Andres Edelstein: Taking into account the global average, the 35% corporate income tax rate is relatively high. But in the case of mining, the accelerated depreciation system and the double deduction for exploration expenses granted by the Mining Investment Law provide some relief.

TNM: How does Argentina differ from Chile and Peru?

AE: Chile has a 24% first category tax, and in Peru it is currently 28%. But in the case of Chile, there is another tax for dividend distributions, so instead of 24%, a company gets taxed 35%. In Peru, a 6.8% withholding tax applies on those distributions. According to some studies, the total tax burden in Argentina has been higher than the one in Chile and Peru. However, the Macri administration’s recent repeal of export duties should have reduced the gap significantly.

TNM: After removing the export duties, is the total tax more or less the same?

AE: If profits are reinvested and not distributed, the tax impact in Argentina is lower. In Argentina, if profits are distributed, there is another 10% tax. That is why the tax rate is still a little bit high in Argentina. And globally, several countries have followed the corporate tax rate reduction trend, while Argentina kept the rate unchanged at 35%.

In terms of the total tax burden comparison, it is not easy to make a general statement, since project-specific factors such as the type of mineral, location, financing, etc., trigger different tax implications, so certain assumptions need to be made. Although updated studies reflecting recent tax developments in those countries should be conducted, it is clear that with the export duty repeal and the removal of exchange and trade restrictions, Argentina now offers a competitive framework.

TNM: What about the 3% provincial royalties?

AE: Provincial royalties are not that complicated, because they are a given rate on the mine head value. There is an issue with the concept of mine head value, however. Some provinces apply this terminology and use this as the taxable basis, and some provinces apply the rate on the gross export value, although under the country’s Mining Investment Law, there is a 3% cap on the mine head value.

TNM: So the provinces decide which one they want the tax to apply to?

AE: They have the right to impose royalties and establish the rate and taxable basis. However, the cap established by the Mining Investment Law should be observed by them. Some of the provinces have agreed with mining companies to increase the taxable basis, and that is why we may have companies paying 3% on gross revenue.

TNM: What is the definition of mine head value?

AE: Mine head value is calculated by the deduction of certain expenses from gross revenues. Under the Mining Investment Law, the mine head value base is the value obtained in the first sale of the product, less direct costs related to exploitation (excluding the depreciation of fixed assets).

TNM: Are there any other taxes that mining companies should be aware of?

AE: In general, the other provincial taxes are not extremely relevant because there are certain exemptions (i.e., the provincial turnover tax does not apply to exports). Value-added tax (VAT) should be neutral because it only applies on domestic sales, not on exports, which are zero-rated, and exporters are allowed to recover the VAT paid on inputs — but there may be financial implications, especially during construction.

TNM: Are there going to be any changes to the tax code for mining companies?

AE: The new government may have some plans. A comprehensive tax reform — including a review of the corporate tax system, and other issues — might be analyzed, but probably not this year. It will take longer, eventually. But the government is working to improve the conditions for mining ventures, promote investments and at the same time bring more revenue to the provinces and local communities.

TNM: Are you suggesting that the royalty may go up?

AE: In the last few years we have seen bills presented to Congress by legislators proposing an amendment to the royalty system, so this seems to be a sensitive matter. Any potential change should be carefully analyzed, taking into account all the stakeholders and the overall impact in the long run.

TNM: I was recently in Ecuador — another country that hopes to encourage more foreign investment in its mining sector — and government ministers spoke of the need for a windfall profits tax. Is this something Argentina might consider?

AE: The government administration is conscious of that and will work hard to improve the conditions as much as possible, but it is not easy because we are facing a fiscal deficit, and that is another constraint to deal with.

TNM: We have been interviewing mining executives and government officials all week here in Buenos Aires in the lead-up to the Prospectors & Developers Association of Canada’s convention starting on March 6. Some executives have said that while mining companies have regularly contributed tax revenues to the federal government, one problem is that little seems to get back to the provinces where the mines are operating. This is a problem when it comes to encouraging a positive attitude to the sector.

AE: That is another matter of concern. Revenues should be allocated in a reasonable manner, and the export duties collected by the federal government was an additional distortion. In fact, some provinces also established a kind of special contribution to finance public works, funded with resources from companies. But again, that was part of an agreement, because companies recognized that the provinces needed more money, and they were willing to make such an effort.

TNM: In 2013 the province of Santa Cruz introduced a 1% tax on ground reserves. Did it feel that it wasn’t getting enough money from the federal government?

AE: The province needed to collect more revenues, so this highly controversial tax was one of the measures to get additional resources. Political issues may have also played a role.

TNM: Santa Cruz was the only province that did that. But didn’t it violate the 1993 Mining Investment Law, under which fiscal stability for mining companies is guaranteed for a period of 30 years?

AE: The tax stability protection is a complex matter. This tax may well violate the tax stability rights of those mining companies with fiscal stability protection. This is clearly a new tax, and any tax that increases the tax burden of the company after the filing of the feasibility study violates the stability, to the extent that it is not offset with a similar reduction in the same jurisdiction.

TNM: The federal government could not do anything about it?

AE: There is a procedure to follow. Companies have started litigation procedures to protect their rights.

TNM: Apart from Santa Cruz, were there any other cases where provinces have introduced extra taxes that were not sanctioned under the Mining Investment Law?

AE: Other provinces have tried to reach agreements with mining companies in their jurisdictions to not breach the fiscal stability regime. The federal government’s decision to impose export duties to companies subject to the fiscal stability regime is another example of a highly controversial measure. That happened in 2007 — five years after the export duty was introduced. Until then, the stability protection had worked pretty well, even during the debt crisis faced by the country in 2001–02.

TNM: What is the situation with the VAT refunds?

AE: There is no special regime other than the one established by the Mining Investment Law for the exploration phase. An exploration company is entitled to request an early refund of VAT paid to suppliers and on imports through a special system. The regime does not work for a company that is actually building a mine. So during the construction stage, the company cannot get the VAT back until the moment that production starts (exporters can request the refund of VAT on a monthly basis). It may be helpful to have a regime allowing the early recovery of VAT during the construction phase as well.

TNM: Are you optimistic that there can be a mining renaissance in Argentina under the new government?

AE: Argentina has a great mining potential that requires a long-term approach. There are many challenges ahead, but the first wave of measures implemented by the new administration look promising, and we expect an exciting future.