811.20 Defense(M)Peru/729: Telegram
The Secretary of State to the Ambassador in Peru (Norweb)
617. From Rosenthal, BEW, for Thompson. Your 601, April 28, 5 p.m.54 and 623 May 1, 11 a.m. We have discussed taxation clause with Duggan. He made no commitment to urge reconsideration of Article 3, merely informing the Peruvian officials that he would review the matter with us.
Mr. Chavez, Commercial Attaché of the Peruvian Embassy, has submitted to us the following proposed text for Article 3.
“Clause A—The Government of the Republic of Peru proposes to continue to administer its tax policy in such a manner as to stimulate the production and free flow of strategic metals and minerals and agrees that any additional or increased taxes, fees, charges, or levies which may be imposed during the term hereof with respect to such metals and minerals shall not prevent the major portion of the increase in prices provided herein from accruing to such producers.
Clause B—If during the term of this agreement the taxes, levies, fees, or other charges imposed by the Peruvian Government on the production or export of strategic metals and minerals should be changed against the conditions of Clause A, the agreement shall not continue in effect unless the Government of Peru and the United States shall agree to its continuation for the full term.”
We have submitted to Chavez a modification of this omitting words “continue to” and deleting all after “shall not” in Clause A substituting “shall not be of such a nature as to interfere with the accomplishment of that purpose”. No change in Clause B.
Chavez agreed to submit this proposal to Lima but objected to our substitution at end of Clause A. His position apparently was that his Government would wish to retain this implied recognition of their right to tax up to 49 percent of any increase in price and that they wanted the right to as “favorable” taxation as that allowed any other Latin American Government. He referred specifically to the Chilean Extraordinary Tax on copper which takes the first one and onequarter cents per pound out of any increase up to two and one-half cents.
Our position, as explained to Chavez, is that our revision of his clause is the least restrictive yet proposed and that we do not wish it to contain a phrase which might limit the effect of the clear expression of intent. We would consider any increase in export tax a violation of that expression.
Any export tax is a direct deterrent to mineral production. Any increase or likelihood of increase, even though from a low level, can [Page 741] seriously curtail production and exploration to the prejudice of the war effort.
We do not intend article 3 to limit ability of Peruvian Government to obtain additional revenue if necessary by means of income or similar taxes which will not have an adverse effect on production.
We point out that the level of taxes in other countries should not be used for comparison. Conditions vary too greatly from country to country. Some countries, such as Mexico, have agreed to more rigid restrictions than we are asking of Peru. Others already had a restrictive tax structure. We could not ask them to reduce taxes nor are we asking Peru to do so.
While wishing to avoid comparisons, we did point out to Mr. Chavez certain special considerations regarding the Chilean Extraordinary Tax which had apparently been overlooked.
- That tax is levied only against bar copper, which is not covered in our overall agreement with Chile.55
- It is applied only to Anaconda and Kennecott, both making good profits. Chagres and Natalgua which buy ores from small producers were specifically exempt. It could not have such an adverse effect on production as a tax applied against a marginal producer.
It is not clear whether negotiation of Article 3 has been finally transferred to Washington. If resumed in Lima please make our views clear to Peruvians and attempt to obtain inclusion of Article 3 as outlined above. We prefer this to any previous texts. We also prefer that negotiation of balance of agreement be concluded in Lima.
Your present instructions with respect to copper ores and concentrates are to offer a price based on 11.75 cents New York. The price in the original Chilean Overall was calculated from the same base. For your information, in August 1942 the Chileans were granted an increase of 5 percent in the case of copper concentrates and 10 percent in the case of copper ores. Another identical increase of 5 percent and 10 percent of the original price has been authorized subject to the discretion of our representatives in Chile.
We may grant the first Chilean increase to Hochschild and Grace in Peru on renewal of their contracts now being negotiated. If you are unable to obtain acceptance in the overall of the price based on 11.75 cents please send your recommendations as to how we might grant an improved price without diverting copper ores and concentrates from Cerro de Pasco and possibly without having to pay the improved price to Northern Peru Mining Company. In this connection you may wish to point out to the Peruvians that the prices [Page 742] in the overall are floor prices which we may exceed in special cases such as Hochschild and Grace, when circumstances warrant.
Embassy’s cable 601 asks whether negotiations can proceed without further reference to Washington. Original instructions were to submit to us final draft before signing. In view of the time elapsed since the discussions were begun and possibility of resultant misunderstandings, we prefer that those instructions be adhered to. Please keep us informed of progress in negotiations. [Rosenthal.]