Are all drilling programs in Chile tax-exempt? No. But the details of the Official Notice published by the Internal Revenue Service at the beginning of August opens the door for this incentive to expand in the future. It is not a general public policy, but it could be the first step in that direction.
An introduction to the issue
CESCO published a report in 2016 entitled Restrictions that Prevent the Increase of Mining Exploration in Chile, which identified the concessions system as the major obstacle to Chile’s ability to compete for international mining investment.
But there are other factors that deter potential investors, such as the scarcity and inaccuracy of Chile’s geological information.
According to data from Cochilco, the number of exploration projects that are paralyzed or abandoned has consistently increased in Chile since 2015. Its most recent annual report called the Survey of exploration companies in Chile 2019, found that only 67 out of 300 projects analyzed were still active.
This situation emphasizes the requirement for national exploration incentives. Ms. María Paz Pulgar is a attorney specializing in mining law from Philippi Prietocarriosa DU and Uria and she believes, “Mining exploration in Chile has declined considerably, due to international factors related to the availability of financing.
The investment required to develop a project from scratch is very high, and it is not uncommon for drilling campaigns to find that discoveries are unprofitable. Since exploration is high risk, it is vital to have sufficient information to substantiate a finding, so exploration needs a significant stimulus and specific measures.”
Exploration and taxes
Ms. Pulgar explained, “Companies exclusively dedicated to mining exploration do not generate profits, because they have no sales. They only receive investment and incur expenses in their accounting. Therefore, mining exploration companies are not generally affected by taxes.”
Ms. Pulgar added, “The current volume of drilling by dedicated drilling companies is marginal and represents about 10% of the total, compared to exploration by companies that both explore and extract.
On August 3, the Internal Revenue Service decided not to tax diamond drilling with core sample recovery, as published in Official Notice N°1484.
What does this mean and what are the consequences for exploration?
The exemption from VAT is very specific. It only applies to this drilling technique for mining purposes and not, for example, for water exploration, and it must be to a minimum depth of 1,300 meters. This means that whoever hires an exploration company to undertake drilling with these features will not have to pay 19% VAT. The decision establishes a criterion that benefits all taxpayers from the moment the Official Notice was published.
Not necessarily. Ms. Pulgar clarified that “it is more than likely that drilling companies will pass on the VAT benefit to exploration companies through their prices, which will reduce the cost for exploration companies.” Every drilling company pays VAT on its consumables, such as spare parts, rods, heads, fuel, etc. “They will most likely pass that value on in their prices” as they will no longer be paying VAT for this specific drilling.
But this new approach will benefit exploration companies that hire drilling companies to drill holes with these features. Ms. Pulgar explained, “This will lower the total cost of a drilling campaign, which generates an indirect stimulus, although not efficiently because it is very restrictive. But nothing prevents an exploration company from submitting a request to the IRS for a ruling on other types of drilling, such as reverse air drilling.”
The drilling conditions described in the IRS decision arise from a specific request for such diamond drilling with core recovery to 1,300m. Ms. Pulgar said, “Therefore, the IRS has only resolved one particular set of conditions. The door is open for other companies to repeat this exercise. I don’t think the purpose of the Official Notice was to promote mining exploration in general, but to respond to a very specific request.”
Several individual requests could make authorities aware of the need for a broader public policy stimulus. This is necessary, because the current situation has resulted in a fall in the geological information available to investors, who are obviously looking to reduce their risks. At a time like the present, when commodities are on the rise, investors are interested in investing in mines that are well described, and that information can only be based on exploration. A stimulus that encourages detailed mining exploration is good business for everyone, at the end of the day.