Changing Mining Royalties and Taxes: What to Expect

Transcription

1 Changing Mining Royalties and Taxes: What to Expect

2 CFEM Mining Royalties Overview 2

3 CFEM Mining Royalties Overview CFEM (Financial Compensation for the Exploration of Mineral Resources) is a mining royalty due for the economic exploration of the Brazilian mineral resources. It was created by the Brazilian Constitution. It is due for the States, Federal District, Municipalities and agencies of the Federal Government, by those engaged in mining activities in Brazil, through the extraction and economic exploration of mineral resources. 3

4 CFEM Mining Royalties Overview Law nº 7,990/89 s scope encompasses, among other subjects, the regulation of the Financial Compensation for the Exploration of Mineral Resources CFEM. It was subsequently complemented and altered by Laws 8,001/90 and 9,993/00, regulated by Decree nº 1/91, as well as by Order nº 6/92 and Normative Ruling nº 6/00, both issued by the National Department of Mineral Production DNPM. It falls under the DNPM jurisdiction to issue rules and rugulations, as well as to supervise the collection of the CFEM (Law nº 8,876/94, sec. 3 - item IX). 4

5 CFEM Mining Royalties Overview The triggering event for the CFEM is the outflow of minerals from the mining site, mine, saltmine or other mineral reservoirs. Furthermore, the usage, industrialization of the mineral product or its consumption by the miner. Current legislation establishes that the CFEM revenue will be distributed as follows: 23% to the State where the mineral was extracted; 65% for the municipality where the production occurs; 12% for the Federal government (DNPM, IBAMA and MCT). Section 6 of Law 7,990/89 states that the CFEM will be charged at up to 3% of the net income arising from sales of mineral products, obtained after the last stage of the adopted processing procedure and before industrial transformation. Section 2 of Law 8,001/90 defines net income for the purpose of calculating the CFEM as the gross income from sales, deduced by transactional taxes levied upon mineral sales (ICMS, PIS and COFINS), as well as freight and insurance expenses. 5

6 CFEM Mining Royalties Overview The rate at which the CFEM is levied varies in accordance with the type of mineral. A 3% rate is applicable for aluminum, manganese, rock salt and potassium; A 2% rate is applicable for iron ore, fertilizers, mineral coal and other mineral substances; A 0,2% rate is applicable for gemstones, colored cuttable stones, carbonate and precious metals; A 1% rate is applicable for gold. 6

7 Potential Changes in the Brazilian Mining Royalties 7

8 Potential Changes in the Brazilian Mining Royalties There has been a lot of discussions regarding the need to update the current mining regulation through the creation of a new Regulatory Framework, substituting the current Mining Code. For the Ministry of Mines and Energy (MME), the creation of this new Regulatory Framework aims to encourage the development of the mining industry in the Country, acting as a mechanism for the sustainability of the mining activity in all of its production stages. Several Bills were presented for consideration by the legislature, to establish a new Regulatory Framework. 8

9 Potential Changes in the Brazilian Mining Royalties There are currently several different bills proposing changes to current laws in the most varied forms. From concession rights to changes in the distribution percentages established by Law, to the creation of funds to support other states affected by mining activities. Proposed changes have various motivations. For instance, the change in mining royalty rates shall consider the relative scarcity of the mineral product to supply the Brazilian market, direct application of the substance in society use and level of value added for mineral exports. 9

10 Potential Changes in the Brazilian Mining Royalties Senate Bill nº 1, of 2011 This bill proposes changes to section 6 from Law 7,990/89 and section 2 of Law 8,001/90. These sections would then state the following: Art. 6º: The financial compensation for exploration of mineral resources, for economic purposes, will charged at up to 3% over the gross revenue arising from sales of mineral products, obtained after the last stage of the adopted processing procedure and before industrial transformation Art. 2º: The financial compensation established by section 6 of Law nº 7,990/89 will be calculated over the gross revenue arising from sales of mineral products, obtained after the last stage of the adopted processing procedure and before industrial transformation 10

11 Potential Changes in the Brazilian Mining Royalties These changes are aimed at increasing the scope of Mining Royalties, reducing the possibility of companies using tactics to reduce the amount due. However, only altering the calculation basis would not be enough to avoid the tactics implemented by companies to reduce the amount of CFEM paid. These tactics include, for example, if you consider a mining company that also has ironworks businesses, the mine can sell the mineral products at a reduced price to the steel company, thus reducing the net income that serves as calculation basis for the CFEM. There are also companies that sell underpriced minerals to trading companies subsidiaries located abroad, which in turn sells to customers using regular market price. With the purpose of stopping this practice, one solution that is currently being discussed, but as of yet has not reached the status of a Bill, refers to establishing that the price used as calculation basis must be the one regulated by the international market for that commodity at the time of the sale (e.g., London Metal Exchange). 11

12 Potential Changes in the Brazilian Mining Royalties Bill nº 990, of 2011 This bill proposes changes to section 2 of Law nº 8,001/90, changing the rates at which the royalties are levied over different types of minerals. For non processed minerals (run of mine) aluminum, manganese, rock salt and potassium : a 6% rate; iron ore, fertilizers, mineral coal and other mineral substances : a 4% rate; gemstones, colored, cuttable stones, carbonate and precious metals : a 1% rate; Gold: a 2% rate when extracted by mining companies; 0,5% rate when extracted by prospecting associations or cooperatives, exempt when extracted by individual prospectors. 12

13 Potential Changes in the Brazilian Mining Royalties Bill nº 990, of 2011 For processed minerals, paragraph 1-A establishes the following rates: aluminum, manganese, rock salt and potassium : a 4% rate; iron ore, fertilizers, mineral coal and other mineral substances : a 3% rate; gemstones, colored, cuttable stones, carbonate and precious metals : a 0.5% rate; Gold: a 1% rate when extracted by mining companies; 0,2% rate when extracted by prospecting associations or cooperatives, exempt when extracted by individual prospectors. 13

14 Potential Changes in the Brazilian Mining Royalties The proposed increase in CFEM rates comes, mainly, by requests from the mining municipalities. The main arguments supporting this increase are: Oil & Gas royalties are higher; Mining royalties charged in other countries are higher. These arguments can be rebutted by considering that: One cannot compare as equals the structure of metallic mineral extraction with that of energetic minerals, and; Global mining market is highly competitive. That considered, an increase in tax burden levied on mining could have a deep impact for local mining business competiveness among international players. 14

15 Potential Changes in the Brazilian Mining Royalties Bill n 841, of 2011 This bill proposes that a 1.5% percentage of the gross amount of CFEM collected should be obligatorily distributed for States and Municipalities directly affected by the mining activity. For the purpose of this Bill, States and Municipalities diretcly affected are those that transport, storage, process, ship or disembark minerals extracted by the producing states and municipalities. By distributing 1.5% of the CFEM collected to the so-called affected states, the government aims to create the necessary conditions for investments in infrastucture and environment for these states. 15

16 State Mining Taxes 16

17 Mining Taxes in Minas Gerais and Pará The Brazilian States that concentrate the majority of the country s CFEM collection are Minas Gerais and Pará, respectively. The State Government of Minas Gerais recently issued Law nº 19,976, of December 27, 2011, creating the Tariff for Control, Monitoring and Supervision of Activities of Research, Exploration, Production and Profiting from Mineral Resources (TFRM) The taxpayer for TFRM purposes is the person, individual or legal entity, that has, by any means, authorization to perform research, exploration production or profit from mineral resources. The triggering event for TFRM purposes occurs at the moment of sale or transference between establishments owned by the same taxpayer that extracted the mineral. The amount due of TFRM shall consist of 1 UFEMG, at the value established at the time the tax is due, per ton of mineral extracted. For 2012, Resolution 4,375/2011 established that 1 UFEMG will be equivalent to R$ (approx. U$ 1.36) 17

18 Mining Taxes in Minas Gerais and Pará The State of Pará issued a similar law, aimed at creating a State Tax levied upon mineral production, prior to the implementation of the Federal new Regulatory Framework. Law nº 7,591, of December 28, 2011, created in Pará the TFRM, as well as State Registry for the Control, Monitoring and Supervision of Activities of Research, Exploration, Production and Profiting from Mineral Resources CERM. The amount due of TFRM shall consist of 3 UPF-PA, at the value established at the time the tax is due, per ton of mineral extracted. Order nº 1,083/2011, established that, for 2012, 1 UPF PA will be equivalent to R$ 2,3020 (approx. U$ 1.35). That considered, the TFRM due shall be of R$ 6,906 per ton of mineral extracted (approx. U$ 4) 18

19 Mining Taxes in Minas Gerais and Pará These new Mining Taxes created by the States of Minas Gerais and Pará may result in a large volume of law suits filed with the purpose of stopping their collection. According to some Brazilian experts, these taxes are deemed unconstitutional mainly for two reasons: State Governments cannot create taxes levied upon mining activity, as only the Federal Government has the constitutional right to do so; The calculation basis established by the States, as it has no connection with fiscalization costs. A tariff is a type of tax related with a service provided or rendered by the State. The revenue arising from the collection of this tax is not aimed at covering the costs incurred by the State for the usage of its services. 19

20 pwc.com/br Jaime Andrade Tax Partner Thank you! 2010 PricewaterhouseCoopers Contadores Públicos. All rights reserved. In this document, refers to PricewaterhouseCoopers Contadores Públicos which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.