Closure of Mining Activities and Environmental Consequences in Peru

Luis Carlos Rodrigo & José Chiarella
Rodrigo, Elías & Medrano Abogados
Lima, Peru

Introduction
It is widely acknowledged that mining activities can have a negative impact on land, air, water and other natural resources, as well as adversely affect public health and distort local community lifestyles, among other things. As Professor James M. Otto observed, "environmental impacts occur at every stage of the mining cycle: during exploration, mine construction, extraction, smelting and refining, closure, post closure and even the product or utilization of metal products can lead to environmental impacts..." Trends in International Environmental Law affecting the mining industry, International Mining Legislation Congress, Lima, Peru (October 1999). Hence, the mining industry can no longer focus solely on maximizing the economic gains of a specific project, but must also try to maximize other areas, that are related in one sense or another, to the protection of the environment.

Mining Closure
A number of countries have already developed legal provisions with the view to protecting natural areas. An example of the above is the "Closure Program" that many mining companies have put in place. The Closure Program has become a very important tool in the mining industry to mitigate, control and, whenever possible, eliminate or reduce all adverse environmental effects resulting from the closure of a mine. The idea is to anticipate, by means of reasonable criteria, the environmental effects that a mining project can cause during its production phase and upon its closing of activities. Accordingly, the Closure Program must be executed progressively through the estimated life of a mine, taking into consideration each facility, area or labor no longer necessary for the operation of the mine. Based on this program, the viability of a specific project from an environmental standpoint may be assessed prior to its development. In addition, most mining companies have a special interest in fulfilling environmental standards in order to avoid the deterioration of the public image of the mining industry, as was the case years ago when mining companies did not pay any attention to the effects of their activities on the environment. From this perspective, the Closure Program is essential to the mining industry throughout the life of the mine and may not therefore be regarded as a tool that applies only once the mining operations have ceased.

Peru’s Closure Program
In the specific case of Peru, legislation passed in the last few years has been intended to follow the international trends in environmental protection in the mining industry. Starting back in 1991, it has constantly been updated to compete with the legal systems in force in other countries. Nevertheless, there are still some aspects of Peruvian legislation that can be improved or need further regulation. In this regard, although the issue of the Closure Program on mining activities became part of Peruvian law in 1993, the year when the Environmental Protection for Mining Activities regulations were approved by Supreme Decree 16-93-EM, the provisions ruling its nature and specific features contained certain deficiencies. Among others, the fact that despite its relevance, this statute was included in the Environmental Handling Program ("PAMA") as a requirement in the Peruvian Mining legislation. The PAMA is a temporary environmental tool whose primary purpose is the reduction of any adverse environmental impact up to a level previously agreed upon by the State and the investor, based on the standards approved by law. However, it is not clear whether the funding for the Closure Program shall be created progressively or not, as well as the tax treatment corresponding to such funds. Furthermore, it is not clear what becomes of the Closure Program once the PAMA is executed; hence, whether the former is deemed as terminated or not. Thus, a Commission at the Peruvian Ministry of Energy and Mines has been evaluating the enactment of a legal provision to further regulate the Closure Program of mining activities within Peru.

Tax Matters
It is important that all new legislation on this topic include a fair treatment of the deductions, for income tax purposes, of the "environmental-related" expenses recorded in the mining companies’ accounts in connection with the Closure Program. It should be noted that, pursuant to the provisions of the existing Peruvian Income Tax Act, only those expenses related to bad debts and to payment of workers’ compensation may be deducted for Income Tax purposes. The general rule states that only those expenses effectively incurred in relation to the generation of revenues or to the maintenance of their source may be deducted when calculating taxpayers’ taxable base for the purposes of the Income Tax, as long as such deduction is not forbidden by other provisions of the Peruvian Income Tax Act. This situation occurs with all accruals recorded in the accounts of Peruvian companies. Consequently, such accruals must be reversed for the purposes of conciliating accounts and tax figures. The two sole exceptions are the ones mentioned above (i.e., accruals related to bad debts and to the payment of workers’ compensations).

In this regard, it is absolutely necessary that the right to deduct the environmental-related expenses be recognized for income tax purposes on an annual basis (once the accrual is recorded in the accounts) and not only when the expenses are effectively incurred at the end of the mining operations. If the total Closure Program costs may only be deducted at the time of the termination of the Project, such deduction would be useless for the investor, since it is highly probable that the profits obtained at the end of the mining project (i.e., in the past year) will not be enough to offset such costs. Significantly, the Peruvian Income Tax Act does not provide for the possibility for the taxpayer to "carry-back" loss, but only to "carry it forward." The mining legal framework in some countries allows for such deduction. For instance, the Argentine mining legislation allows the deduction for inncome tax purposes of an estimated environmental-related accrual, although it fixes a cap by establishing that the amount that may be deducted for tax purposes must not exceed 5% of the operational extraction and benefit costs.

Conclusion
The treatment proposed above is supported by the principles contained in the Peruvian Code of Environmental and Natural Resources, which states that the tax regime must guarantee an effective preservation of the natural resources, its recovery and the promotion of a sustainable development. The deduction of environmental-related expenses duly authorized for tax purposes would not constitute a special tax incentive for the mining industry, which may undermine or create unfairness in the Peruvian tax system. Such deduction should be regarded as a necessary provision due to the nature of the mining sector, taking into account that an important part of the Closure Program’s costs are incurred after the termination of the mining operations, once the mine has ceased to generate revenues. It is unfair to demand environmentally clean behavior from the mining companies (when, in the great majority of cases, such behavior requires considerable economic effort) without at the same time enacting the necessary provisions to grant a fair treatment for such behavior.