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Viewing cable 06LIMA3662, MINING COMPANIES TO MAKE "VOLUNTARY" SOCIAL CONTRIBUTION

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Reference ID Created Released Classification Origin
06LIMA3662 2006-09-14 17:09 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Lima
VZCZCXYZ0001
RR RUEHWEB

DE RUEHPE #3662/01 2571709
ZNR UUUUU ZZH
R 141709Z SEP 06
FM AMEMBASSY LIMA
TO RUEHC/SECSTATE WASHDC 2287
INFO RUEHBO/AMEMBASSY BOGOTA 3892
RUEHBU/AMEMBASSY BUENOS AIRES 2575
RUEHCV/AMEMBASSY CARACAS 9775
RUEHQT/AMEMBASSY QUITO 0678
RUEHLP/AMEMBASSY LA PAZ SEP SANTIAGO 0842
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RHEFDIA/DIA WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RUEAIIA/CIA WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
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