Recent experience in mining in Guatemala With emphasis on taxation

1. Recent experience in mining in GuatemalaWith emphasis on taxation Carolina Roca Superintendent of Tax Administration and ex Vice Minister of Mining Washington D.C. October 2006

2. Peten Lowlands Central Highlands Volcanic Highlands Paficic Plains Guatemala: viewed by a miner

3. Guatemala: a mining actor to be discovered • Mining in the GDP 2005: 0.5% • Mining products: • Non metalic (construction driven) • Nickel (70’s) • Most recently gold • Less than 5,000 employed by industry • International investors are Canada, US and Bahamas

4. Guatemala: a mining actor to be discovered Country Territory 108,889 km2 Area granted 1,144 m2 for production 1.1% n/t Areas effectively 4.5 km2 mined 0.004% n/t

5. Taxes Paid by the Mining Industry2005 Values in USD Millions

6. Legal framework (1997) • Political Constitution declares mining as an activity of “public need and usefullness” • Drafting of current law derived from a modern and business driven official policy • Explotation is based on permits (not on negotiated contracts) called “licencias mineras” • Initial assessment (reconocimiento) • Exploration • Production • Royalties fixed at 1%, 0.5% for the government and 0.5% for the municipality in which the mine is located. • Royalty values calculated on product volume and value of goods in international exchanges

7. Legal framework (1997) • Taxation in accordance to “regular” tax system • Moderate fees on permit granting • Mandatory public notice “Edictos” to allow challenge from individuals or legal entities who may considered to be impacted by the granting of the mining permit, before issuance. • Mandatory environmental impact studies and mitigation meassures to be made public for consultation and, eventually, challenged.

8. Implementation framework • Nickel mining project (EXMIBAL) in the 70s generated regional development and support, in spite of the political criticism during the contract negotiations. However, low social memory of benefits. • Legal reform 1997 did not create public debate at the time. No mining investments perceived as inminent or with high environmental risks. • Institutional weekness (MEM and MARN) • Developing Metalic mining technical and supporting services

9. Implementation framework • Environmental awareness increasing • Envrionmental NGOs very actively participate in the public arena • Increasing democratic and community participation (High interest in royalty) • Awareness of increasing world demand for metals

10. RECENT DEVELOPMENTS • National debate started by the granting of development license to Montana (Glamis Gold), JAGUAR Nickel and CGN (Sky Resources) in 2003 and 2004. • Some communities, NGOs and the Catholic Church led actions opposing mining whilst Mining companies, local governments and communities supported implementation of RESPONSIBLE MINING as proposed by the Ministry of Energy and Mines. • Anti-mining media campaign and radical actions and protests were led by a small but loud environmental groups • The environmental impact of mining and the amount of the royalties were the main topics raised. • The government encouraged negotiated agreements within the rule of law • Consultation of Communities have taken place eventhough the procedure for consultations mandated by OIT Convention 169 is yet to be regulated.

11. In search of dialogue: • Government at the time took the decision to convene a “Mining Forum” • It comprised eleven entities: government, environmental groups, academic forums, mining companies and international agencies • General objective of the Forum: to advance in the building of national consensus for a competitive mining policy but at the same time socially and environmentally responsible

12. In search of dialogue: the Mining Forum and the High Level Commission • More than ten international experts arrived. More than 350 participants from over 200 institutions. • Open discussion on relevant topics such as environment, total revenue return (tax or others), community • Some international experts said that it was the most important mining event in Latin America for many years. • www.foromineria.org

13. In search of dialogue: the aftermath • A High Level Commission, with the participation of the Catholic Church, Civil Society, Environmental Groups and Government institutions was created to maintain dialogue • The objective was to achieve a national consensus on mining policies • Taxation has become a corner stone where the community feels satisfied on the use of the “national assets” without disregarding the entreprenurial nature of the industry.

14. The Way Forward • The High Level Commission proposed in August 2006 reforms to the Mining Law. Other groups have presented more radical proposals (including moratoria) • When delivering the proposal to the President, Bishop Alvaro Ramazzini, President of the Episcopal Conference, said: "I do not think that mining will resolve the poverty of the country, but neither do I feel that the deposits should be wasted but rather used responsibly". • Project has been presented by the Executive Branch to Congress

15. The Way Forward: Main Proposals • Royalties set at 1% for non-metallic minerals, 1% for construction materials, 2% for basic metallic minerals and 3% for precious metals and precious stones • “Small scale-Artisan” mining is exempt from royalties • Prohibition for granting income tax exemptions to the mining industry even if regulated in other legal bodies. • Mandatory compliance bonds and insurance introduced for eventual mitigation of environmental damages • The Mining Technical Advisor (Regente Minero) made mandatory in all mining operations

16. Tax Impact: The Future • Voluntary agreement signed with Montana was very relevant: the company waived the income tax exemption to which it has a right under the promotion of exports law. • Around US$9mln will be paid by Montana Exploradora this year making them the 12th biggest income tax payer. • Said fund will be used to strengthen the Ministry of Energy and Mines (MEM) and the Ministry of the Environment and Natural Resources (MARN)

17. 4) The performance of mining • Montana Exploradora made eight shipments of doree between October and December 2005 for a total of 5,177.14 kilos and a value of US$12.82 million • During 2006 (up to May 17), it has made seventeen additional shipments for a total of 16,913.35 kilos of doree for a value of US$39.7 million • National paradigms were broken in both the search for consensus and that the mining industry may remain competitive if taxed responsibly.

18. Some final remarks • Mining has generated intense discussion in recent years • State mining policy promotes RESPONSIBLE MINING and negotiated solutions • Mining must be compatible with the environment, take the communities into account, contribute to the Treasury and generate employment and growth • The Mining Forum and the High Level Commissions were important steps in this process • The moratorium of mining has not been politically supported • Taxes and royalties have been the balancing stone in allowing a better understanding among the actors involved in the mining sector.