25, March, 2013

Profit-based versus Production-based Tax Regimes: Latin America’s Experience

In specific contexts of mineral booms and strong government capacity, shifting from production-based to profit-based tax regimes might be the best option. The cases of Peru and Chile demonstrate why.

In the context of both increasing mineral prices and mining companies’ profits, governments naturally seek to maximise their revenue in order to achieve maximum social welfare. By taking a panoramic look at the taxation regimes in place across Latin America, the authors compare two different regimes: profit-based vs. production-based fiscal regimes. This Brief uses the examples of Peru and Chile to highlight Latin American experiences when migrating from production-based to profit-based tax regimes, in particular arguing that profit-based regimes seem to be the best choice in the current Latin American context of a mining boom. It also addresses the institutional conditions needed to successfully move from one regime to another. Finally, it underlines enabling factors and policy lessons that may prove useful for other regions.

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Key Lessons:

  • Tax regimes need to be developed taking into account both state capacities and socioeconomic contexts.
  • Profit-based regimes seem to be more suitable in the Latin American context in order to maximise countries’ overall revenue collection, while continue to attract foreign investment.
  • Institutional capacity is a condition for successfully implementing profit-based regimes.

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