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