The current situation of the tax and exchange stability in mining

1.    Introduction

Mining is a high risk activity, which requires substantial capital investments and long-term periods to recoup such capital. Thus, investments in the mining area are only feasible provided there is a general framework of predictability and stability in respect of the legal rules.

In order to provide for such a stability framework, the Mining Investment Law No. 24,196 was passed during 1993, as further amended by Law No. 25,429 (hereinafter the “MIL”).

Under the legal scheme granted by the MIL a strong growth of mining activity occurred in Argentina, which in the last eight years accounted for a direct investment of US$ 3,000 million. The mining exports reached the amount of US$ 700 million in the year 2001, surpassing the Argentine exports of meat and by-products. At the present date, important investments have been announced (for example, Barrick Gold will invest US$ 1,600 million in the “Veladero y Pascua-Lama” project and Meridian Gold will invest US$ 130 million in the “Cordón de Esquel” project).

2.    Tax stability under the Mining Investment Law

The MIL (section 8) guarantees, for such companies which have been registered in the registry kept by the Argentine Mining Sub-Secretary, tax stability for a term of 30 years counted as from submission of the feasibility survey. The MIL provides that tax stability comprises all taxes (with the exception of Value Added Tax), including direct taxes, duties and contributions, as well as tariffs and other levies applicable to imports and exports. The MIL also grants certain benefits as to the income tax and the import of mining equipment free from any duties.

The practical application of the above principle lies on the fact that the registered mining companies shall not suffer any increase in their “total tax burden”, determined at the time of submission of their feasibility survey, within the national, provincial and municipal scopes (these last two provided they have adhered to the national regime of the MIL). To this effect, the tax burden at a national, provincial and municipal levels shall be taken separately. Any tax increase shall be able to be compensated in the same jurisdiction by means of a reduction or suppression of other taxes, as long as the “total tax burden” in such jurisdiction has not been increased.

Now, by means of Resolution No. 11/2002 (as amended) of the Ministry of Economy and Infrastructure, an “export duty” was imposed, with a rate ranging from 5% to 20% of the value of the exported goods. Prior to the enactment of such regulation, exports of mining products (same as of the majority of the products and raw materials) were exempted from the payment of any duties.

Pursuant to information received from mining companies registered under the MIL regime prior to the enactment of Resolution No. 11/2002, the tariff stability (absence of export duties) is being complied by the national authorities, and such companies are not required to pay the above mentioned export duty. In addition, tax stability is also being complied by the tax authorities.

3.    The tax exemption under the Mining Code

The current section 214 of the Mining Code (introduced by Law No. 10,273 of 1917, as amended) provides that, during the first five years of the concession, counted as from the date or registration of the concession, no tax or duty, whether at a national, provincial or municipal level, present or future, shall be levied over the property of mines, their production or the exploitation and commercialization of the mining products, machinery and facilities. The mining cannon is excluded from the above exemption, as well as taxes in retribution of services and stamp duty on proceedings.

The above mentioned exemption has a scope greater than the tax stability provided under the MIL, inasmuch as it implies the elimination of taxes to events which are normally taxable. However, as Mr. E. Catalano, a prestigious mining legal author, indicates (Commented Mining Code), such exemption has little effect since five years is the minimum term required for a mining company to commence production (the period required to perform the feasibility survey, procurement of financing, etc.). Thus, little of this five-year tax exemption will be left for the mining company at the moment of starting production.

Pursuant to information received from mining companies which enjoy the tax exemption provided under section 214 of the Mining Code, such companies are not required to the payment of any export duty and tax exemption is being duly complied with by the authorities.

4.    Exchange stability under the Mining Investment Law

The uniformity of opinions and interpretation from national authorities in respect of tax and tariffs (customs) stability is not present to the same extent in the area of the so-called “exchange stability”.

On this point, the MIL (section 8, paragraph 6) provides: “What is provided in this section shall also be applicable to the exchange and customs regimes, with the exception of the rate of exchange and reimbursements, drawbacks and/or return of taxes on account of exports.“

The exchange regulations on this area have developed as follows:

· Decree No. 2581/64 (section 1) provided for the obligation of the exporters to transfer to Argentina the value of the domestic goods which have been exported, and to sell in the local market such foreign currency within the term provided by the applicable regulation.

· Decree No. 530/91 repealed the regime established by Decree No. 2581/64 and, therefore, provided that the exporters were no longer required to transfer the proceeds of their exports into the country and to sell such foreign currency in the local market.

· Emergency Decree No. 1606/01 repealed Decree No. 530/01 and reinstated the effectiveness of section 1 of Decree No. 2581/64, and thus the obligation of the exporters to sell in the local market the proceeds of their exports was again established.

· Finally, Decree No. 1638/01 (section 3) provided that such activities which enjoyed a specific exemption granted by law (i.e., the MIL) were not required to transfer the proceeds of their exports into the country.

5.    The dispute concerning the exchange stability

The mining companies Borax Argentina S.A. and Minera del Altiplano S.A. (the “Petitioners”) requested to the Argentine Central Bank (the “Central Bank”) the passing of a resolution which authorized them to freely dispose of the proceeds of their exports and to be excluded from the obligation to transfer such proceeds back to the country. Petitioners had been registered under the MIL regime prior to the date Decree No. 1606/01 was issued, that is when the obligation to transfer the export proceeds into the country was reinstated.

After this presentation made by Petitioners, the following contradicting opinions were issued:

a) The Legal Department of the Ministry of Economy held that the exemption provided by Decree No. 1638/01 (exemption to transfer the proceeds of the exports for such companies registered under the MIL regime) was valid and, therefore, it was Central Bank’s obligation to issue a resolution concerning Petitioners’ request.

b) The Legal Department of the Central Bank, on the other hand, held that (i) pursuant to the jurisprudence of the Supreme Court, “no party has the right to the preservation of laws or regulations concerning issues of economic policy” (“Fallos” 259:377 and 432); and (ii) Decree No. 1638/01 can not modify the provisions of Emergency Decree No. 1606/01, because the latter enjoys a category superior than the former.

Taking into consideration the discrepancy which arose between the two legal departments mentioned above, the matter was sent for the consideration of the Attorney General, who is the chief counsel of all legal departments of the national government.

The Attorney General issued an opinion on September 16, 2002, addressed to the Central Bank, which denied the request of Petitionerson the following grounds:

· It can not be concluded from the language of the MIL, that a right to “exchange stability” has been created, with the scope requested by Petitioners. The jurisprudence of the Supreme Court must be taken into consideration, which has held that “no party has the right to the preservation of laws or regulations concerning issues of economic policy” and that “the amendment of regulations by other regulations enacted subsequently does not affect any rights arising from the National Constitution” (“Fallos” 259:377 and 432; 267:247, 268:228 and 275:130).

· The prospect of Petitioners being included under the regime provided by Decree No. 530/91 (free disposition of export proceeds) was always subject to the compliance, at the moment of performing the relevant export, of all the conditions required by such Decree in order to freely dispose of such proceeds.

· Petitioners only enjoyed a “potential right”, which means that their right to freely dispose of the mining exports proceeds was subject to the fact that the regulations which granted such free-disposition right continued in force at the moment the export was made.

6.    Conclusion

The MIL has been instrumental to the growth of mining activity in Argentina from mid 1990s to the present date. Under the umbrella granted by the MIL, foreign investors have been provided with the necessary stability that allowed them to structure large mining projects, as well as obtain the finance necessary to develop them.

The recent opinion of the Attorney General brings about serious concerns as to the nature and scope of the tax, tariff and exchange stability granted by the MIL. The Attorney General, by means of holding that the rights of the mining companies registered under the MIL were “potential rights”, and this criteria could validly be extended to the tax area, has made the stability under the MIL completely ineffective.

Under this scenario, any regulation issued following the date of registration of a mining company will be in a position to repeal exchange benefits (and, eventually, tax and tariff benefits) existing at the moment of registration of the mining company.

To the present date, several mining companies with important investments budgeted for the near future have pronounced against the above interpretation of the MIL. Moreover, some of these mining companies are currently reviewing their investment plan until the Central Bank modifies its position on this matter. In addition, the association of Argentine mining companies (Cámara Argentina de Empresarios Mineros) is currently performing different actions to defend the stability granted by the MIL.

On October 22, 2002, a news article was published (Ambito Financiero newspaper) which informed that the Central Bank would formally communicate on that day to the main banking associations (ABA and ABAPRA) that oil and mining companies would be required to transfer the entire proceeds of their exports to Argentina. To the present date no such communication has been issued by the Central Bank.

It is to be expected that a new regulation or opinion will be issued in the near future, modiying the position of the Attorney General and of the Central Bank in respect of the scope of the stability provided under the MIL. If such action is taken, the predictability that mining requires in order to develop in Argentina would be restored.