TAXES AND CANON FUNDING STILL ISSUES FOR CERRO

C O N F I D E N T I A L LIMA 002733 SIPDIS SIPDIS DEPT FOR WHA/AND, WHA/EPSC, EB/OIA COMMERCE FOR 4331/MAC/WH/MCAMERON USTR FOR BHARMAN E.O. 12958: DECL: 07/14/2016 TAGS: EMIN EINV ENRG PGOV ECON PE SUBJECT: TAXES AND CANON FUNDING STILL ISSUES FOR CERRO VERDE REF: LIMA 2437 - REGIONAL LEADERS PROTEST CERRO VERDE Classified By: Economic Officer Samantha Carl-Yoder for reasons 1.4 (b) and (d) ¶1. (C) Summary. Cerro Verde Officials continue to engage in dialogue with the coalition of 14 Arequipa regional mayors to find resolution to tax and canon funding issues. The Arequipa Mayors are incensed that Cerro Verde, which reinvested a percentage of its profits in expansion and social development projects per its tax stability agreement, paid 37 percent less in taxes in 2005 compared to $21 million paid in 2004. Cerro Verde offered to loan approximately $4 million to the municipalities, to be paid back with future canon funds. Cerro Verde refused to provide the $23 million requested by the Coalition, arguing the company would in effect be overpaying its 2005 taxes. No date has been set for the next meeting; the Coalition is threatening to again demonstrate in front of Cerro Verde operations if the company does not provide an acceptable solution. End Summary. Dialogue With Regional Leaders -------------- ¶2. (U) On June 15, a coalition of 14 regional mayors organized a demonstration of 3,000 strong in front of Cerro Verde's opencast copper mining operations. Protestors contended that Cerro Verde, a Phelps Dodge subsidiary located in southern Peru, underpaid its taxes and canon funding by 37 percent (reftel). (Note: 50 percent of taxes paid by mining companies is earmarked for the canon, which is the portion of mining income earmarked for municipal projects. End Note.) ¶3. (SBU) Cerro Verde, per its tax stability agreement, may reinvest up to 80 percent of profits into its current expansion and social projects, including building a new dam and other water projects, before paying taxes. According to the Ministry of Mines, Cerro Verde did nothing illegal. Cerro Verde, assisted by APRA leader Jorge del Castillo, began a series of meetings with the Coalition of 14 mayors, Arequipa Regional President Daniel Ballon and representatives of the Mining Society on June 24 in an effort to resolve the issue. (Note: Media reports place del Castillo as the next Prime Minister. End Note.) ¶4. (C) The Coalition was initially pleased that Cerro Verde was willing to discuss a solution and called off a planned June 26 strike. Led by Arequipa Mayor Yamel Romero (APRA), the Coalition on June 24 requested that Cerro Verde pay full taxes and royalties for the years 2004-2006 and that the Ministry of Mines revoke Cerro Verde's investment tax credit. The Ministry of Mines refused and suggested that the Coalition find a way to work with the company instead of making impossible demands. Cerro Verde offered to prepay taxes for 2006-2008; the Ministry of Finance commented that it was impossible for the company to take this action. ¶5. (C) At a June 30 meeting, Cerro Verde offered another solution: the company would provide a loan to the municipalities of up to $4 million for social investment projects. This loan would be repaid with money from future canon funds. Romero indicated that this was a possible solution, but that Cerro Verde should provide $23 million in loans. (Note: According to the Coalition, Cerro Verde should have paid a total of $23 million in taxes in 2005. The company, after reinvestment, paid $13 million. End Note.) On July 10, Cerro Verde reiterated its offer of $4 million, commenting if it provided the $23 million requested by the Coalition, the company would be, in effect, overpaying its taxes for 2005. The Coalition refused Cerro Verde's offer and has threatened to demonstrate in front of Cerro Verde's operations if the company does not meet its demands. No date has been set for the next meeting, although Cerro Verde believes the Coalition will return to the dialogue table in approximately one week. Comment -------------- ¶6. (C) Cerro Verde has been working hard to accommodate the demands of the Coalition, but recognizes that if it agrees to too much, it will open a Pandora's Box. Cerro Verde President John Broderick has commented that APRA leader Jorge del Castillo has been instrumental in the process, and has tried to reign in the APRA mayors from Arequipa. Cerro Verde acknowledges it will have to provide something to the mayors, but continues to reiterate that, if copper prices remain stable over the next 14 years, Arequipa will receive more than $1 billion in canon funding. The goal is for the mayors to start thinking about long term prospects rather than short term gains. STRUBLE