Windfall profit taxes have been a central issue in Peru’s last two presidential campaigns. After President Ollanta Humala took office this July, his administration negotiated a new tax framework for the mining sector to account for the higher profits mining companies have made during the commodities boom of the last five years.
Former President Alan Garcia negotiated an agreement with mining companies in 2006 that established a voluntary payment of 3.75 percent of net profits over five years, instead of a windfall profit tax. Under the agreement, the government captured only a fraction of company revenues from 2007-2011: a total of $900 million, instead of the $6 billion they would have received under a windfall tax. The government also allowed these revenues to be managed directly by the companies.
But this year, mining companies said they were open to a windfall profit tax, as long as it would not damage the sector’s competitiveness. The companies warned, however, that if the sector seems to be less competitive they may consider shifting how they invest the $40 billion they plan to commit to Peruvian projects over the next five years.
President Humala said the extra revenues generated by the new tax will be distributed among non-producing regions to help fight poverty and address economic distortions created by the current revenue sharing scheme. The current scheme benefits producing regions exclusively, dividing 80 percent of extractive profits among just eight out of Peru’s 25 regions.
On 19 September, Peru’s congress passed three bills codifying the new tax framework into law, establishing three mechanisms to capture additional income for companies operating under varying contract and royalty agreements.
RWI partner Grupo Propuesta Ciudadana (GPC) estimates that the new framework will likely bring an additional $500 million into government coffers—significantly more than what companies have paid under the voluntary contribution agreement, but only half of the government’s official estimate. Companies have argued that these new contributions should be tallied as business expenditures, lowering the base income to be taxed under the new framework. Additionally, while the increased royalty payments will be distributed equally among subnational regions, the other two new taxes, for companies operating on non-royalty contracts, will be paid directly to the central government.
The mining guild’s agreement to the new windfall tax framework is significant, but the approach could lead to a recentralization of mining revenues. This makes it even more important for advocates to monitor and publicize how these new revenues are managed, to ensure they are being used in the national interest.
