Politics of Poverty

Peru’s fight for millions in tax revenue from Cerro Verde mine

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Cerro Verde mine, Arequipa, Peru (Photo: PCM Peru, 2016)

New research from Oxfam’s partners in Peru shows – yet again – how hard it can be for governments to protect the tax base over the life of a mining project (and hold mining companies accountable).

For many countries, tax and other payments from oil and mining companies represent an important source of government revenue. A case in point is Peru, where the government receives billions each year from companies in the extractive sector. But is Peru receiving all that it should be from these companies?

Last month, Peru’s Supreme Court ruled that its tax regulator (SUNAT) could finally recover millions in lost revenues from Peru’s largest copper mine, Cerro Verde.  For the last six years, SUNAT has fought to recover $250 million in unpaid mining taxes between 2006 and 2009.  Of this, $140 million is due to be paid to the local government of Arequipa – the region where the mine is located – under Peru’s decentralized mining, oil, and gas revenue sharing rules. These payments will help pay for urgently needed public investments. The Supreme Court appeal was the latest attempt by Cerro Verde to avoid paying what the government says is due.

Oxfam’s partner, Grupo Propuesta Ciudadana (GPC), has followed the Cerro Verde case closely and analyzed the publicly available data.  At the center of the now six year fight to recover the lost millions is a tax stabilization agreement signed by then-President Alberto Fujimori in 1998, who is now imprisoned for corruption and gross human rights violations.  The company argues that this agreement entitled it to tax exemptions related to its first major expansion investment in 2006 when it invested $900 million to nearly triple its annual production.  Peru’s tax regulator disagrees, as do their courts.

Peru is right to be pursuing these unpaid taxes—but what if this is just the tip of the iceberg?  GPC argues that they should be trying to recover more from the Cerro Verde mine.  Their analysis shows that between 2006 and 2011 the mine failed to pay an additional $200 million in taxes.  Cerro Verde, in their own financial statements, state that if they lose all the appeals they will owe $544 million in unpaid taxes between 2006 and 2013.

Further, between 2005 and 2012 (the “boom” years for mining companies around the world) GPC estimates that Cerro Verde generated upwards of $5 billion in tax credits, as a result of overly generous fiscal terms.  And last year, a second major investment by Cerro Verde allowed copper production to further double (500,000 tons in 2016).  This is a major concern for the tax justice groups in Peru.  Basically, despite production increasing and commodity prices recovering, a second tax stabilization agreement signed in 2015 (allowing for accelerated capital depreciation) is likely to mean that Cerro Verde’s taxable income for the next few years is effectively zero.

These discretionary tax exemptions are already having a huge impact on budget transfers to Arequipa: since 2012, subnational transfers from mining have collapsed (from an average of 70 percent in 2012 to just 2 percent in 2016). GPC cautions that these revenues are unlikely to recover until 2019 or 2020, at the earliest.

In just the last two years Oxfam has commissioned similar case study research in Cambodia, Kenya, Malawi, Zimbabwe, and Niger—which each map government risks to revenue.  Understanding oil, gas, and mine economics at the individual project level allows us to understand how national tax policy, royalty policy, subsidies and other investment incentives affect the amount and timing of revenue being produced by extractives projects for government coffers – and then into investments that yield inclusive human development outcomes.  For our partners and allies, it is at the project level where revenues are secured or lost and it is where the real transformative potential for those revenues to support pro-poor development outcomes rests – as opposed to “economic growth,” and its often false promises of sustainable and inclusive jobs, infrastructure, or voluntary corporate social responsibility commitments.

Like the Cerro Verde case, these case studies show how countries that are heavily dependent on minerals or hydrocarbons for government revenues lose taxes from a combination of poorly negotiated, overly generous, and secretive contracts, and weak fiscal regimes vulnerable to abuse.  Unlike Peru, not all governments have the wherewithal to audit multinational mining companies, and stay the fight through years of appeals.

But it’s not all doom and gloom. Despite the seemingly infinite ways large mining, oil, and gas companies can avoid paying taxes in countries where they work – as new research from PWYP Canada shows – the pathways are not unlimited.  There are clear patterns and concrete legal, policy, and administrative solutions that can minimize these risks.

In Peru, for example, the government should:

  • Eliminate opportunities for governments and political figures to offer discretionary tax benefits;
  • Move to eliminate all unjustified tax benefits for the mining sector and move to a volume-based (rather than profit-based) royalty system; and
  • Strengthen its capacity to monitor and audit the fiscal agreements with mining and oil companies, and should ensure it has the full ability to track the quantity and value of minerals extracted from its lands.

Peru’s fight to recover lost revenues is not unique.  Too often, countries with significant mineral, oil and gas resources fail to secure a fair share of the revenues generated by these projects.  Such losses (which some global estimates put in the billions) are, quite simply, a matter of life or death. The lost billions represent money that should have been spent on building schools and hospitals, paying teachers, doctors and nurses, and providing equal access to safe drinking water or health care, among other urgent development priorities.

For more than ten years, Oxfam has fought for law and policy reform to require public disclosure of project-by-project payments, contracts, and beneficial ownership.  We continue to defend anti-corruption laws like Section 1504 of Dodd-Frank and are now seeing a flood of new disclosures from laws in the EU and Canada. These long fought for gains are now allowing us to better understand how individual mining, oil, and gas project revenues are lost and we are ramping up our campaigns to stop them.

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