Identifier
Created
Classification
Origin
06LIMA3662
2006-09-14 17:09:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Lima
Cable title:  

MINING COMPANIES TO MAKE "VOLUNTARY" SOCIAL CONTRIBUTION

Tags:  ECON EMIN EINV ETRD SOCI PGOV PE 
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UNCLAS LIMA 003662 

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR WHA/AND, WHA/EPSC, EB/OMA, EB/TPP
COMMERCE FOR 4331/MAC/WH/MCAMERON
USTR FOR BHARMAN AND MCARRILLO
DEPT PASS TO INT/USGS/RESTON FOR DMENZIE/AGURMENDI
DEPT PASS TO OPIC FOR J BRACHE
DEPT PASS TO EXIM FOR DON HULTMAN

E.O. 12958: N/A
TAGS: ECON EMIN EINV ETRD SOCI PGOV PE

SUBJECT: MINING COMPANIES TO MAKE "VOLUNTARY" SOCIAL CONTRIBUTION


UNCLAS LIMA 003662

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR WHA/AND, WHA/EPSC, EB/OMA, EB/TPP
COMMERCE FOR 4331/MAC/WH/MCAMERON
USTR FOR BHARMAN AND MCARRILLO
DEPT PASS TO INT/USGS/RESTON FOR DMENZIE/AGURMENDI
DEPT PASS TO OPIC FOR J BRACHE
DEPT PASS TO EXIM FOR DON HULTMAN

E.O. 12958: N/A
TAGS: ECON EMIN EINV ETRD SOCI PGOV PE

SUBJECT: MINING COMPANIES TO MAKE "VOLUNTARY" SOCIAL CONTRIBUTION



1. (U) Summary: To fend off political pressure, including the
specter of a windfall tax, mining companies operating in Peru agreed
to make a "voluntary" contribution of up to $773 million over the
next five years. The solution, in which Prime Minister Jorge del
Castillo played a key role, was seen as an effective way of
increasing funds for much-needed poverty alleviation without
"changing the rules" on investors in a vital sector. The deal is off
if taxes increase or world metal prices drop below a reference
level. The firms, which include a number of U.S.-owned companies,
will control the funds, to be used for community development
projects, but will coordinate the involved communities and receive
"guidance" from the GOP. Public dissatisfaction over lack of access
to the mining royalties reserved for communities had led to mounting
political pressure for a legislated solution such as a windfall
profits tax. Already Peru's largest taxpayers, most U.S. mining
firms already have extensive community projects in place. The extra
development funds will support President Garcia's "Investment
Shock", aimed at creating immediate jobs and alleviating poverty.
End Summary.

CONTRIBUTION AGREEMENT
--------------

2. (U) On August 24, 2006, Prime Minister Jorge Del Castillo
announced to the Peruvian Congress that the mining companies
operating in Peru were going to make a collective contribution
totaling 2.5 billion soles ($773 million) to be used for community
development. The contribution will be divided among all firms and
paid in five parts from 2006 to 2010. Del Castillo stressed that
this contribution was in addition to what the mining companies were
already spending to assist community projects.


3. (U) The deal, del Castillo explained to Congress, respects the
rule of law while giving the GOP immediate funds to fight poverty,

malnutrition and social exclusion in mining zones, some of Peru's
poorest areas. (Note: Areas that voted for Ollanta Humala and may do
so again in November, unless the government is seen as addressing
their needs. End Note) The voluntary contributions are in addition
to the $10 billion that mining companies plan to invest in new
projects in the next five years, which del Castillo admitted, in his
address to Congress, will provide thousands of new jobs and generate
indirect social benefits.

DETAILS
--------------

4. (U) Mining companies will not pay the voluntary contributions to
SUNAT (the tax agency) but will manage them as company-specific
private funds. The GOP will not be involved in executing projects
and will only offer "guidance." The companies, communities, and
local governments will jointly determine where, on what and when the
monies are spent. This process would avoid the long delays that
local governments have experienced in accessing the growing "Canon"
royalty funds. Corporate management will "unblock" needed public
works since the firms have the qualified engineering and management
staff that the local governments do not, and the firms need not be
hindered by bureaucratic regulations that slow public projects.
(Note: the Mining Canon comprises half of firms' income taxes,
reserved for local development. The dramatic delay in canon funds
actually disbursed for projects has been due in part to the
inability of municipal governments to prepare suitable project
proposals, and in part to what appear to have been holdups in the
Finance Ministry's screening system (SNIP). End Note)

ROYALTY PAYMENTS CAN BE DEDUCTED FROM CONTRIBUTION
-------------- --------------


5. (U) The deal was negotiated directly with the main industry
trade organization, the Peruvian Society of Mining, Petroleum and
Energy (SNMPE). While the deal has yet to be formalized by lawyers,
we understand the agreed contribution will be three percent of each
mining company's pre-tax profits. All companies will pay this
contribution, regardless of any previous tax stability contract.
SNMPE Vice-President (and also CEO of Peru's largest mine, Southern
Peru Copper),Oscar Gonzalez Rocha clarified that companies that
currently pay mining royalties will deduct these from the
contribution that they may be assessed. (Note: mining royalties are
taxes created in 2004, and started as a compensatory fee for use of
Peru's resources. The Constitutional Court upheld firms' challenge
to the law in a controversial 2005 ruling. End note.)


6. (U) Mining companies obtained the GOP's acceptance to several
important conditions for these extraordinary contributions: the deal
is off should current tax rates increase, new taxes be passed, or
world metal prices decrease below a reference level. The GOP is
currently working out with the companies the formula to be used for
calculating each firm's baseline for the contribution, as well as
the final amount that each firm will contribute.

FIT WITH GARCIA'S INVESTMENT SHOCK
--------------

7. (U) GOP officials, from President Garcia down, expressed public
satisfaction at the results of the negotiations and say the extra
money will be a shot in the arm for the GOP's well-publicized
"Investment Shock," designed to jump-start local economies. The
plan is to carry out projects as promptly as possible in
impoverished regions to create jobs and alleviate poverty. The mine
firms agreed that one-third of the first year's contribution could
cover collective compensations the GOP would pay to victims of human
rights abuses that occurred in the 1980s and 1990s during the
conflict with the Shining Path and MRTA guerilla groups.

BACKGROUND TO THE DEAL
--------------

8. (SBU) The idea of a voluntary contribution actually arose within
the mining community as a means of forestalling growing political
pressure to void tax stability agreements. Nonetheless, some mining
firms resisted the idea of voluntary contributions for months.
Mining companies are already Peru's main taxpayers; moreover, the
new voluntary contributions are not tax deductible. The industry
pays a 30 percent income tax -- estimated to reach $1.85 billion in
2006 -- plus a variety of other taxes. While some of the Peruvian
mining firms have done little in the way of community projects,
most, if not all of the foreign firms have funded extensive
community projects, including U.S.-owned companies.


9. (SBU) Realists within SNMPE understood that during the recent
presidential election campaigns, two of the three main contenders
(APRA's Alan Garcia and UPP's Ollanta Humala) called for a windfall
profits tax and a revision or even abrogation of the tax stability
contracts held by most of the foreign firms that had acquired mines
during the 1990's privatization campaign. Even after new President
Garcia pledged to encourage foreign investment, many Peruvian
congressmen expressed a preference for some sort of increased taxes.
Del Castillo appeared keen on reaching a compromise without
"changing the rules", wanting to deliver something to Congress to
avoid a call for legislation. (Note: One of President Toledo's last
acts in office was to veto a law that would have imposed royalties
on firms with tax stability agreements. End Note.) Del Castillo's
planned presentation to Congress was delayed several times as
negotiations continued.


10. (SBU) Producing a deal that involved all mining companies was
an ambitious undertaking. On the basic question of whether to give
any voluntary contributions, the smaller companies argued that they
could not contribute extra when world metal prices go down. Most
firms realize that once the public gets used projects facilitated by
the voluntary contributions, it will be very hard to stop the
contributions during lean years of low mineral prices. Internal
negotiations on the size of contributions were complex and took
several weeks due to the wide variations in: operation size;
reserves size; type of operation or metal/s produced; and cost
structure and legal situation (some with tax or juridical stability
contracts, for some or all of their projects).

COMMENT
--------------

11. (SBU) Mining companies have learned some bitter lessons over the
past several years. Some mining contacts acknowledged they did not
do enough for local communities; others lament that they did not
publicize well enough the good works that they were doing. Some
firms, such as U.S. Phelps Dodge, have recently reached deals to
support local community projects. Others, such as U.S. Newmont's
operation of Yanacocha, have also supported local projects for years
but face determined opposition from Peruvian and international
forces that are anti-mining and anti-foreign investment. The
voluntary contributions and company-managed local projects hold out
the opportunity for foreign investment and poverty alleviation to
work - to continue working - hand in hand. Calculating and managing
the contributions for so many diverse firms will be daunting, but
well worth it if the collective will of the miners, the communities
and the GOP can pull it off. Prime Minister del Castillo has shown
political skill once again in resolving a thorny issue; our only
concern is that he will simply not have the time to intervene
personally to resolve every complaint by a local community against
a mining company.

STRUBLE