BEHIND THE SCENES, MINING TAX DISCUSSIONS BEGIN

UNCLAS LA PAZ 000137

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/AND LPETRONI
COMMERCE FOR JANGLIN
TREASURY FOR SGOOCH

E.O. 12958: N/A
TAGS: EMIN EINV ECON PREL PGOV BL
SUBJECT: BEHIND THE SCENES, MINING TAX DISCUSSIONS BEGIN

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SUMMARY
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1. (SBU) GOB officials and mining company executives have
quietly begun discussing tax increases. Industry
representatives say the changes will be significant -- on
paper, GOB officials are seeking a 50 percent share of
before-tax profits -- but far less substantial than the 500
percent hike proposed January 6 by Bolivia's minister of
mining. Representatives of U.S.-based Coeur d'Alene and Apex
Silver said January 18 that the GOB's proposed tax hikes
would adversely affect their operations, potentially forcing
each firm to cancel or halt investment. Miners'
cooperatives, meanwhile, have expressed staunch opposition to
any tax increase and threatened nation-wide road blockades,
presenting a significant challenge to the Morales
administration. End summary.

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MINING TAX DISCUSSIONS BEGIN
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2. (SBU) Behind the scenes, GOB officials and mining company
executives have quietly begun discussing mining tax
increases. Coeur d'Alene executive Jim Duff told Econoff
January 18 that the GOB clearly wants to raise taxes,
suggesting that the administration has little choice but to
act in some way on President Morales' frequent promises to
"nationalize" the mining sector. Duff said he expected the
GOB to move quickly to present new legislation, perhaps
within the next two weeks; according to Duff, the GOB is
looking for ways to mark President Morales' inaugural
anniversary and to honor his much-publicized declarations
that 2007 will be the "year of mining."

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GOB PROPOSES SIGNIFICANT CHANGES
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3. (SBU) Industry representatives say the proposed changes
will be significant -- on paper, GOB officials are seeking a
50 percent share of before-tax profits -- but far less
substantial than the 500 percent hike proposed January 6 by
Minister of Mining Jose Dalence. GOB officials have told the
industry's major players -- Apex Silver, Coeur d'Alene,
Newmont Mining, and Swiss-owned Glencore -- that they want to
eliminate companies' ability to credit the complementary
mining tax (CMT) against income taxes; abolish the tax rate
cap on the sliding scale currently in place (the scale varies
by mineral, imposes different tax rates at different mineral
prices, and sets minimum and maximum tax rates); and raise
taxes at each level of the sliding scale. To illustrate,
gross sales of silver are currently taxed at a minimum rate
of three percent at a silver price of $4/ounce, with rates
varying up to a maximum rate of six percent at a silver price
of $8/ounce; with the GOB's proposed changes, tax rates at
each price would increase, with taxes potentially rising as
high as 20 percent at a silver price of $21/ounce.

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COMPANIES SAY THEY MAY LEAVE
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4. (SBU) Representatives of U.S.-based Coeur d'Alene and Apex
Silver said January 18 that the GOB's proposed tax hikes
would adversely affect their operations, potentially forcing
each firm to cancel or halt investment. Coeur d'Alene's Duff
told Econoff that the elimination of companies' ability to
credit the CMT against income taxes would alone significantly
damage profitability; together with proposed tax hikes, the
modification could more than double the company's annual tax
bill (which includes the CMT, taxes on income and dividend
withholdings, and royalties paid to the seven mining
cooperatives leasing the project's silver deposits to Coeur
d'Alene). Duff reportedly told the mining minister and other
GOB officials that new taxes would make it impossible for the
firm to recover its capital investment, especially if silver
prices fell from today's record highs to their long-term
average of $5/ounce. Duff ultimately told GOB officials he
believed tax increases would force Coeur d'Alene's board to
suspend the firm's $130 million San Bartolome silver project;
the possibility of cancellation reportedly had some effect,
but Duff said he suspected GOB officials would ignore the
threat and move blindly ahead.


5. (SBU) Apex Silver CEO Jeff Clevenger echoed Duff's
concerns, telling the Ambassador January 18 that the GOB's
proposed tax hikes would effectively amount to a 70 percent
share of earnings. Company executives reportedly tried to
explain the effective tax rate to GOB officials but made
little progress, as most officials possessed only a limited
understanding of the industry. Executives indicated that
Apex would accept a true 50/50 profit split and urged GOB
officials to carefully consider the effective impact of
proposed tax hikes on the company's ability to realize a
satisfactory investment return, lest Apex be forced to halt
its $900 million San Cristobal project. Executives also
urged GOB officials to moderate their rhetoric, noting that
threats to "nationalize" the mining sector and introduce a
500 percent tax increase had disastrous implications for the
company's stock price; according to one executive, Apex lost
$300 million in market capitalization on the mining
minister's comments alone. Despite their arguments'
relatively limited success, company representatives said they
would continue to engage GOB officials.

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MINERS' COOPERATIVES EXPRESS OPPOSITION
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6. (SBU) Miners' cooperatives, meanwhile, have expressed
staunch opposition to any CMT increase and threatened
nation-wide road blockades, presenting a significant
challenge to the Morales administration. The National
Federation of Miners' Cooperatives immediately rejected
proposed tax hikes and called on the GOB to respect existing
contracts and honor past promises to seek cooperatives'
agreement before changing the industry's tax structure; in
response, the GOB announced January 16 that it would begin
discussions with mining cooperatives and state mining
employees' unions.

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COMMENT
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7. (SBU) While executives fully expect tax increases, they
appear confident that the GOB will avoid extremes. Many
believe the GOB's much-hyped "nationalization" of the mining
industry will parallel that of the hydrocarbons sector, e.g.,
that GOB officials will introduce tax increases in lieu of
asset expropriations. Industry representatives do not
consider the GOB's public statements an indication of the
GOB's true intentions; rather, they consider the rhetoric an
effective means of alarming companies and forcing a softening
of negotiating positions, pointing out that a 50 percent
share of before-tax profits suddenly seems acceptable when
the alternative is a 500 percent increase.

8. (SBU) Comment continued: Company representatives may be
able to accept the inevitability of tax hikes, but many have
a difficult time accepting the disconnect between the
administration's harmful proposals and GOB officials' public
statements recognizing the importance of private investment.
By raising mining taxes, the GOB risks losing the investment
it claims to want, puts thousands of much-needed jobs on the
line, and sets the stage for a potentially damaging
confrontation with miners' cooperatives -- unless it placates
a once supportive group by exempting them from tax increases.
End comment.
GOLDBERG