Earlier this week, Citigroup upgraded shares of Chilean copper mining company Antofagasta from “neutral” to “buy,” with a target price of 870 pence per share (USD 10.92). As the news spread, the company’s share price rose from USD 9.57 on January 19 to USD 10.38 on Monday.
If you think this is an everyday occurrence on stock markets, you’re right. What struck me in this case is that a new copper discovery did not prompt Citigroup’s review. Nor did an increase in the miner’s productivity. Instead, Citigroup analysts claim they have identified a tax loophole that Antofagasta should be able to use. The Financial Times reported that “sidestepping Chile’s withholding tax until at least 2020 would trim 8 percent off the group’s overall tax rate.”
Though Citigroup hasn’t shared its analysis externally, the main loophole sounds pretty straightforward. Antofagasta sold its Chile water business for USD 1 billion in 2015. The proceeds were used to purchase a 50 percent stake the Zaldívar copper project in northern Chile. But part of the money seems to have been routed via a U.K.-based holding company as corporate loans—about USD 500 million would have been loaned by Antofagasta’s holding company to a Chilean subsidiary when it acquired the Zaldívar stake.
Therefore, as Antofagasta’s Chilean mines generate cash flow, for the next few years most proceeds will be remitted to the U.K. as loan repayments, not dividends. This may help the company significantly lower its Chilean tax payments. According to Chilean tax law, dividend payments made by companies to non-resident shareholders are subject to a withholding tax of 35 percent. (This figure is reduced to 15 percent for U.K. residents by a bilateral tax treaty.) Loan repayments are not subject to any withholding tax, except for any interest charged on the loan.
In this case, up to USD 500 million of “corporate-level funding” could sidestep Chile’s withholding tax, meaning a total potential loss for the Chilean treasury of USD 75 to USD 175 million over several years, depending on the applicability of the bilateral tax treaty. For 2016, the company’s effective tax rate—the net tax paid by Antofagasta to different governments as a share of its global profits—could already be down to about 35 percent from an estimated 40 to 50 percent.
When the news that Antofagasta could exploit this loophole surfaced, investors read it as a transfer of wealth from the Chilean government to the company, boosting the company’s stock. But how should Chilean citizens and taxpayers assess the situation? They just lost millions of dollars to Antofagasta’s shareholders, international capital owners such as global pension and asset management funds. That the economic assets at stake are minerals that belong to Chile and its people makes this case more telling.
Antofagasta’s experience here highlights two issues:
Domestic and international tax systems have weaknesses. The loophole identified here is common—a perfectly legal and widely used technique in the tax planning toolkit of international miners. It shows that despite progress in international cooperation against tax base erosion, there remain far too many loopholes multinational companies can use to avoid paying taxes in countries where they operate.