The mining that impoverishes Brazil

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By JOÃO CARLOS LOEBENS*

Holes, pollution, public debt, poverty, high concentration of income and wealth, millions of poor people and a very few ultra-rich

Mineral substances range from oil and natural gas exploration to water extraction, and are widely used in the most diverse products used daily. Under this approach, mining activity should have a very positive image. However, the image of mineral extraction activities, or especially of mining companies, is becoming increasingly negative. If we look at the periods of gold extraction/exploitation in Brazil – Minas Gerais, and in South America – Peru; it would be fair to ask: what has the exploitation of gold, for centuries, brought in terms of benefits and development?

The increase in this negative image, including worldwide, is based on results that normally do not receive emphasis or are not disclosed. What is normal is the bombastic disclosure of positive results, restricted to the huge profits, which become the private property of half a dozen wealthy shareholders/owners, often residing in a country different from the country where the minerals are extracted. In practice, it appears that, on the one hand, mining companies accumulate more and more mountains of dollars in profits while, on the other hand, they also accumulate more and more human and environmental tragedies, coupled with swollen cities with precarious conditions in infrastructure services, lack of basic sanitation, water pollution, impoverishment and, in some cases, even child labor, as seen in regions such as Marabá, in Pará.

Due to this conflict between the positive and negative results of mining activity in the most diverse parts of the world, the question arises: has mining activity brought benefits? If so, benefits for whom? In the end result, does society receive benefits or costs? Likewise, at the end of the day, does the State have benefits or costs with the mining activity?

One of the aspects to consider is the level of local development generated by mining companies, mainly through jobs and income. Observing the historical examples of gold exploration in Minas Gerais and Peru, it seems that the answer is relatively easy to obtain, practically observable with the naked eye. There are locally impoverished societies, huge holes, environmental damage, and equally impoverished and indebted States. Another important aspect, probably the main parameter for answering these questions, is the payment of taxes, as it is through taxes that the State will provide infrastructure services and invest in generating well-being for the local community and development in country terms. That is, the main question becomes: do mining companies pay taxes? When do they pay, how much do they pay?

In Brazil, taxes on mineral products are basically the Corporate Income Tax (IRPJ), the Social Contribution on Net Profits (CSLL), the Contribution for the Financing of Social Security (COFINS), the Integration Program and the Civil Servant Asset Formation Program (PIS/PASEP), and the Tax on Circulation of Goods and Transportation/Communication Services (ICMS). The Tax on Industrialized Products (IPI) is not levied on mining products as it is considered an extractive activity. Bearing in mind that most mineral extraction is exported, we will focus on taxes on the export of mineral products.

PIS/PASEP, COFINS, ICMS, IPI taxes and, in addition, the Export Tax (IE) are immune, exempt or have a zero rate on exports[I]. That is, mining companies do not pay any IE, ICMS, PIS/PASEP and COFINS on what they export. This leaves IRPJ and CSLL, which is taxation on mining company profits.

One of the increasingly common practices, not only of large mining companies, is to open branches in other countries, especially the so-called “tax haven” countries. In this way, the export goes through intermediary stages of circulation (transfer, usually only “on paper”) between establishments of the same company (mining company), located in different countries. In fact, the most appropriate name for “tax haven” countries would be “criminal tax havens”, as they play a fundamental role in the structure that allows large corporations to escape paying taxes in the countries where they operate.

For example: a Brazilian mining company opens a branch in Switzerland and “transfers” the ore to the Swiss branch. Obviously, in practice, this ore is not transported to the mountain ranges of Switzerland to be sold from there and transported again down the mountain range to be delivered to the final buyer, which could be, for example, a buyer in China. That is, in practice, the iron is already shipped in Brazil on a ship bound for China, but the Invoice makes a transfer to the branch in Switzerland, and, along the way, the Invoice for the sale of the Swiss branch to the buyer in China.

The effect of this “paper” transfer of the ore to the Swiss branch is that the company chooses the value to be included in this Invoice (since it is not a purchase/sale operation), without having to declare the value of the sale in Brazil for China, as this amount will only be declared on the Invoice issued by the Swiss branch to the buyer in China. Although the ore is shipped from Brazil to China, the sale takes place from Switzerland to China, as “on paper” the ore left Brazil for Switzerland by transfer between establishments of the same mining company. This transfer price chosen by the mining company (normally lower than the sale price - under-invoicing) is what determines the profit that the company will earn in Brazil, directly influencing the two taxes left over for taxation, reducing or canceling the IRPJ and CSLL ( taxes), and CFEM (royalties). The end result (taxation on the value of the transfer, not on the sale) is usually low or zero taxation in the country producing the ore.

Now that we have seen the physical circulation (ship: Brazil-China) and the “on paper” circulation (Invoice: Brazil-Switzerland-China) of the ore, we can comment on the circulation of money referring to the payment of the exported ore. The payment/cash takes the opposite path (return), but following the path “on paper” that occurred in the circulation of the ore. This means that the payment made by the buyer in China is destined for Switzerland, and not Brazil, the exporting country. The subsidiary (of the Brazilian mining company) in Switzerland receives the sale price and sends to Brazil only the amount corresponding to the “transfer price” declared by the Brazilian mining company when exporting the ore.

Thus, the difference between the amount paid by the Chinese buyer and the transfer amount chosen by the Brazilian mining company remains in Switzerland. To a certain extent, it could be said that it is a “legal” way of “stealing” from Brazil the wealth resulting from mineral extraction. This value of the difference between the sale price and the transfer price (fictitious – “on paper”) is no longer taxed in Brazil, and may lead to a drastic reduction or even zero payment of IRPJ and CSLL.

Examples of this harmful practice by mining companies can be seen in these two studies, one referring to the extraction of minerals in Brazil and the other referring to the largest mining company in Peru: “Extraction of resources in Brazil – Undue commercial billing in the mining sector” and “La Gran Mining: Do you pay the taxes you should pay? The Yanacocha Case”. Both studies are easily located on the internet through a search engine such as Google or DuckDuckGo.

The first study, “Resource Extraction in Brazil – Commercial Invoicing in the Mining Sector”[ii], demonstrates how Brazilian mining companies, using the artifice of “artificial transfers” of iron to, for example, a subsidiary in Switzerland, failed to collect, between 2009 and 2015, around 12 and a half billion dollars as IRPJ and CSLL, approximately 48 billion reais. Considering that Bolsa Família,[iii] main social assistance program in Brazil, which represents around 25 billion annually, it can be calculated that the few Brazilian companies that export minerals “pocketed” practically two Bolsa Familias in that period, through practices such as the “Swiss branch”. Only Vale, the largest Brazilian mining company, using this commercial maneuver, failed to pay at least R$ 23 billion in taxes on iron ore exports between 2009 and 2015 – a Bolsa Familia/country.[iv] In addition, also by way of comparison, Vale's profit in 2017 was BRL 17,6 billion, and in the 21 years of privatization, shareholders received the enormous amount of BRL 320 billion[v] (one Bolsa Família/country for Vale each year).

The second study, “La Gran Minería: ¿do you pay the taxes you should pay? The Yanacocha case”[vi], deals with the largest gold mining company in Peru and the third largest in the world. In recent years, the expansion of China and other industrialized countries has increased the demand for raw materials at the same time that many States and companies have sought to protect their gold reserves against the possible weakening of the dollar, resulting in significant increases in the price of gold. Despite this favorable international environment, the Peruvian mining company declared losses of more than US$500 million in 2013.

In addition to this drastic reduction or elimination of taxes, it is worth adding, quickly, the issue of Tax Waivers (or, as businessmen prefer, Tax Benefits), which favor mining companies to the detriment of the State and society. Mining companies have their Import Tax (II) rate reduced from 16% to 2% on imports of equipment used in mining. When mining is in Pará, there is also a 75% reduction in IRPJ. Mining companies also benefit from Tax Exemptions that are not exclusive to the sector, such as maintaining ICMS credits on exports (which are exempt), distributing profits and dividends to owners/partners without paying IRPF even when remitted abroad, and discounting IRPJ interest on own capital. As the Shareholders' Equity of mining companies is high, the volume of interest on own capital is quite expressive. For example, the iron ore extracted from Carajás, in Pará, with a turnover of approximately 20 billion reais in the year 2011, collected only R$ 30 million from the public purse, a measly 0,15% rate.

In order not to lengthen the description, it is worth mentioning finally the Financial Contribution for the Exploitation of Mineral Resources (CFEM) and royalties, which seek to establish a counterpart to the exploration of exhaustible products. In iron ore, for example, Australia charges between 5% and 7,5% of the value at the mine, China charges 2% of the sale value, Indonesia charges 3% of the sale value, and Brazil charges 2% of net sales. With the use of the strategy of opening a branch in Switzerland (or another criminal tax haven) to reduce the amount of revenue (price manipulation), the Brazilian mining company also drastically reduces the amount of CFEM to be collected. Added to this is the fact that, in addition to reducing the billing amount with the fictitious transfer to Switzerland, reducing or canceling the IRPJ, CSLL and CFEM, the remaining amounts eventually due are still not paid, as can be seen in the article “500 companies owe R$ 392 billion to the Union; mining company Vale leads the ranking”, available at https://www.brasildefato.com.br/node/33203/ .

It is also worth noting a brief comment on the history of Vale, Brazil's largest mining company. In 1942, Getúlio Vargas took over the iron reserves of the Itabira Iron Ore Company and created the Companhia do Vale do Rio Doce, which became one of the largest companies in the country, with a railway network of around 2.000 kilometers. It became the object of appetite of large national and international economic groups, and in the Fernando Henrique Cardoso government, in May 1997, it was privatized/sold for a price of 3,3 billion, an amount considered scandalously low (in addition to the BNDES having financed/paid much of it), as the assessment of mineral reserves could raise the value to approximately 200 billion at the time. One of the alleged reasons for privatization was to reduce the external debt, but the money was used in current expenses and parliamentary demands. In the 21 years of privatization, the owners/shareholders, who bought for 3,3 billion using BNDES resources, received no less than R$ 320 billion in profits and dividends!!!! Is there a worse deal than this for Brazilian society?

Comparing the mineral extraction sector with the Oil and Gas sector, there is a notable difference in terms of tax payments. In 2008, Petrobras recorded a net profit of US$ 18,9 billion and Vale, US$ 13,2 billion. In the same period, Petrobras generated indirect tax collection, plus royalties, of R$ 80 billion, while Vale, in the same terms, generated values ​​below R$ 1 billion (80 times less, despite the profit being only 0,3 times smaller)[vii].

In conclusion, it appears that the mining companies, despite exploiting public assets of high value, non-renewable and owned by society (Union), do not pay taxes on exports, receive a series of benefits through Tax Waivers, and pay, when they pay , low values ​​for income tax and financial compensation for the exploitation of non-renewable resources. Mining companies generate mountains of profit dollars for half a dozen partners/shareholders, usually abroad, at the same time that they generate regional “(sub)developments”, “producing” polluted, impoverished, and even indebted places when it comes to governments where mineral exploration takes place.

Looking, for example, at the experience of centuries of gold exploration in the “Minas Gerais” of Brazil, it can be concluded that, if the country adopts today the same public policy of mineral exploration as the one adopted in previous centuries, the result of the current exploration immense deposits of iron, niobium and even oil will bring the same results to Brazilian society as those obtained with the exploitation of gold in previous centuries: holes, pollution, public debt, poverty, high concentration of income and wealth, millions of poor and a very few ultra-rich (including abroad).

*Joao Carlos Loebens is a doctoral student in economics and tax auditor at the State Revenue Service of Rio Grande do Sul.

Notes


[I] Immunity: ICMS and IPI; exemption: PIS/PASEP and COFINS; zero rate: IE.

[ii]http://ijf.org.br/estudo-revela-como-empresas-de-mineracao-retiram-bilhoes-do-brasil-sem-pagar-devida-tributacao/

[iii] Bolsa Família is an income transfer program for poor families with a monthly per capita income of no more than R$178,00 (US$44,50), subject to health and education conditionalities – more information: https://pt.wikipedia.org/wiki/Bolsa_Fam%C3%ADlia

[iv]https://economia.uol.com.br/noticias/redacao/2019/04/01/triangulacao-vale-minerio-ferro-confiscos-brumadinho-suica-china.htm

[v]https://www.brasil247.com/pt/colunistas/luizalbertogomezdesouza/381830/Crimes-ambientais-e-humanos-numa-empresa-privatizada.htm

[vi]http://www.latindadd.org/2014/11/07/informe-elusion-tributaria-el-caso-yanacocha/

[vii]http://ijf.org.br/mineracao-e-tributacao-no-brasil/

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