New research published by Grupo Propuesta Ciuadana (GPC) highlights the difficulties faced by Peru’s government “to protect the tax base over the life of a mining project”. The study focuses on the Sociedad Minera Cerro Verde in Arequipa, one of the many companies that for years have benefited from tax stabilisation agreements designed to attract foreign investment.

GPC argues that this sort of agreement has resulted in the loss of millions in revenues that should have been channelled to Arequipa by way of the mining canon.

SUNAT, the Peruvian tax authority, has made several attempts to force Cerro Verde to pay royalties on one of its expansion projects, the Primary Sulphide Mineralisation Project, where production started in 2006. Cerro Verde argues that the tax stabilisation agreement make this exempt from royalties; SUNAT disagrees.

The company has taken to the courts. Last month the Supreme Court ruled in the government’s favour, meaning that SUNAT can finally recover US$ 250 million in lost revenues for the years between 2006 and 2009. Of this, $140 million is due to be paid to the local government of Arequipa.

GPC argues that the government should be trying to recover more. Its analysis suggests that Cerro Verde owes an additional US$200 million in back taxes and that Cerro Verde’s own financial statements indicate that, if it loses all the appeals, the company will owe no less than US$544 million in unpaid taxes for the period 2006-13.

In a blog written for Oxfam America, Scott Selwood argues that discretionary tax exemptions are causing the loss of huge amounts of revenue that should be channelled to local regions where the minerals are extracted, helping thereby to fund effective local development outcomes.

This is but one of several studies sponsored by Oxfam in a number of countries. Oxfam argues “how countries that are heavily dependent on minerals or hydrocarbons for government revenues lose taxes from a combination of poorly negotiated, overly generous and secretive contracts, and weak fiscal regimes vulnerable to abuse”.

GPC argues that the government should:

  • eliminate discretionary tax benefits;
  • change the way mining royalties are calculated, moving back to the system where royalties are calculated on the basis of volumes extracted; and
  • abolish unjustified tax benefits for large mining companies as well as for other business sectors, such as the agro-exporters, and banks and finance.