Again the Royalty to Mining appears as a matter of debate in the Chilean public. This time the possibility that one alternative is to finance part of the reconstruction of the country as a result of the devastating earthquake that struck us on 27 February. A reconstruction may involve the chilling sum of 30,000 million dollars, one third of which the state has to finance itself or another.
And the question that immediately arises is how? as financing alternatives, which more and that less will hurt down the road.
a) Reallocate the budget: In the absence of budget increases, the various ministries must tighten their belts, the same as some regions that will work with a smaller budget than expected, which will lead them to postpone the execution of projects and programs.
b) Sell State Enterprises: The privatization of public enterprises is politically sensitive and unpopular, but only talk to alienate a fraction of Codelco.
c) Use of the savings that Chile has abroad: The inflow of funds from abroad and the rapid clearance of foreign currency in the local market would imply a depreciation of the dollar (The exchange rate falls), damaging the Chilean export sector.
d) Contract with multilateral loans: While the IDB and other international agencies are willing to finance reconstruction, no one can ensure that they are soft loans with rates and that this measure will have effect on the type exchange.
e) Domestic borrowing: Recourse to domestic borrowing in significant amounts, generate an increase in interest rates.
f) Increasing taxes: Alternative unpopular game has negative effects on economic activity:
A increase in VAT would cause a decrease in consumption would tax those who are living directly on the disaster and harm the poor.
increase the tax burden for SMEs lead to an increase in the unemployment rate and create stagnation in production.
Increase the tax on large companies -even if the 17% tax on profits is lower than the European economies and those of Latin America it increased less incentive to generate investment affect growth the country and a likely transfer of higher costs for people, especially in those basic goods that have no substitutes.
If you doubt there are other alternatives to be analyzed, but it is important to emphasize that although it is absolutely obvious that the solution will fund reconstruction by using a mix of alternatives, each time louder in the political arena that is the mining royalty of that mix. The latter alternative will require an interesting maneuver for negotiation with a break point beyond the amount of tax.
Although the rate currently applied in Chile, between 0% and 5% - is one of the lowest in the world (the royalty income from natural resources in countries Canada, U.S. and Norway ranges between 8% and 35%) will be the ingredient that gives legal headaches for the government negotiating team.
Remember that when Royalty was established in 2005, added an article to Decree Law 600 which specified the tax invariability up to 15 years mining companies that signed the agreement. Thus a modification to the above, could generate such companies are turning to international courts for breach of contracts, which would undoubtedly affect competitiveness, credibility and strength of our country.
In the best case, and access miners to reformulate the legal framework could be expected to sit at the negotiating table, aiming for a mild and transient increase is not maintained beyond this particular situation. Is it possible?
For now, the ability to approach for a "new deal" appears high on the agenda.
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