Chile May Raise Mining Taxes to Fund Reconstruction (Update2)

March 19 (Bloomberg) -- Chile may increase taxes on mining companies to help pay for reconstruction after last month's earthquake, Deputy Finance Minister Rodrigo Alvarez said.

The government of Sebastian Pinera is considering changes to mining taxes among other measures such as raising debt externally after last month's 8.8-magnitude earthquake damaged infrastructure and buildings, Alvarez told Radio ADN today.

"We need a lot of resources and for many years," he said.

Chile's Mining Council, which represents BHP Billiton Ltd., Rio Tinto Plc, Anglo American Plc and other mining companies, said today that the tax increase may discourage planned investments of $22.1 billion over the next five years.

Higher taxes will not be the "centerpiece" of reconstruction funding and any increase would be "moderate," Finance Minister Felipe Larrain said at conference in Santiago today. The government will also tap its $11.3 billion copper savings fund, Larrain said. Reconstruction costs are estimated at $30 billion, the minister said.

Copper prices have almost doubled in the last 12 months after China, the world's largest consumer of the metal, boosted demand. Prices rose fourfold between 2003 and 2007 as Chilean production fell and China's economy expanded.

Economist Paul Fontaine presented a study to Chile's government that included proposals such as an increase in mining royalties to 8 percent, from between 4 and 5 percent currently, he said in an interview today.

Tax Revenue

"The government would earn about $500 million a year," if the law is passed, said Fontaine, who has been working on a proposal to increase royalties for Pinera since his presidential campaign. "If mining companies agree to pay higher royalties, their contracts would be extended until 2040, which increases business stability."

Companies that don't agree to pay higher taxes would have to renegotiate levies in a few years and "may end up paying as much as three times more than they pay now," Fontaine said.

The council said mining companies paid $24.8 billion in taxes over the past five years, more than any other industry.

Chile is the world's largest copper producer. BHP and Rio Tinto operate Escondida, the world's largest copper mine, in Chile's Atacama Desert.