Peru's President-Elect Ollanta Humala says he will meet with owners of mining companies to discuss increasing mining taxes after he takes office on July 28th.

Author: Dorothy Kosich
Posted: Monday , 11 Jul 2011

Peru's President-Elect Ollanta Humala said mining companies will have to pay royalties to help reimburse the state for mining costs that government now subsidizes.

In a recent interview with the Washington Post, Humala, 49, said, "What we want to do is to get on well with the mining companies, but we also want them to get on well with the country."

"Many big mining companies only pay income tax, but they extract minerals, they pollute the water," he told the Post. "They don't give any form of compensation in the regions where the minerals are extracted and where they do the damage, forcing the state to help those regions."

"What we are stating is that mining companies will have to pay that compensation, that is called a royalty," he emphasized.

"The state is paying for the mining companies; it is doing a favor to the mining companies for the last 10 years, equivalent of half the income tax the companies pay," Humala told the Post.

Peru is the world's largest producer of silver, the third-ranked producer of copper and zinc, and the sixth larger gold miner.

Nearly one-third of Peru's population has yet to be brought out of poverty, although the nation's poverty rate has been reduced from 48.7% in 2005 to 30% in 2010. Economic growth in Peru has been associated only with the mining sector, which provides 61% of the nation's exports.

Peru's income tax is 30% of profit, Humala noted. "The state collects that amount, and half of that returns to the region. That is why we have 12 states that are rich in the sense that they receive money from the state, and another 12 states that are poor."

Humala suggested those states were poor because they have no mines "and also because the state has to spend 50% of the income tax on compensating the regions for the damage done by mining companies, instead of building hospitals and schools."

"The windfall tax is different," he told the Post. "That consists of seeing the level of profits they have and having a technical conversation with the mining companies so as to preserve their competitiveness."

Humala emphasized that he would "meet with the owners of the mining companies to have that conversation." The president-elect said he believes it would be easier to speak to mining company owners because they understand cash flow. "It's an issue of corporate social responsibility."

Last week Pedro Martinez, president of Peru's National Society of Mining, Petroleum & Energy, told reporters that representatives from the group will meet with Humala's advisors to reach a technical solution that won't make Peru less competitive than nations like Chile and Canada.

"We must be very careful with tax policy as the key for investors is confidence," Martinez said. "If we don't send clear signals to investors that the growth model will continue. We'll be shooting ourselves in the foot."

Last month Southern Copper Corp. CEO Oscar Gonzales Rocha also stressed that mining companies operating in Peru are ready to hold talks with the Humala government concerning a mining windfall profits tax.

In an analysis published last month, Business Monitor International suggested, "Whilst the proposed 40-45% tax on mining companies' profits is significant, it is unlikely that major investment will be deterred, given Peru's substantial mineral wealth and elevated metal prices. Thus, so long as metal prices remain high the reward will outweigh the risks."

Nevertheless, the Business Monitor also observed, "Humala derives much of his support from the indigenous regions of the country where there have been numerous protests against the effects of mining operations."

"Indeed, under the centre-right government of Alan Garcia, local protests have been a constant thorn in the side of new investment. Whilst social conflict will not be eradicated under Humala, it is likely that he will have more sway addressing indigenous grievances than precious centre-right governments," the Business Monitor concluded.

Nevertheless, in an interview with Bloomberg last month, Humala's chief economic adviser stressed, "We will respect accords with companies that have stability contracts."

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