Over the last year, several Latin American countries, including Chile, Peru, and Mexico, have discussed various measures that, if adopted, could materially affect the mining, energy and natural resource sectors.
In Peru, the Castillo administration has pushed for measures to raise mining taxes, though Peru’s Congress has rejected the administration’s proposals as of December 2021. In Mexico, President López Obrador has proposed constitutional amendments which would adversely impact the electricity and mining sectors, including measures to cease granting concessions for lithium and other minerals.
In Chile, the Senate’s mining and energy committee approved a draft bill proposing: (i) a sales tax of up to three percent on gross revenue from copper, lithium and other extractable materials (thus requiring taxes irrespective of losses) and (ii) a profitability tax on the operating margin of copper mining companies. The Chilean legislature aims to make this bill law by March 11, 2022, creating potential challenges for the industry in the near future.
In a similar vein, Chile’s Constitutional Convention—a group of 155 delegates tasked with rewriting Chile’s constitution—has proposed measures affecting the mining and lumber sectors, including: (i) the nationalization of mining companies; (ii) annulment of mining and foresting concessions on indigenous lands; and (iii) requiring water use permits for mining, farms and utilities. While the success of these measures is uncertain, if implemented they will fundamentally alter the landscape for existing and future investments in Chile. To be enacted, the measures must pass another committee vote, a two-thirds vote of the plenary session of the Constitutional Convention, and then a public referendum on the draft constitution, which could occur by mid-2022 if the mandate of the Constitutional Convention is not extended. Investors should accordingly stay apprised of developments on the Constitutional Convention process over the next several months.
This note examines each of Chile’s recent proposals and highlights their relevance to affected companies. This note further highlights potential legal considerations for protecting and enforcing investors’ rights to mining investments in Chile. Shearman & Sterling remains available to provide advice to investors considering how best to protect their investments, including proactive risk mitigation measures, in response to the proposed measures in Chile.
On September 12, 2018, Chile’s Chamber of Deputies proposed a bill to impose new royalty measures on the mining of copper and lithium. The original bill imposed a royalty of three percent of the value of the extracted materials. On May 6, 2021, after several years of deliberations and revision, the Chamber of Deputies approved a revised version of the bill, which proposed to apply a three percent royalty on sales of copper, lithium and all materials eligible for concessions under Chilean law. It also established an additional progressive royalty based on the annual price of copper. The bill then moved to the Senate, where it was submitted for discussion in the mining and energy committee. This bill was notable in that the royalty would be tied to a reference price calculated from industry guides instead of the actual price at which a company sold the affected ore. Thus, the proposed royalty failed to account for discounts or other arrangements affecting actual sales prices in any given transaction. Further, as it was based on a reference sales price, it was not connected to profits earned by mining companies.
These early legislative proposals were met with significant resistance from both Chile’s executive branch and the mining industry. At least one executive official stated that the proposed legislation would put Chile “completely out of kilter” with other mining nations. Representatives from Sonami, Chile’s National Mining Society, protested that the proposed “tax levels are akin to expropriation and this is going to inhibit investment immediately.” Lundin, which has substantial copper mining operations in Chile, announced that it was “going to wait and see before we put too much money into it and I’m sure everybody else is doing the same.”
On January 27, 2022, the Senate’s mining and energy committee approved an amended draft of a bill to regulate royalties for copper, lithium and other extractable minerals. For copper, the amended bill imposes a tax on both sales and profitability. The sales tax is one percent of annual sales of copper products for companies producing under 200,000 metric tons of copper per year, and one to three percent of annual sales of copper products (depending on copper prices) for those producing over 200,000 metric tons per year. Companies producing under 50,000 tons per year are exempt. The second component is a tax based on the operating margin of the copper mining companies. This tax would be an amendment to and increase of the current specific tax on mining activity. Although this proposed tax is partially tied to profits, it still imposes a royalty on mining companies based on sales, which would apply regardless of whether the sales were profitable.
For lithium, the bill includes a three percent sales tax with an exclusion for certain contracts.
The bill now moves to the Senate’s finance committee. If approved, it will move to the plenary session of the Senate. If passed by the Senate, it will return to the lower Chamber of Deputies. The legislature’s stated objective is for the bill to become law by March 11, 2022.
While touted as an improvement over more aggressive proposals approved by the Chamber of Deputies, the Senate bill has also received a negative reception from the mining sector. The president of the Chilean Mining Counsel (Consejo Minero), a trade association for large mining companies operating in Chile, has called the sales tax “problematic” as it requires the payment of taxes even when companies experience losses. Similarly, the Mining Counsel considers the profitability tax to be “a disincentive to future investment in Chile” because the tax does not account for depreciation or start-up expenses, representing a departure from the current specific tax on mining activity.
In 2019, after months of protests over social and environmental issues, Chile’s congress authorized a referendum, in which the electorate would decide whether to hold a convention to write a new constitution. In October 2020, 78 percent of the public voted “yes” and approved the initiative to form a constitutional convention to draft a new constitution. The results of the election were surprising and signaled a shift left in the political system. The center-left and left-leaning parties hold more than a two-thirds majority in the Convention, with the right holding less than one-third of the seats.
The Convention began its work on July 4, 2021. It was given nine months (with the potential for a three-month extension) to present the new draft constitution. Once presented, the new constitution must be approved by a national referendum, which must take place within 60 days of the presentation of the draft constitution. If the new constitution is rejected, the 1980 Constitution will remain in place. In short, Chile may have a new constitution by June 2022 (September 2022, if the extension is invoked).
While there are several proposed additions to the new constitution that, if enacted, could affect natural resource companies, three recent proposals stand out as potentially significantly problematic:
All of these proposals still require final approval by the environmental committee and then a vote of the plenary session of the Constitutional Convention to become part of the draft constitution.
If the Royalty Bill is approved by the Chilean Congress and/or the measures pending before the Constitutional Convention are approved as discussed above, existing natural resource projects would be subject to significant uncertainty. The consequences of enacting these proposals could include deprivation of investors’ ownership rights, breach of investors’ contractual rights and impairment of the economic value of investments, all of which would likely give rise to many commercial and investor disputes.
The commercial disputes that may arise will depend on the specific terms of an investor’s commercial contracts, and would likely include claims for breach of contract, force majeure, material adverse change, and changes to local laws and regulations. Investors should analyze their contracts to identify potential claims and liabilities that could arise if the proposed constitutional initiatives or royalty bill are enacted. Investors should also take special care to review any applicable contractual notice requirements to ensure that their claims are preserved.
The enactment of these amendments could also breach Chile’s obligations under the over 50 bilateral and multilateral investment treaties (hereafter, “Investment Treaty” or “Investment Treaties”) to which Chile is a party. These include Investment Treaties with Spain, France, the Netherlands, Germany, Japan, the United States and the United Kingdom. Investors may be able to bring a claim against Chile under one or more of these Investment Treaties.
Investment Treaties protect “investors” from one treaty country that make “investments” in another treaty country from certain adverse government actions. Such investments include physical assets owned in Chile, equity shares held in a company, debt instruments, property interests, certain contractual rights, and other tangible and intangible interests arising out of capital investments made in Chile. Subject to the nationality of the investor and the terms of the specific treaty, investments in the Chilean natural resource sector likely to be affected by the proposed regulations should be covered.
Investment Treaties serve two principal purposes.
First, they define the types of protections accorded to foreign investors and investments. Protections invoked in Latin American mining disputes:
Second, investment treaties provide private investors a direct right of action against a host government for violations of international law. Most investment treaties give investors the right to bring claims either in the local courts of the host country or before an international arbitral institution.
Each investment treaty will contain its own dispute resolution provision with the options and requirements for bringing claims against a host state. Investors wishing to bring investment treaty claims against the Chilean government would need to do so in compliance with the procedures set out in the various treaties. For example, certain of the Investment Treaties to which Chile is a party require investors to wait three months after a dispute has arisen to initiate arbitration. Additionally, many of Chile’s treaties require an investor to submit their claims to arbitration or local courts but prohibit submission to both. Investors, therefore, will need to ensure they have complied with the necessary preconditions to initiating arbitration so as not to put their claims in jeopardy.
Chile has been a party to several investment arbitrations (though notably not as a respondent in the mining context) and has prevailed in three of five completed disputes. Most recently, in December 2021, the Chilean state-owned copper producer, Codelco, filed an arbitration against Ecuador for an alleged breach of a 2019 agreement to jointly develop the Llurimagua copper project. Investors considering investment treaty claims against Chile are recommended to obtain legal counsel with expertise in investment treaty disputes, as well as the mining, energy and natural resources sectors.
Investors faced with changing regulatory environments or emerging disputes should take steps to protect both their legal and commercial interests. While there are a variety of steps companies can take, the focus should be on preserving critical data, assisting in the prosecution of their claims, and minimize corporate disruption.
Ultimately, the steps that a particular investor should take are highly fact-dependent, so consultation with experienced international arbitration practitioners is recommended.
Shearman & Sterling has extensive experience representing foreign and domestic companies and states in commercial and investment disputes related to Latin America in various sectors, including mining, energy and natural resources, and remains at the disposal of investors considering potential commercial or investment treaty claims.
 See Shearman & Sterling’s perspectives on regulatory developments in the Mexican power sector: Recent Regulatory Developments in the Mexican Power Sector | Shearman & Sterling; Recent Regulatory Developments in the Mexican Power Sector—Chapter 2: The Tug of War Continues | Shearman & Sterling; Regulatory Developments in the Mexican Power Sector—Chapter 3: Tipping the Scales Further in Favor of State-Owned Companies | Shearman & Sterling; Regulatory Developments in the Mexican Power Sector—Chapter 4: AMLO Strikes Back | Shearman & Sterling; Regulatory Developments in the Mexican Power Sector—Chapter 5: Disputes Options Arising From Mexico’s Efforts to Amend the Constitution | Shearman & Sterling
 Cambero, Fabian, Chilean mining chief warns royalties bill in current form ‘akin to expropriation’, Reuters (May 4, 2021 7:04 PM).
 Cambero, Fabian, Chilean mining chief warns royalties bill in current form ‘akin to expropriation’, Reuters (May 4, 2021 7:04 PM).
 Snapshot: Lundin’s projects in Chile and Argentina, BNAmericas (May 20, 2021).
 Marconi, Catherine, Senate Mining Commission approves Mining Royalty Bill, La Tercera (Jan. 26, 2022 6:45 PM).