ACADEMIA Letters Post-pandemic metal supercycle and effectiveness of fiscal instruments Víctor Torres Cuzcano, Universidad Nacional Mayor de San Marcos The COVID-19 pandemic, which began in 2020, has brought terrible economic and social effects at the global level, which has triggered or accentuated various events: changes in the demand for financial instruments by international investors, inflation risks due to expansionary policies -in the monetary plane- and countercyclical policies -in the fiscal sphere- to face the ravages of the disease, renewed concern for less polluting energy sources and products, recovery of the Chinese economy, among others. The confluence of these factors helps to explain the rise in the price of minerals since the second quarter of 2020, which has raised the question of whether we are facing a new supercycle of metals, similar to the one that ended almost 10 years ago. Likewise, in the countries that export these raw materials, the debate is renewed on whether the fiscal instruments available to the State are efficient enough to capture the income generated by extraordinary profits from mining. This is so because you do not want to repeat mistakes or omissions from the past. In the case of Peru, for example, the supercycle that began in 2003 and lasted until 2012, was a lost decade in the objective of optimally capturing mining rent by the State. Fiscal policy at that time played an exaggeratedly passive role. Until September 2011, no new fiscal instruments were explored for the sector, apart from the ad valorem mining royalty that was established in 2004 (which was not paid by the largest companies because they hid behind their tax stability contracts). This despite the variety of alternative and / or complementary instruments that were already applied in those years in other countries with extractive industries (Torres, 2018). Only in 2012, when the supercycle was almost over, a new mining tax regime was incorporated, that since then has coexisted with the old regime, composed of the corporate income tax and the ad valorem mining royalty. Academia Letters, December 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Víctor Torres Cuzcano, vtorresc1@unmsm.edu.pe Citation: Torres Cuzcano, V. (2021). Post-pandemic metal supercycle and effectiveness of fiscal instruments. Academia Letters, Article 4292. https://doi.org/10.20935/AL4292. 1 Higher prices with greater intensity The recent increase in the price of metals has been showing greater dynamism compared to the mining bonanza of the decade 2003-2012. This is observed when analyzing the evolution of the price of some of the minerals that are most exported in the world: copper, gold, iron and zinc. For this purpose, our source of information is the statistics published by the Central Reserve Bank of Peru (BCRP). For each mineral, the month and year in which the sustained rise in its price begins is used as the base period for comparison. In the case of copper, the base period of the past bonanza is October 2003; for the recent price increase, the base period is April 2020. When comparing the period April 2020-October 2021 (19 months) with the first 19 months of the supercycle (October 2003-April 2005), it is observed that the recent increase in the price of copper has been more pronounced than that observed in the past boom (figure 1). Although with comparison periods that differ in their start and duration, the prices of gold, iron and zinc have also been registering more pronounced growth rates in relation to the 2003-2012 supercycle. The recent increase in the international price of metals is not only more intense than that observed during the past boom, but has also started from a higher threshold. In the case of copper, 19 months after the recent increase, the average price (¢US$/lb. 357,0) is 2,8 times higher than the average of the first 19 months of the supercycle (¢US$/lb. 128,4) (table 1). Academia Letters, December 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Víctor Torres Cuzcano, vtorresc1@unmsm.edu.pe Citation: Torres Cuzcano, V. (2021). Post-pandemic metal supercycle and effectiveness of fiscal instruments. Academia Letters, Article 4292. https://doi.org/10.20935/AL4292. 2 During the supercycle, the rise in the price of metals began in 2003 and lasted - in general terms - a whole decade. Copper reached its maximum price in February 2011 (447,59 ¢US$/lb.); that is to say, about 90 months after having started its upward trend in October 2003. In the recent rise, the projections are more conservative, although they point to prices above pre-pandemic levels. According to the World Bank (2021), the price of metals would fall by 5% in 2022, after an estimated increase of 48% in 2021. The global trend towards an energy transition that seeks to move away from fossil fuels is expected to increase the demand and the price of metals such as tin and -especially- copper. For the medium and long term, it is estimated that the price of copper will remain approximately 25% above its 2020 price. Extraordinary income: The case of Peru To approximate a quantification of the extraordinary income that the mining sector has been registering due to the higher prices of metals, we are going to take Peru as a reference and set the prices of its mining exports to April 2020. This period is the one that, in this paper, we have identified as the beginning of the recent rise in the price of copper. Therefore, it is Academia Letters, December 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Víctor Torres Cuzcano, vtorresc1@unmsm.edu.pe Citation: Torres Cuzcano, V. (2021). Post-pandemic metal supercycle and effectiveness of fiscal instruments. Academia Letters, Article 4292. https://doi.org/10.20935/AL4292. 3 representative for Peru since this metal contributes more than half of the value of its mineral exports. Once again, our main source of information is the BCRP statistics. Of the total revenue from mining exports accumulated from April 2020 to September 2021 (18 months), 27,9% was due to the higher price of metals. That is, an additional US$ 13 673 million just for a price effect (table 2). Most of the extraordinary income (65,2%) was due to copper, whose exported value increased by 55,1% due to the rise in its international price. In the case of iron, 48,0% of what was exported was due to the price effect; as for zinc, 33,3%. The price effect is very significant in all the metals that Peru exports: tin (41,1%), refined silver (36,3%), molybdenum (35,0%). In gold, there is not a very high price effect (+ 7,6%), at least if we do the calculation for the last 18 months, because -as already mentioned- the price of gold began to rise in May 2019; that is, for 30 months. Academia Letters, December 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Víctor Torres Cuzcano, vtorresc1@unmsm.edu.pe Citation: Torres Cuzcano, V. (2021). Post-pandemic metal supercycle and effectiveness of fiscal instruments. Academia Letters, Article 4292. https://doi.org/10.20935/AL4292. 4 Collection and effectiveness of tax instruments The rise in the international price of metals increases the income of mining companies, which has the positive effect of a higher payment of taxes by them. Next, the intensity of this positive effect in the recent conjuncture (April 2020-September 2021) is compared with that observed in the past boom (October 2003-March 2005). The analysis is carried out for the collection of corporate income tax (CIT), since the new fiscal instruments that currently also tax mining were only implemented in 2012, when the supercycle had almost ended: new mining royalty (NRM), special mining tax (SMT) and special mining contribution for companies with tax stability (SMC). In this case, our main source of information is the statistics published by the National Superintendency of Customs and Tax Administration of Peru (SUNAT). The collection of CIT in the mining sector has been increasing at a rate much more accentuated than that observed during the past boom (figure 2). If we compare the payments on account of September 2021 with those of the base period April 2020, the collection for this concept increased by about 8 times. On the other hand, during the past bonanza, the payments on account of March 2005 compared with those of October 2003 increased by only 1,5 times. In accumulated terms, the total collection from CIT (payments on account plus regularization) during April 2020-September 2021 is about 5 times higher than the amount collected in the first 18 months of the last boom (October 2003-March 2005) (table 3). Academia Letters, December 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Víctor Torres Cuzcano, vtorresc1@unmsm.edu.pe Citation: Torres Cuzcano, V. (2021). Post-pandemic metal supercycle and effectiveness of fiscal instruments. Academia Letters, Article 4292. https://doi.org/10.20935/AL4292. 5 Whether higher prices translate into higher tax revenues will also depend on the effectiveness of the tax instruments with which they are collected. We will approach this issue from the percentage of export earnings that mining companies allocate to pay taxes. In the best years of the past bonanza (2006-2011), what was collected under the old tax regime, made up of CIT and the ad valorem royalty - still in force - that is applied on mineral sales (Old RM), represented -in average- 12,0% of the exported value (figure 3). Since then, this participation has fallen steadily until reaching the floor of 2,7% in 2016. This was the case despite the fact that, since 2012, the old tax regime was “reinforced” with the new tax regime composed of the SMT, the NRM and the SMC, instruments whose common denominator is that their tax base is the operating profit determined according to accounting standards. The recent rise in the price of metals has favored a recovery in the part of export revenues that mining companies allocate to paying taxes: from 4,1% in 2020 to 9,3% during 2021 (January-September). However, this result is still below the 16,9% recorded in 2007, when only the old mining tax regime existed, which proved ineffective to optimally capture the extraordinary profits of the sector during the 2003-2012 supercycle. Indeed, during the past bonanza it was not possible to increase tax revenues to the same extent that extraordinary profits increased. The net profit after tax of the mining companies increased at an average annual rate of 41,0% in the period 2005-2011, but the collection of CIT plus the Old RM did so at a rate of 27,0%. It was a regressive tax regime, since it did not favor a comparatively growing participation of the State in mining profits. The new mining tax regime, inaugurated in 2012, was designed to correct this scenario and capture extraordinary profits in periods of price bonanza. However, this would not be fulfilling Academia Letters, December 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Víctor Torres Cuzcano, vtorresc1@unmsm.edu.pe Citation: Torres Cuzcano, V. (2021). Post-pandemic metal supercycle and effectiveness of fiscal instruments. Academia Letters, Article 4292. https://doi.org/10.20935/AL4292. 6 that function with the same intensity that is observed in the old tax regime. In statistical terms, the latter correlates better with the exported value, compared to the new tax regime. In other words, mining companies have been obtaining higher extraordinary income compared to the past boom, but the percentage of their total revenues that they use to pay taxes does not yet show a similar dynamism. This should lead us to reflect on whether the fiscal instruments implemented since 2012 are being sufficiently effective in capturing the extraordinary profits of the sector. Conclusion On more than one occasion we have opined (Torres, 2018) that the growth and development of a country should not be subject to tax revenues that originate mainly from the export of raw materials, as this makes it very vulnerable to market fluctuations international. However, this perspective does not contradict the right that every State has to optimally capture the income generated by the exploitation of its natural resources. In this context, the effectiveness of fiscal instruments is a sine qua non condition. Academia Letters, December 2021 ©2021 by the author — Open Access — Distributed under CC BY 4.0 Corresponding Author: Víctor Torres Cuzcano, vtorresc1@unmsm.edu.pe Citation: Torres Cuzcano, V. (2021). Post-pandemic metal supercycle and effectiveness of fiscal instruments. Academia Letters, Article 4292. https://doi.org/10.20935/AL4292. 7 References Banco Central de Reserva del Perú - BCRP (November 20, 2021). 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Post-pandemic metal supercycle and effectiveness of fiscal instruments. Academia Letters, Article 4292. https://doi.org/10.20935/AL4292. 8