Mining in Brazil: Time to dig deep (The Economist – June 22, 2013)

http://www.economist.com/

FOUR years after Brazil’s government said it was planning a radical rewrite of mining laws, on June 18th the industry, which accounts for 4% of GDP and almost a quarter of exports, finally learned its fate. Maximum royalties on mineral wealth are to rise from 2% to 4%, with iron ore and gold probably attracting the top rate, and will be levied on turnover rather than profit. Future licences will come with minimum-investment conditions and licensing will be simplified.

The announcement was met with resignation by mining firms, which had been braced for worse. The government had been keen to squeeze the sector until it squealed, but falling commodity prices and a deteriorating trade balance seem to have made it moderate its plans. A feared new federal levy did not materialise.

The only surprise was that the proposals came in the form of a draft bill to be approved by Congress, rather than presidential decree. Approval will probably take the rest of the year. But there was relief that an end to the wait, which has played havoc with business plans, is in sight.

The new rules will raise total royalties from 1.7 billion reais ($0.8 billion) to 4.2 billion, estimates Murilo Ferreira of Vale, Brazil’s largest mining company and the world’s biggest iron-ore producer.

Though that only brings the country’s light taxes on mineral wealth closer to those levied in other resource-rich countries (Australia charges up to 12%), mining firms complain that Brazil’s chaotic tax system subjects them to costs and risks they do not bear elsewhere. Vale, for example, has spent more than a decade disputing a tax bill for 30 billion reais on profits generated by foreign subsidiaries.

Miners must now hope that the bill’s passage through Congress does not burden them further. Local politicians in non-mining areas may lobby for a share of royalties; under current plans they get nothing. Mining states also want higher revenues: Minas Gerais (whose name means “general mines”) has raised monitoring fees in recent years, though these are supposed only to cover costs. The government may give permission for more state taxes to smooth the bill’s passage.

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