Brazilian mining sector proposed reforms

November 2011 Authors: Robert Milbourne, Silvia Canetti

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The minerals sector has become a backbone of the rapidly growing Brazilian economy and the new president, Dilma Rousseff, has announced earlier this year a series of policy reforms in the form of a “National Mining Plan 2030” to address the growing importance of the sector.  The reforms, which will have wide ranging consequences to the minerals industry, have been the subject of intensive discussion with the industry in Brazil and are yet to be finalized. This briefing outlines some of the major proposals in the reform currently under consideration.

The National Mining Plan 2030 provides for new investment plans and anticipated regulatory changes to boost the mining industry even further in the next 20 years. The far reaching plan includes, amongst other things, the creation of a national mining agency and a mineral policy council to assist the government in decision-making related to the industry, a new mining code and a new royalty regime.

Much of the proposed legislation is similar to the oil legislation passed over the last 15 years. The bills for the new mining regulatory framework are now expected to be submitted to congress shortly.  While the draft legislation may take some time to come into effect, the restructuring of the sector is expected to have important consequences for domestic and foreign resources sector investors.

The new regulatory framework

The new mining legislation will replace the existing 40 year old mining code (Decree-Law no. 227, dated February 28, 1967) and its regulations.  Importantly, it will change the regulations for the granting of concessions and mining rights in general, and set forth a new structure for the development of mining activities in the country.  The new proposals aim to reduce exploration tenure periods while increasing expenditure and mineral development investments to combat prior “land banking” practices among some resources participants.

Under the new regime, exploration licences would be granted for a shorter period and there is some suggestion that a 20-year limit may be imposed on mining concessions, with renewals being allowed on a case-by-case basis.  It is also anticipated that the new laws will introduce a bidding process for areas where exploration rights have been lost or forfeited, and for areas with known economic value. Regulations and mining agreements are expected to set minimum levels of investment, require the use of local resources and adding value to minerals, as well as other obligations to benefit both the development of the Brazilian market and attract private investment  (a formula that has been very successful in the Brazilian oil and gas sector). Further, it is also expected that the government will be entitled to revoke concessions and repossess projects where companies do not comply with contractual obligations (e.g. do not meet their exploration commitments) or commit infractions such as defaulting on tax payments.  Finally, there have been indications that not all types of deposits will be subject to the bidding model. Under the new legislation, it may be that only large mines or deposits that are deemed to be strategic to the national industry would be auctioned, in order to avoid discouraging private investment.

Authorities are also evaluating the possibility of carrying out prospecting in areas that have no geological data, and are therefore too risky for investors to bid for. These areas would first be identified by federal geological service. Another objective of the new legislation is to shorten the wait for regulatory decisions related to mining rights and speed up the granting of concessions.

Under the new framework, mining companies will also be encouraged to help set up industrial development areas and promote greater processing of ores into higher-value final products such as steel to increase industrial employment, tax revenue and social development.  The government introduced similar guidelines for new oil projects and recently launched a buy-Brazil campaign, known as 'Brasil Maior' or Bigger Brazil, which  provides incentives to some industrial sectors for local purchasing.  

The new royalty regime

As part of the reforms being drawn up, the government plans to increase the mining royalties, known as CFEM. Under current legislation, CFEM varies between 0.2 percent and 3 percent of net revenue from the sale of mineral products depending on the type of product.  Bauxite, manganese, rock salt and potassium miners pay a 3 percent royalty, while iron ore, fertilizers and coal, among others, pay a 2 percent royalty fee.  Gold is subject to a 1 percent charge while precious stones, coloured stones, carbides and noble metals pay 0.2 percent. The Mines and Energy Minister indicated earlier this year that different ranges of royalty rates could be set for different minerals. The plan is to reduce royalty payments for minerals used in construction and to raise the payments for minerals that are exported. Under the new regime, four mineral groups would receive special tax treatment due to their importance to the economy. The four groups comprise minerals exported as raw materials, such as iron ore and bauxite; minerals that are essential for the country's industrial development, such as copper and nickel; non-metallic minerals for construction, such as sand and limestone; and minerals used for fertilizer production, such as potassium, phosphorus and phosphate. More recently, however, the Minister stated that the tax will double for all minerals. The government has also made indications that it is considering the introduction of a flexible system for the payment of royalties under the new mining regulatory framework. The system would reduce mining royalties in periods of low demand for commodities, such as in times of crisis, while rates would increase in periods of economic growth.

Even though royalties in Brazil are lower than in other countries, the overall tax burden is higher. In addition to the CFEM, mining companies are subject to an annual fee per hectare (TAH) for exploration targets, surface rights holder’s statutory royalty and all other taxes levied on economic activities in general (corporate income tax, social contribution on profits, import duty (unless an exemption is available), excise tax, social integration plan and social welfare tax, State VAT, property tax, municipal service tax, financial transactions tax and payroll tax). In response to the sector's concern that any increase in the royalty rates could significantly impact on the competitiveness of the Brazilian mining industry globally, the government has stated that any increase is likely to be combined with changes to other taxes.