Mining and tax stability

1.    Introduction

During the 1990s different laws were enacted in Argentina to promote mining investments. One of the most important benefits is tax stability, granted by Law No 24,196 (the “Mining Investments Law”) in 1993. The incentive scheme allows that taxes in force at the time the feasibility report is submitted by the mining company can be fixed for a period of 30 years. Under the terms of the regulations, a mining company that files a feasibility study (or pre-feasibility study) for a project is granted a certificate by which the aggregate tax burden upon the beneficiaries cannot increase, as a consequence of any increase or new enactment of any taxes, duties (including export duties) or charges, whether federal, provincial or municipal. Furthermore, if taxes are abrogated or tax rates decrease, those benefiting from the regime will have the benefit of these.

2.    Background of the Case

On August 14, 1996, Cerro Vanguardia submitted the feasibility study of the project to the Mining Investment Bureau and obtained the corresponding tax stability certificate, according the Mining Investments Law.

On December 7, 1998, the Federal Congress passed Law No 25,063, which was published in the Official Gazette on December 30, 2008, and whose Article 4 p) added to Article 69 of the Income Tax Law (Law No 20,628) the allowance for companies paying dividends or distributing profits, in money or kind, which exceed the profits determined in said Law (that is to say, profits accumulated in the previous fiscal year in relation to the date of such payments or distributions) to withhold 35% of said excess permanently. Therefore, Law No 25,063 determined as taxable persons, shareholders, and partners of companies whose profits or utilities exceed the limits contained in the Income Tax Law.

Considering that Cerro Vanguardia’s shareholders’ profits during the fiscal year 2000 reached the limits set by Law No 25,063, the Argentine Tax Authority (Argentine Federal Revenue Administration) requested Cerro Vanguardia the sums owed by way of withholdings of income tax attending the distribution of dividends of 2000.

Cerro Vanguardia opposed said request considering that fiscal stability assures no increase in the tax burden of mining companies for a 30-year period. In this sense, the economic equation of the mining investment must be respected and said protection includes dividends flow originated in the business. Otherwise, the stability provided by the Law will no longer exist as such. Both the First Instance and the Court of Appeals dismissed Cerro Vanguardia’s request.

3.    The Supreme Court’s Decision

The Supreme Court had to decide whether or not the tax burden established by Law No 25,063, added to Article 69 of the Income Tax Law, is compatible with the tax stability granted by the Mining Investments Law. Hence, the Court ruled that:

a) when interpreting tax laws, the purpose and economic meaning must be attended; therefore, the tax established by Law No 25,063 has the same effect as an abrogation of the fiscal exemption or preferential treatments, which causes “an increase of the entity’s income tax rate”;

b) there is a misinterpretation when stating that fiscal stability only benefits mining companies, since a new tax due on dividends is the same as an increase of the company’s income tax rate; and

c) the 30-year tax stability established by the Mining Investments Law is a commitment made by the State not to increase the tax burden of mining companies since they file the feasibility study; therefore, the State can not alter the company’s economic equation by imposing new taxes or increasing existing ones.

The Supreme Court concluded that new taxes affecting mining companies’ shareholders under stability regime entails an infringement to the Mining Investments Law since a tax on dividends means shareholders’ profits will decrease, which is the same as a new tax duty on behalf of the mining company.

4.    Conclusion

The Supreme Court’s decision is an encouraging precedent for mining investors. On such grounds, it is indeed significant that the Court said that: “even though, nobody has a vested right to keep the law unchangeable, this case constitutes an exception since Law No 24,196 was enacted to encourage mining investments by means of keeping a stable tax scenario”.

The mining industry is highly-risky and requires large investments, so legal certainty is demanded to achieve said kind of investments. The enactment of new taxes, which violates federal regulations, discourages current and future investments. The Mining Investments Law is the main foundation of the Argentine legal framework promoting mining, and the Supreme Court has considered its application worthwhile.

Finally, the Court’s decision supports mining companies with stability regimes which were affected by taxes on mining exports. Bear in mind that at the beginning of December of 2007, the Secretary of Domestic Trade and the Secretary of Mines enacted Resolutions No 288 and No 130 which instructed the Argentine Customs Agency to collect export taxes from mining companies, which had obtained their certificates on fiscal stability before taxes on mining exports were created. Many mining companies have challenged said Resolution, and the Courts have given some good responses to mining investors. Although the Supreme Court has not rendered a decision in this matter, according to the Cerro Vanguardia’s precedent, we believe that the Court should declare this attempt to impose new taxes on mining companies protected by fiscal stability contained in the Mining Investment Law unconstitutional.