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PERU: Government Generosity Swells Mining Company Profits

Milagros Salazar

LIMA, Feb 4 2008 (IPS) - The Peruvian government saw its tax revenues shrink by nearly 2.7 billion dollars in 2006 and 2007 as a result of a decision not to charge mining companies royalties or a tax on windfall profits generated by the current high prices, according to a civil society umbrella group.

Peru is Latin America’s leader in the production of gold, silver, zinc, lead and tin, and the world’s fifth biggest producer of gold, second of silver, third of copper and zinc, and fourth of lead. The mining industry accounts for nearly 60 percent of the country’s export revenues.

"It is hard to understand why Peru gives away its natural resources when other states have adopted measures to increase their share of the benefits generated by extractive activities," said Nilton Quiñones, the author of the report by the Grupo Propuesta Ciudadana, which links non-governmental organisations working at the provincial and national levels.

The study, drawn up using official data, says that in the last two years the government forfeited 379 billion dollars in royalties from large mining companies that benefited from so-called legal stability contracts, which locked in each firm’s tax status when they were signed under the administration of president Alberto Fujimori (1990-2000) with the aim of promoting private investment.

Because of the rise in international minerals prices and the dire poverty of the communities located near the mines, President Alan García pledged in his election campaign to renegotiate the contracts.

But after he took office in July 2006, he said that was impossible, because renegotiations with the foreign companies could cause severe legal problems for Peru.


According to the Ministry of Energy and Mines, 25 of the 27 large mining companies operating in the country under legal stability contracts do not pay royalties.

They include Canadian giant Barrick Gold and Yanacocha, the largest gold mine in Latin America, and the second largest in the world, which is operated by the U.S.-based Newmont Mining Corporation.

Nearly all of the 40 companies that do pay royalties are small and medium-sized operations, with the exception of Buenaventura, Shougang and Southern Peru, large corporations whose stability contracts expired in 2005 and are non-renewable.

García not only promised to renegotiate the mining companies’ contracts in order to charge royalties, but also said he would levy a tax on windfall profits, to reflect the rise in mineral prices seen since 2003.

The Bloomberg economic news agency reported that prices for copper went up 111 percent from 2004 to 2005, 42.5 percent for gold, 65.5 percent for silver, 150 percent for zinc, 36.5 percent for lead and 15 percent for tin.

But instead of renegotiating the contracts, in August 2006 Prime Minister Jorge del Castillo negotiated with the mining companies a "voluntary payment" of 172.4 million dollars a year for the five years that García will be in office, as long as metals prices remain high.

The payments were to go into an "Equality Fund" to fight poverty, malnutrition and social exclusion in poor mining regions. Over 50 percent of Peru’s population is poor.

Propuesta Ciudadana estimates that mining companies took in windfall earnings of nearly 3.45 billion dollars in 2006, and nearly 4.14 billion dollars in 2007, as a result of the high international prices.

Large corporations took in most of the extra earnings. The Cerro Verde mining company, which operates in the southern region of Arequipa, saw its net earnings increase from 103 million dollars in 2004 to 930 million dollars in 2007, according to government figures.

Barrick Gold’s net earnings climbed from 195.8 to 505.8 million dollars in the same period.

Among Peruvian firms, perhaps the one that benefited the most was Volcan, whose earnings soared from 24 to 449 million dollars.

The state would have taken in an additional 2.27 billion dollars if it had charged the companies a 30 percent tax on the windfall profits – a conservative proportion in terms of the international mining industry, according to Propuesta Ciudadana.

If the 379 million dollars in lost royalties are added to that, the total climbs to 2.65 billion dollars in revenue that the state coffers were deprived of, says the study.

"A number of countries have taken steps to raise the share of government revenue from resource extraction by raising taxes, renegotiating contracts with transnational corporations or increasing state ownership," says the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2006.

In Bolivia, the royalties and taxes paid by oil companies have been increased to 50 percent of the value of natural gas production, compared to between one and three percent in Peru.

In Ecuador, the government increased its share of gas and oil earnings since 2006 by renegotiating contracts.

And Mongolia adopted a 68 percent tax on windfall earnings that kicks in once the prices of gold and copper reach a certain level.

But Prime Minister del Castillo sees things in a different light, arguing that "if mineral prices have soared, the companies are paying more taxes as a result, and there are more resources to be distributed among the villages."

The National Society of Mining, Oil and Energy informed IPS that the mining industry paid the state three billion dollars in 2006 and an estimated 3.5 billion dollars in 2007.

"It’s true that the mining industry’s contribution to the state coffers is large. But the question here is that both the state and the companies should share the windfall earnings in a more equitable manner and the corporations shouldn’t pocket by far the largest share," economist Humberto Campodónico, a columnist with the La República newspaper, told IPS.

U.S. economist and Nobel laureate Joseph Stiglitz, who Campodónico met with a few weeks ago in Lima, remarked that "the interest of the private sector is to maximise profit. And maximising profits means reducing to a minimum what it pays to the state."

 
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