Mining tax to go up in Brazil (I'm sorry)

On June 18, the government of the State of Minas Gerais, Brazil, launched the movement “Justice, albeit late” (Justiça ainda que tardia), which defends the campaign “Ore with more justice” (Minério com mais justiça) which main proposal is the increase of the royalties rate levied on the mineral production. In Brazil, although explored by private companies, the ore in the soil belong to the country. The mining concession system has as a consideration the payment of royalties via CFEM (Financial Compensation for the Exploration of Mineral Resources).

CFEM was introduced by the 1988 Brazilian Constitution as the consideration to the exploration of mineral resources in Brazilian territory. The funds collected with the tax are distributed between the central government (12%), the producing State (23%) and the municipality where the production is conducted (65%). CFEM’s rate varies between 0.2 to 3% of the net profit in accordance with the extracted substance.

The movement headed by Governor Antônio Anastasia alleges that the difference between mineral production royalties and oil and gas royalties is unfair and jeopardizes the producing States. Indeed, mineral royalties are significantly smaller than those paid for oil and gas: nowadays, the royalties’ rate for the exploration of oil related products varies between 5 and 10% of gross profit with production.

This movement is in line with the global trend in regards to mineral royalties. Just in 2011, the mineral production royalties’ rate increased in Australia, Chile, Peru, South Africa, Ghana, Tanzania and Burkina Faso.

Moreover, countries like India and Russia introduced new taxes which levy on the exportation of ore.

The movement’s proposal is to raise the medium royalties’ rate to 4% of the companies’ gross revenue with production. This implies a restructuring of the calculation basis in order to simplify and facilitate the collection of accrued taxes. This shift in the calculation basis of CFEM might cause a larger impact in the tax cost than the (seemingly reasonable) increase in its rate. Nowadays, CFEM accrues over the net revenues with ore sales, comprised by the total sale’s value minus the accrued taxes (ICMS, PIS and COFIS) on trade activities and expenses with carriage and insurance. The shift in the calculation basis means that mining companies would have to pay CFEM accrued over the total value of the ore sales, which would increase the exploration expenses and would reflect on prices.

For instance, considering a company which works with a profit margin of 30%, for each $1.000,00 of sold products, collected taxes would go from $ 6.00 to $ 40.00 (so, almost 7 times more).

The main argument against the increase in royalties and the new calculation basis is the reduction in the international competitiveness of Brazilian ore. Considering the slowdown in commodities’ market due to the Euro crisis and the decrease of growth rates of some Brazil’s most important commercial partners, this might not be the best opportunity to raise CFEM’s rates.

However, this royalties’ battle is bound to last, because, though the launched campaign has the support of several economic sectors, the lobby of mining companies is still sufficient to diminish the effects of the movement in Brasilia, the country’s political center.

Until then, the financial and profit projections of the mining companies in Brazil are, unstable to say the least.

My opinion: It is outrageous and I hope this increase never comes to reality. The government seems to be working hard to erode Brazilian main source of export revenues.