Contributed By Pinheiro Neto Advogados
The mining sector plays an important role in the Brazilian economy and, in 2019, accounted for USD32.5 billion in exports (FOB), representing a share of 14.5% of all Brazilian exports. The national mineral production in 2019 was USD38 billion, and it is expected that 2020 mineral production in Brazil may reach USD40 billion. Iron ore was the most exported mineral substance in 2019, representing approximately 68% of overall mineral exports, followed by gold (approximately 11%), copper (7%), and niobium (7%). These figures are encouraging particularly if one considers the impact of the COVID-19 pandemic not only to workers, supply chain and production, but also to markets in general.
Besides the slight recovery of the mineral production, 2020 also marks the second anniversary of the creation of the National Mining Agency (ANM), which replaced the former National Department of Mineral Production (DNPM). By creating a new standard of agency for the mining sector, the government placed the mining industry within the same management model that has been applied to the oil and gas, power and telecommunications sectors for two decades.
New Administrative Model
The new administrative model proved itself more democratic and transparent, adding more certainty to the business. Over the past two years, the ANM organised several public consultations to discuss regulatory changes, as well as meetings of the board of directors in which interest parties are allowed to participate. The ANM also put in place the regulatory framework for public offer of areas that reverted back to the government and organised the first tender based on this framework. Finally, tailings dams rules were updated.
Yet, there is still a number of measures that need to be addressed by the agency, namely the review of old regulatory instruments, the new regulation on liens on mineral rights, and the system of reporting resources and reserves. The considerable administrative backlog and the lack of experience with the new administrative practices also mean that processes tend to move at a slower pace in the ANM, although this may be reverted with the development of more practical procedures in the long run.
International Collaboration Initiative
The agency also entered into an international collaboration initiative with OECD that aims at identifying regulatory barriers and inefficiencies that affects the dynamics of the mining sector in Brazil, and proposing improvements to the regulatory framework for the mining sector. The initial results of that collaboration effort are expected in 2021.
Brazil is a federative republic divided administratively into 26 states and the federal district. Brazil’s legal system is based on civil law tradition.
The federal constitution currently in force, enacted on 5 October 1988, has general provisions involving the economic activity in the country and addresses a few industrial sectors, including mining. The constitution basically provides that:
The most relevant legal text on mining in Brazil is the Mining Code (Decree-law No 227/1967), which is supplemented by the regulations of the Mining Code (Decree No 9406/2018). The Mining Code and its regulations define and classify deposits and mines, set requirements and conditions for obtaining authorisations, concessions, licenses and permits, and provide for the rights and duties of holders of exploration licenses and mining concession.
There are additional pieces of legislation and regulatory provisions governing specific matters related to the mining sector, such as the National Mining Agency (ANM), mining royalties and tailings dams, among other matters.
The Federal Constitution provides that the Federal Government owns the deposits and mineral resources (soil and subsoil), even where the land is regarded as private property. Any person who is intending to explore and/or extract minerals (mining) in Brazil must apply to the ANM for the corresponding authorisation or concession, even if the applicant owns the land where the exploration or mining will take place.
It is common to have mining companies performing exploration and sometimes mining land belonging to third parties. Brazilian legislation does not require the company to acquire the property of those lands. In case the titleholder is not the owner of the land related to its operations, it shall enter into land access/use agreements (or mining servitudes) with the respective landowner/occupier, in order to have access to and use the areas that are required for its operations.
The landowner/occupier is entitled to be paid a rent for the occupation of the area and a compensation for damages. If any minerals are extracted from private lands that are not owned by the titleholder, the landowner is entitled to a royalty equal to 50% of the statutory royalty (CFEM).
In the event that it is not possible to reach an agreement with the landowner/occupier, the Mining Code provides for a specific judicial court to allow access to the area, guaranteeing payment of compensation to the property owner/occupier.
As a grantor-regulator, the federal government oversees the exercise of exploration and mining activities under a system of concessions, licences, permits and authorisations in which it has the authority to grant mining titles to private companies.
Mineral exploration and/or mining activities can only be conducted by Brazilian nationals or companies incorporated under Brazilian laws, with registered offices and management in the country. There is no requirement for mandatory joint venture or any sort of state participation.
The federal constitution provides that exploration and mining can be performed based on an authorisation or concession granted by the federal government. In that aspect, the mineral right has a constitutional basis, although the terms for grating and using an exploration licence or a mining concession will be provided by the law (ie, the Mining Code).
Mineral rights are not considered a property right, but rather a right granted by the State based on administrative law.
Mineral rights are unilateral administrative acts, granted by the federal government. The ANM is the federal agency entitled to manage, regulate and supervise mining activities in Brazil, along with the Ministry of Mines and Energy (MME). By definition, exploration rights are granted by the ANM and, in most of the cases, mining concessions are granted by the MME (but concessions for the exploitation of minerals employed in the construction industry without industrialisation are issued by the ANM).
States do not have the authority to grant mineral rights.
In general, there are two main types of mineral rights in Brazil, the exploration licences and the mining concessions. Exploration licenses are granted on a first-come, first-served method (also known as “priority”), which determines that, as long as the claimed area is not covered by any other mineral rights in force, and all legal requirements have been met, the first individual to apply for a specific area will have the right to obtain the corresponding mineral right. Exploration licences are granted for a period from one to three years, being allowed its renewal for an equal period at the discretion of the ANM.
If the exploration works are deemed successful with the identification of a resource, the titleholder shall submit to ANM an exploration report. Upon the analysis and approval of the exploration report by the ANM, the titleholder shall have the exclusive right to apply for the mining concession within a one-year term counted as from the publication of the ANM approval.
The application for the mining concession shall include detailed geological and geophysical information of the related area, as long as a mine development plan and a closure plan. The mining concession shall also be granted once, in addition to the ANM reviewing and approving all technical materials, the titleholder presents the corresponding environmental installation licence of the project.
In short, Brazilian legislation provides enough certainty that the holder of the exploration rights, upon being successful in exploration, will have exclusive rights to apply for the corresponding mining concession. The ability to mine is provided for in legislation, but there are other circumstances that may affect the exercise of such rights. The application for mining concession can be denied if it is deemed harmful to the public good or if it adversely affects other interests that, in the view of the federal government, should prevail over mining. In addition, if the environmental license for the installation of the facilities is not obtained, the mining concession will not be granted.
The federal constitution establishes the people’s right to an ecologically balanced environment. It recognises the environment as essential for a healthy quality of life, and imposes on the government and society the duty to defend and preserve the environment for present and future generations.
As a general rule, the State environmental authority is in charge of licensing a mining project, as opposed to the federal environmental authority. The federal environmental authority will be in charge on an exceptional basis, whenever mining activities will be undertaken in, or cause an impact on, areas deemed as federal, such as national environmental conservation units or indigenous lands, as well as in cases where mining activities will be executed in two or more States.
Environmental licensing is required for projects and activities that use environmental resources and/or are potentially polluting, such as mining. In general, there are three licencing phases:
Such licences may provide for specific conditions to be met by the company on a case-by-case basis, considering the particulars of the project and of the affected environment.
Environmental authorities are usually well equipped and efficient in Brazil, but, in some cases, there is criticism that they hold too much discretion. Many of those authorities are constantly supervised by the public prosecutor’s office to ensure that proper protection to the environment is addressed. In addition, the recent tailings dam failure events in the Mariana and Brumadinho have led the ANM and environmental authorities to focus on stricter rules for companies, mainly regarding environmental protection and safety on mining operations.
In order to remove vegetation, the companies must observe restrictions in connection with legal reserves and permanent preservation areas. Legislation provides for the mandatory constitution of the legal reserve, which consists in the setting aside of the area of a rural property for native forest. The legal reserve usually corresponds to 20% of the area of each rural property, but in the Amazon such area can be increased to 35% of the property in areas of cerrado (vegetation similar to savannah) or 80% of the property in areas of forest.
Permanent preservation areas (APPs) are areas defined as such by applicable legislation and may be covered by native vegetation, such as:
Mining activities may only be performed in APPs upon the acknowledgement that the operation would meet the public interest, upon the fulfilment of the conditions imposed by regulations.
Moreover, when exploration and mining works are performed within environmental conservation units of sustainable use (environmental protection areas created by law or decree where economic activities may be coupled with conservation activities), Brazilian environmental legislation determines that special requirements may apply on a case-by-case basis. The conservation units usually have a buffer zone around them in which economic activities can be restricted.
In the context of the environmental licensing process, public hearings to discuss the environmental impact assessment and its report may be held, so that communities can obtain further details of a project and voice their concerns. Although the industry generally acknowledges that mining companies should keep communities informed prior, during and after the mining works regarding the developments that may affect them, there is no such requirement in Brazilian legislation. Usually, this information is provided by means of public hearings.
Although Brazil is a party to Convention No 169 of the International Labour Organisation (Indigenous and Tribal Peoples Convention), the Convention has not yet been transferred into regulation in Brazil. Even so, mining companies that undertake activities in lands of indigenous or tribal peoples do carry out consultation.
Likewise, the public prosecutor’s office holds the view that compliance with Convention No 169 is mandatory regardless of the lack of regulations. In some cases, lawsuits have been filed to seek a court decision to force the mining company to perform proper consultation.
In those cases where the consultation has been carried out, it was performed by the investor and not by the Brazilian government.
The Brazilian constitution establishes that indigenous peoples hold the original right and the exclusive use of the lands they have traditionally occupied. Exploration and mining activities inside indigenous areas are permitted by the federal constitution upon the approval by the National Congress. However, due to lack of specific regulation for this matter, the National Congress has yet to have authorised any exploration or mining activities within indigenous areas. The federal government did send a bill to Congress to regulate the matter in February 2020, but there was no meaningful development in its review so far.
In addition, the Quilombola peoples (descendants of former slaves that organised themselves in communities) are another example of a traditional community legally protected in Brazil. The Quilombolas are entitled to obtain title to the land that they occupy. Mining activities are permitted in Quilombola areas, but require specific review prior to the granting of mineral rights. Furthermore, in order to carry out their operations within those areas, mining companies must negotiate with the Quilombola representatives so that they can enter into agreements on the payment of compensations for the use of such lands.
Brazilian laws do not provide for the requirement of the company entering into community development agreements. Nonetheless, companies usually enter into communities with local authorities to support some social initiatives, as part of their corporate social responsibility.
Generally, good examples are set when the mining companies believe on aggregating the local communities as part of the project itself. This can be by creating jobs, developing local infrastructure with compliance and, in short, engaging communities to a certain extent in the project or operations.
However, companies that do not involve local communities in their projects from the outset usually face conflicts and popular rejection, which may result on the decrease of political will and support of the project, creating larger difficulties for its development.
In addition, the recent tailings dam failure events in Mariana and Brumadinho also created a more complex scenario for mining companies to develop a relationship with communities and to hold their social licence.
So far, there is no specific legislation or regulation referring to climate change matters in Brazil applicable specifically to mining activities. The issues related to climate change are indirectly addressed by means of the regular environmental protection laws in force in the jurisdiction.
No climate change legislation has been passed in Brazil. Considering the current political scenario, climate change in regard to mining does not seem to be among the top priorities in the country, at present.
One of the main principles of the Mineral Law in Brazil is the provision for environmentally sustainable mining. As a result, holders of mining concessions are obligated to restore the areas degraded by mining activities.
In practical terms, some companies have incorporated sustainable development initiatives not only in preparation for mine closure, but also as part of the operations. Some of those initiatives have the purpose of meeting one or more tasks of the sustainable development goals. It has also been reported that a few initiatives may involve partnerships with local authorities. However, there are no public policies by the federal government to encourage or foster such initiatives.
Mining activities are taxed in the same way as businesses in general. The Brazilian tax system contains a variety of taxes in federal, state and municipal levels.
Corporate Income Tax
Brazilian corporate income tax (IRPJ) is levied at the federal level at the rate of 15% on taxable profits. A 10% surcharge is levied on the actual profits, presumed profits or profits determined by the tax authorities, in excess of BRL240,000 (approximately USD48,000) per year. Taxable profits are ascertained by deducting the operating costs and expenses from the gross income originating from the company's core activity and incidental businesses. Some of these costs and expenses are not deductible because of their nature or the amount involved. There are also provisions for tax exemption once a company's taxable profit has been ascertained.
Brazilian legal entities are allowed to carry forward losses indefinitely, which is of importance for companies that undertake exploration, development and later mining activities. These losses can only offset 30% of taxable profits, which can result in deferral of the utilisation of the losses in the event that the legal entity sustains material losses and profits that are not substantial.
As a general rule, the income, capital gains and other earnings paid, credited, delivered, employed or remitted by a Brazilian source to a foreign-based individual or legal entity are subject to withholding tax at a general rate of 15%. The tax rates on capital gains of Brazilian individuals or non-residents (both individuals and companies) may vary from 15% to 22.5% depending on the amount of the capital gains. Rates may reach 25% for income paid to a person residing in a jurisdiction deemed to be a tax haven or privileged tax regime for Brazilian tax purposes.
The social contribution on net profits (CSL) is calculated on the net profits before the allowance for income tax, adjusted by the additions, exclusions and offsets prescribed by tax law. The CSL rate is 9% and the figures paid are not deductible from the income tax base (actual profits). Other federal contributions – PIS (Programme of Social Integration) and COFINS (Contribution for the Financing of Social Security) – are levied at the combined rate of 9.25% and are assessed over the gross billings of the company.
Tax on Transactions
The tax on financial transactions (IOF) is a tax on foreign exchange, securities, credit, gold and insurance transactions. The IOF/Exchange is currently imposed on a variety of foreign-exchange transactions. Currently, for most exchange transactions, the rate of IOF/Exchange is 0.38%.
Tax on Distribution
The tax on distribution of goods and services (ICMS) is a valued added tax levied by the state on the circulation of goods (thus covering the entire chain of trades from the manufacturer to the end consumer) and on the provision of intrastate and interstate transportation and communications services. Normally, the transaction value serves as the ICMS tax base. It is a non-cumulative tax and, as such, generates a tax credit to be offset by the product or service recipient against the tax payable on future transactions. Each Brazilian state is free to establish its own ICMS rates (generally between 17% and 18%).
Tax on Services
The tax on services (ISS) is assessed on the services provided by a company or independent contractor or professional, in accordance with a list of services attached to a federal supplementary law. ISS is levied by the local municipality at a rate of between 2% and 5% on the service value.
The mining statutory royalty is known as the Financial Compensation for the Exploitation of Mineral Resources (CFEM) and the proceeds of this royalty are shared between the local (75%), state (15%) and federal (10%) governments. The royalty rate varies from 1% to 3.5%, depending on the substance. The royalty is calculated based on the revenue arising from the sales of the ore, with the deduction of marketing taxes. In the event the mining concession holder actually consumes the substance in its production chain, then the royalty will be calculated based on the market price of the substance or, if such a price cannot be determined, a reference value determined by ANM.
There are no tax stabilisation agreements in Brazil.
Tax exemptions, breaks and incentives are granted or cancelled via agreements (convênios) entered into between the relevant Brazilian governmental authorities. More commonly, they are granted at the state level and with reference to the ICMS taxes. However, states that usually grant ICMS tax breaks and incentives to attract investment, but without the consent of other states, may generate the so called “tax war”.
In addition, there are tax breaks available in connection with IRPJ assessed in projects located in the Amazon or the north-eastern regions of the country. These tax breaks may represent a deduction of 75% in IRPJ tax.
As a general rule, if the seller of a mining project has a capital gain arising from the transaction, the seller shall pay capital gains tax.
In the case of corporate structures outside Brazil, Brazilian tax rules provide that if a non-Brazilian entity has any capital gain arising from the disposal of a Brazilian asset, then such gain could be subject to withholding tax at a sliding scale rate between 15% and 22.5%, as described in 4.1 Mining and Exploration Duties, Royalties and Taxes (if the seller is based in a tax-haven jurisdiction, the applicable rate will actually be 25%).
Attracting investments for mining is crucial for the development of the Brazilian economy, since the mining sector contributes for the creation of direct and indirect jobs, the expansion of infrastructure and the increase of the Brazilian Trade Balance.
Since Brazil does not have any bilateral investment treaty in place, the federal government relies on general policies and legislation applicable businesses in general (eg, exemption of export tax in the exportation on non-manufactured goods, exemption of ICMS tax on exported goods, etc).
Foreign capital in Brazil is governed by Law No 4131/1962 (Foreign Capital Law). As a general rule, foreign capital can enter Brazil freely, without constraints over the total amount to be invested and without the need of prior approval by the government.
The registration of foreign capital with the Central Bank of Brazil is required when bringing funds into Brazil, remitting profits abroad, repatriating capital, and reinvesting proceeds. Investment is registered in the foreign currency in which they are actually made, or in Brazilian currency if the funds originate from a non-resident account properly kept in Brazil or from assets located in the country.
The main restriction referring to foreign investment in the Brazilian mining sector is related to foreign ownership of mining companies that have rights in certain areas. The current interpretation of the federal government is that legislation does not allow that mining companies that have 51% equity interest held directly or indirectly by non-Brazilians to hold mineral rights and perform exploration and/or mining activities within the country’s border area (ie, the 150 km strip of land parallel to the country’s dry borders). There are rumours that the federal government may revisit the matter to remove or reduce restrictions, but no clear proposal has been unveiled so far.
Brazil has not ratified any bilateral or multilateral investment treaties. Brazilian authorities, at some point, considered that those treaties might lead to international disputes and could limit the government’s ability to change policies and regulations. In this context, Brazil chose to rely exclusively in domestic legislation to protect investment and private property in general (both Brazilian and foreign).
The main financing options for mining development in Brazil are the banking system, the São Paulo Stock Exchange (although very few mining companies are listed in that exchange), the international capital markets and the international financing markets. The Canadian, United States, British and Australian markets are important sources of investment (both equity and debt).
Internally, the São Paulo stock exchange has not been widely used as a source for financing for mining companies until 2020. Despite a few companies that are listed on the São Paulo stock exchange, such as Vale, CSN, Gerdau and Ferbasa, most capital market transactions involving mining assets are structured in other markets, by way of parent companies.
Nonetheless, this scenario may change in the near future. In 2020, Aura Minerals was successfully listed on the São Paulo stock exchange, which evidences that the current economic conditions may allow for mining companies other than majors float their shares in the Brazilian market. The Aura Minerals public offer paved the way for other companies to adopt the same strategy and more mining companies may be seen listing their shares in Brazil in 2021.
According to the Mining Code, the titleholders of mining concessions are allowed to create a security interest over such mineral rights. The current interpretation of the federal government is that no security interest can be created over other types of mineral rights. This restriction affects the ability of exploration companies to secure their financing.
In addition, as royalties and streaming transactions cannot be registered against title to the mineral rights, companies have to put in place creative alternatives to ensure that creditors have protections. Even so, the lack of proper regulatory provision for those transactions may add some uncertainty to financing parties and that may reflect in less favourable financial conditions to the mining company.
During 2020, a significant part of the mining companies operating in Brazil enjoyed advantages stemming from the depreciation of the local currency, as most of the costs are generally structured in Brazilian currency but revenues are accrued in foreign currency for those companies that export their production. Alongside the increase of certain commodity prices (such as iron ore and gold), foreign companies may increase their investments in Brazil in view of favourable exchange rates.
On the other hand, the COVID-19 pandemic affected projects and operations in specific and different ways.
As a general note, however, operating mining companies have quickly adapted themselves to properly cope with pandemic and were able to proceed with their operations at their full capacity (unlike other jurisdictions where operations were halted completely for some weeks or months).
Developments in 2020 and COVID-19
In April 2020, the federal government determined that mining, processing, production, commercialisation, outflow and supply of minerals are essential activities, so that restrictive measures imposed by States and Municipalities should not affect the continuity of those activities.
Some contractual claims emerged from the pandemic, as the parties’ ability to fulfil their respective obligations in the various types of contracts may have been affected by the pandemic. Renegotiations were naturally sought, but different views on clauses and concepts such as force majeure, act of God and undue hardship in some cases gave rise to legal disputes that may prove to be time-consuming.
Another major development to be seen in the mining sector is related to tailings dams. Due to the recent tailings dam failures in Brazil and, in light of the general public concerns connected with this, new laws and regulations were enacted at the feral and state levels to ban upstream tailings dams, provide for stricter rules, and strengthen oversight of dams in general and, more particularly, tailings dams. According to laws recently enacted, authorities may request companies to provide guarantees, insurance or bonds for the purposes of repairing damages to life, to the environment and to public property.
Finally, the federal government managed to start a programme to free up mineral rights where certain exploration or mining activities had taken place, but the respective rights returned to the government. Following the success of the first auction in 2020, several offerings and auctions for mineral rights in the exploration stage are expected to take place 2021. Likewise, as the first auction of the state-owned National Geological Survey (Companhia de Pesquisa de Recursos Minerais or CPRM) was successfully completed, further auctions for cooper and phosphate projects are currently underway and should be concluded in 2021. Other similar auctions for coal and kaolin are also expected to take place in 2021.