VZCZCXYZ0000
RR RUEHWEB

DE RUEHLP #0137/01 0192118
ZNR UUUUU ZZH
R 192118Z JAN 07
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC 2117
INFO RUEHAC/AMEMBASSY ASUNCION 6466
RUEHBO/AMEMBASSY BOGOTA 3789
RUEHBR/AMEMBASSY BRASILIA 7667
RUEHBU/AMEMBASSY BUENOS AIRES 4916
RUEHCV/AMEMBASSY CARACAS 2158
RUEHPE/AMEMBASSY LIMA 2246
RUEHMD/AMEMBASSY MADRID 3269
RUEHMN/AMEMBASSY MONTEVIDEO 4352
RUEHQT/AMEMBASSY QUITO 4798
RUEHSG/AMEMBASSY SANTIAGO 9390
RUEHKO/AMEMBASSY TOKYO 0277
RUEHUB/USINT HAVANA 0093
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUMIAAA/USCINCSO MIAMI FL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC

UNCLAS LA PAZ 000137 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/AND LPETRONI 
COMMERCE FOR JANGLIN 
TREASURY FOR SGOOCH 
 
E.O. 12958: N/A 
TAGS: EMIN EINV ECON PREL PGOV BL
SUBJECT: BEHIND THE SCENES, MINING TAX DISCUSSIONS BEGIN 
 
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SUMMARY 
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¶1. (SBU) GOB officials and mining company executives have 
quietly begun discussing tax increases.  Industry 
representatives say the changes will be significant -- on 
paper, GOB officials are seeking a 50 percent share of 
before-tax profits -- but far less substantial than the 500 
percent hike proposed January 6 by Bolivia's minister of 
mining.  Representatives of U.S.-based Coeur d'Alene and Apex 
Silver said January 18 that the GOB's proposed tax hikes 
would adversely affect their operations, potentially forcing 
each firm to cancel or halt investment.  Miners' 
cooperatives, meanwhile, have expressed staunch opposition to 
any tax increase and threatened nation-wide road blockades, 
presenting a significant challenge to the Morales 
administration.  End summary. 
 
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MINING TAX DISCUSSIONS BEGIN 
---------------------------- 
 
¶2. (SBU) Behind the scenes, GOB officials and mining company 
executives have quietly begun discussing mining tax 
increases.  Coeur d'Alene executive Jim Duff told Econoff 
January 18 that the GOB clearly wants to raise taxes, 
suggesting that the administration has little choice but to 
act in some way on President Morales' frequent promises to 
"nationalize" the mining sector.  Duff said he expected the 
GOB to move quickly to present new legislation, perhaps 
within the next two weeks; according to Duff, the GOB is 
looking for ways to mark President Morales' inaugural 
anniversary and to honor his much-publicized declarations 
that 2007 will be the "year of mining." 
 
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GOB PROPOSES SIGNIFICANT CHANGES 
-------------------------------- 
 
¶3. (SBU) Industry representatives say the proposed changes 
will be significant -- on paper, GOB officials are seeking a 
50 percent share of before-tax profits -- but far less 
substantial than the 500 percent hike proposed January 6 by 
Minister of Mining Jose Dalence.  GOB officials have told the 
industry's major players -- Apex Silver, Coeur d'Alene, 
Newmont Mining, and Swiss-owned Glencore -- that they want to 
eliminate companies' ability to credit the complementary 
mining tax (CMT) against income taxes; abolish the tax rate 
cap on the sliding scale currently in place (the scale varies 
by mineral, imposes different tax rates at different mineral 
prices, and sets minimum and maximum tax rates); and raise 
taxes at each level of the sliding scale.  To illustrate, 
gross sales of silver are currently taxed at a minimum rate 
of three percent at a silver price of $4/ounce, with rates 
varying up to a maximum rate of six percent at a silver price 
of $8/ounce; with the GOB's proposed changes, tax rates at 
each price would increase, with taxes potentially rising as 
high as 20 percent at a silver price of $21/ounce. 
 
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COMPANIES SAY THEY MAY LEAVE 
---------------------------- 
 
¶4. (SBU) Representatives of U.S.-based Coeur d'Alene and Apex 
Silver said January 18 that the GOB's proposed tax hikes 
would adversely affect their operations, potentially forcing 
each firm to cancel or halt investment.  Coeur d'Alene's Duff 
told Econoff that the elimination of companies' ability to 
credit the CMT against income taxes would alone significantly 
damage profitability; together with proposed tax hikes, the 
modification could more than double the company's annual tax 
bill (which includes the CMT, taxes on income and dividend 
withholdings, and royalties paid to the seven mining 
cooperatives leasing the project's silver deposits to Coeur 
d'Alene).  Duff reportedly told the mining minister and other 
GOB officials that new taxes would make it impossible for the 
firm to recover its capital investment, especially if silver 
prices fell from today's record highs to their long-term 
average of $5/ounce.  Duff ultimately told GOB officials he 
believed tax increases would force Coeur d'Alene's board to 
suspend the firm's $130 million San Bartolome silver project; 
the possibility of cancellation reportedly had some effect, 
but Duff said he suspected GOB officials would ignore the 
threat and move blindly ahead. 
 
¶5. (SBU) Apex Silver CEO Jeff Clevenger echoed Duff's 
concerns, telling the Ambassador January 18 that the GOB's 
proposed tax hikes would effectively amount to a 70 percent 
share of earnings.  Company executives reportedly tried to 
explain the effective tax rate to GOB officials but made 
little progress, as most officials possessed only a limited 
understanding of the industry.  Executives indicated that 
Apex would accept a true 50/50 profit split and urged GOB 
officials to carefully consider the effective impact of 
proposed tax hikes on the company's ability to realize a 
satisfactory investment return, lest Apex be forced to halt 
its $900 million San Cristobal project.  Executives also 
urged GOB officials to moderate their rhetoric, noting that 
threats to "nationalize" the mining sector and introduce a 
500 percent tax increase had disastrous implications for the 
company's stock price; according to one executive, Apex lost 
$300 million in market capitalization on the mining 
minister's comments alone.  Despite their arguments' 
relatively limited success, company representatives said they 
would continue to engage GOB officials. 
 
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MINERS' COOPERATIVES EXPRESS OPPOSITION 
--------------------------------------- 
 
¶6. (SBU) Miners' cooperatives, meanwhile, have expressed 
staunch opposition to any CMT increase and threatened 
nation-wide road blockades, presenting a significant 
challenge to the Morales administration.  The National 
Federation of Miners' Cooperatives immediately rejected 
proposed tax hikes and called on the GOB to respect existing 
contracts and honor past promises to seek cooperatives' 
agreement before changing the industry's tax structure; in 
response, the GOB announced January 16 that it would begin 
discussions with mining cooperatives and state mining 
employees' unions. 
 
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COMMENT 
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¶7. (SBU) While executives fully expect tax increases, they 
appear confident that the GOB will avoid extremes.  Many 
believe the GOB's much-hyped "nationalization" of the mining 
industry will parallel that of the hydrocarbons sector, e.g., 
that GOB officials will introduce tax increases in lieu of 
asset expropriations.  Industry representatives do not 
consider the GOB's public statements an indication of the 
GOB's true intentions; rather, they consider the rhetoric an 
effective means of alarming companies and forcing a softening 
of negotiating positions, pointing out that a 50 percent 
share of before-tax profits suddenly seems acceptable when 
the alternative is a 500 percent increase. 
¶8. (SBU) Comment continued: Company representatives may be 
able to accept the inevitability of tax hikes, but many have 
a difficult time accepting the disconnect between the 
administration's harmful proposals and GOB officials' public 
statements recognizing the importance of private investment. 
By raising mining taxes, the GOB risks losing the investment 
it claims to want, puts thousands of much-needed jobs on the 
line, and sets the stage for a potentially damaging 
confrontation with miners' cooperatives -- unless it placates 
a once supportive group by exempting them from tax increases. 
 End comment. 
GOLDBERG