Friday, 4 August 2017 • Gwyneth Jones
Brazilian lawyers say the government’s decision to create an independent mining regulator will increase transparency, compliance and efficiency, but fear hiking taxes will deter investment
On 25 July, Brazil’s President Michel Temer announced the Brazilian Mining Industry Revitalization Programme aimed at reducing bureaucracy and regulatory uncertainty, while boosting investment in the sector. As part of the programme, the government intends to create the National Mining Agency, an independent regulatory body, to replace the former National Department of Mineral Production and has announced an increase in penalties for compliance breaches. The programme also includes plans to increase tax rates on mining income in a bid to raise government revenues from the sector by 80%.
Lawyers believe the creation of an independent regulatory body is a positive and much needed change for the sector. The agency’s new staff will be selected according to their expertise whereas the current department’s employees were typically appointed by government. The increased income from taxes and fines are also expected to help boost efficiency in answering enquiries, carrying out inspections and awarding permits, according to João Nascimento, legal affairs counsel for mining sector servicing company SNC-Lavalin. “Sometimes you would submit an enquiry and not hear back for three or four years,” he says, adding that the increased focus on hiring staff with academic training and field experience in the extractive industries will also helped professionalise the agency. “[Previously] most employees were government appointed and rarely had any other experience of working in the sector.”
Other local lawyers also welcome the programme. Since the 1990s, Brazil has replaced many government departments with agencies, which has generally had a positive impact in sectors where they have been introduced, according to Leonardo Lamego, partner in the mining practice of Azevedo Sette Advogados in Belo Horizonte. “Agencies regulate the telecoms and energy sectors now and these industries are more profitable, transparent and efficient than before,” he notes.
Another important part of having the regulatory body as an independent entity from the government is that it will have to submit any proposed new bylaws, regulations, ordenances and decrees to public consultation before approval. Public consultation allows interested or affected parties to add comments or recommendations to the agency’s proposals. Nascimento believes this process will benefit him and other GCs in the sector by providing greater opportunity to influence regulatory amendments and prepare their companies for implementation.
Lawyers have also welcomed the increase in sanctions introduced by the programme as a positive step for the industry. Previously, fines even for significant breaches were limited to a maximum of 2,500 reais (US$800). But under the new rules, the ceiling has been lifted to 60 million reais (US$19.2 million).
Companies may also have their mining permits revoked for serious regulatory failings. Many have criticised the mining industry’s compliance record in the past, claiming weak regulation and poor enforcement has contributed to environmental degradation and disasters such as the Samarco dam collapse. One lawyer, speaking on condition of anonymity, admits that “compliance was a non-issue” for many companies in the sector in the past, because it was typically far cheaper to pay a fine than introduce a programme or system to address a given issue. GCs argue that heavier penalties will reduce the number of companies that cut corners. “You absolutely must strip away any benefits or temptations towards disobedience,” underlines Nascimento.
However, one aspect of the government’s proposed regulatory changes that has been met with less approval is the increase in income tax rates for companies in the sector. Cristiana Couto, head of legal at cement and mining company Supremo Cecil, is particularly concerned about the financial impact the changes will have and says her team is already spending considerable time reviewing the legislation. Earlier this week, the tax rate on gold mining income rose from 1% to 2% and the niobium income tax has increased from 2% to 3%. Iron ore will be taxed on a sliding scale of between 2% and 4% depending on its market price at the time.
The government has defended its decision to increase taxes, arguing it needs to reach its 2017 fiscal targets and has highlighted that the industry’s new royalty rates remain lower than those paid by companies in other mining-dependent countries, such as Australia, where iron ore is taxed at a blanket 7.5% rate. However, Nascimento questions the government’s decision to increase costs on companies at a time when the industry is still struggling from low prices and demand. “Iron ore is a major commodity in Brazil, so the global price drop hit the economy hard,” he notes. “Just as the [iron ore] price was stabilising and the mining sector in Brazil was starting to show signs of recovery, the government decided to increase the costs of business for the sector, which will affect clients’ budgets and the general investment appetite.”
The introduction of a variable rate for iron ore only compounds the issue for Couto. “The proposed legislation hasn’t clarified how ‘market rate’ will be calculated for products,” she says. “[Our legal team] is discussing this with others in the sector to try and see how this can be best solved.” Couto adds that the sliding rate means companies will likely have to adjust their sales targets and reporting systems to use gross rather than net values, as it will be difficult to predict profit margins.
The new fixed-rate taxes came into effect on 1 August via a temporary decree which the government issued to accompany its plan to revitalise the sector. The Senate is expected to approve the other elements of the plan into law within 60 days.
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