[Page 2557]
BEFORE THE INTERNATIONAL CENTRE FOR THE SETTLEMENT
OF INVESTMENT DISPUTES
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| In the Matter of Arbitration between: FREEPORT-MCMORAN INC., Claimant, v. REPUBLIC of PERÚ, Respondent. | : Case No. : ARB/20/8 |
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HEARING ON JURISDICTION, MERITS, AND QUANTUM
Thursday, May 11, 2023
The World Bank Group
1225 Connecticut Avenue, N.W.
Conference Room C1-450
Washington, D.C. 20003
The Hearing in the above-entitled matter
came on at 9:27 a.m. before:
MS. INKA HANEFELD
President of the Tribunal
MR. GUIDO SANTIAGO TAWIL
Co-Arbitrator
MR. BERNARDO M. CREMADES
Co-Arbitrator
[Page 2558]
ALSO PRESENT:
On behalf of ICSID:
MS. MARISA PLANELLS VALERO
ICSID Secretariat
MS. CHARLOTTE MATTHEWS
Assistant to the Tribunal
Realtime Stenographers:
MS. DAWN K. LARSON
Registered Diplomate Reporters (RDR)
Certified Realtime Reporters (CRR)
B&B Reporters/Worldwide Reporting, LLP
529 14th Street, S.E.
Washington, D.C. 20003
United States of America
SR. LEANDRO IEZZI
D.R. Esteno
Colombres 566
Buenos Aires 1218ABE
Argentina
(5411) 4957-0083
Interpreters:
MR. CHARLES ROBERTS
MS. SILVIA COLLA
MR. DANIEL GIGLIO
[Page 2559]
APPEARANCES:
On behalf of the Claimant:
MR. DIETMAR W. PRAGER
MS. LAURA SINISTERRA
MR. NAWI UKABIALA
MR. JULIO RIVERA RIOS
MR. SEBASTIAN DUTZ
MR. FEDERICO FRAGACHÁN
MS. MICHELLE HUANG
MS. ASTRID MEDIANERO BOTTGER
MS. LUCIA RODRIGO
MR. PEDRO FERRO
MS. MARY GRACE MCEVOY
MR. REGGIE CEDENO
MR. THOMAS MCINTYRE
MR. ORRIN CASE
MR. GREGORY A. SENN
MR. CHRISTOPHER V. TRAN
Debevoise & Plimpton LLP
66 Hudson Boulevard
New York, New York 10001
United States of America
MR. LUIS CARLOS RODRIGO PRADO
MR. FRANCISCO CARDENAS PANTOJA
MR. LOURDES CASTILLO CRISOSTOMO
MR. JOSÉ GOVEA
MR. ALEJANDRO TAFUR
Rodrigo, Elias & Medrano
Av. Pardo y Aliaga 652
San Isidro 15073
Perú
Party Representatives:
MR. DAN KRAVETS
MR. SCOTT STATHAM
Freeport-McMoRan Inc.
MS. PATRICIA B. QUIROZ PACHECO
Socied Minera Cerro Verde S.A.A.
[Page 2560]
APPEARANCES: (Continued)
On behalf of the Respondent:
MR. STANIMIR A. ALEXANDROV
Stanimir A. Alexandrov, PLLC
1501 K Street, N.W.
Suite C-072
Washington, D.C. 20005
United States of America
MS. JENNIFER HAWORTH MCCANDLESS
MS. MARINN CARLSON
MS. MARÍA CAROLINA DURÁN
MS. COURTNEY HIKAWA
MS. ANA MARTÍNEZ VALLS
MS. VERONICA RESTREPO
MS. ANGELA TING
MR. NICK WIGGINS
MS. NATALIA ZULETA
MR. GAVIN CUNNINGHAM
MR. KEVIN DUGAN
MS. ARA LEE
MS. SADIE CLAFLIN
MR. NOAH GOLDBERG
Sidley Austin LLP
1501 K Street, N.W.
Washington, D.C. 20005
United States of America
MR. RICARDO PUCCIO
MR. OSWALDO LOZANO
MS. SHARON FERNANDEZ TORRES
MS. ANDREA NAVEA SÁNCHEZ
MR. RENZO ESTEBAN LAVADO
Navarro & Pazos Abogados SAC
Av del Parque 195
San Isidro 15047
Lima
Perú
[Page 2561]
APPEARANCES (Continued)
Party Representatives:
MS. VANESSA DEL CARMEN RIVAS PLATA
SALDARRIAGA
MR. MIJAIL FELICIANO CIENFUEGOS FALCON
Ministry of Economy and Finance
MR. EDMÓSTINES MONTOYA JARA
SUNAT, Republic of Perú
[Page 2562]
PAGE
PRELIMINARY MATTERS..................................2563
WITNESSES:
LUIS HERNÁNDEZ BERENGUEL
Direct presentation..............................2568
Questions from the Tribunal.......................2592
Cross-examination by Ms. Hikawa....................2615
JORGE ANTONIO BRAVO CUCCI and JORGE LUIS PICÓN
GONZALES
Direct presentation..............................2659
Questions from the Tribunal.......................2686
Cross-examination by Ms. Sinisterra................2706
Redirect examination by Ms. Hikawa.................2754
PABLO T. SPILLER and CARLA CHAVICH
Direct presentation..............................2759
Questions from the Tribunal.......................2779
Cross-examination by Ms. Carlson...................2782
ISABEL SANTO KUNSMAN
Direct presentation..............................2830
Cross-examination by Mr. Ukabiala..................2847
Redirect examination by Carlson....................2880
[Page 2563]
LUIS HERNÁNDEZ BERENGUEL, CLAIMANT'S WITNESS, CALLED
PRESIDENT HANEFELD: Good morning. Welcome
to Day 9 of our Hearing.
As tomorrow is already the final day, the
Tribunal discussed yesterday evening about the
post-Hearing steps, and we would kindly invite the
Parties to consult with each other and inform us
tomorrow after the Closing Statements whether they
have any joint ideas on the following aspects: First
one, the finalization of the Transcript; second, the
timing, number, sequence, content, possible page
limits for the Post-Hearing Briefs; and then as the
next item, the Cost submissions also here, number,
sequence, timing, and content.
So, if the Parties can inform us tomorrow
about their ideas, this would be appreciated, and we
will then move it from there.
Are there any other housekeeping matters the
Parties wish to address?
MR. PRAGER: Good morning, Members of the
Tribunal.
[Page 2564]
We will have those conferrals regarding the
next procedural steps. Regarding today, you will
remember that you instructed the Parties to reach an
agreement on how to ensure that we finish the day
timely. We agreed that each Party would have
three hours today, which is less than the remaining
allocated time, which I think--I don't have the exact
number in front of me. I think it was in excess
of--yeah, it was about five--over five hours, so we
reduced the time.
We think that it's workable, even if we were
to finish at 5:30. We would proposes, if the Tribunal
were agreeable to that, to reduce the lunch break to
30 minutes, and also make the coffee breaks shorter,
with our apologies, but we are in your hands,
obviously.
The position that we as Claimant have is
there's enough--there should be enough room to finish
at 5:30, but if, for whatever reason, we could not
finish our three hours, we don't want sort of to be
told at 5:30 that we have to stop the
cross-examination because it's 5:30. It probably
[Page 2565]
would, under those circumstances, only last, like,
five or 10 minutes longer, but I think each Party
should have those three hours that are allocated.
That's our position.
PRESIDENT HANEFELD: Does the Respondent
wish to comment, or can we just take note?
MS. CARLSON: Just to confirm, I believe
that the Parties have discussed this; I think the
three hours for each side is ambitious, but doable, if
we are all conscientious and try to make sure that we
move the calendar along, including with the shorter
breaks that Counsel for Claimant has identified.
Obviously, we will operate in a rule of reason. We
may reassess at the lunch break, if need be.
We're just trying to ensure that the Parties
are not--and the Tribunal, are not eating into their
own preparation times for the Closing by running late
tonight.
So, again, we think it's doable with
conscientious effort on all sides.
PRESIDENT HANEFELD: This is noted, and we
will then reduce the lunch to 30 minutes and the
[Page 2566]
coffee breaks to 10 minutes each, and we will also try
to be efficient with our questions, and now maybe we
even start questioning the Peruvian Tax Expert with a
couple of questions, and so--okay. Let's move it from
there.
(Comments off microphone.)
PRESIDENT HANEFELD: Okay. I think then we
can call in the Expert for Claimant.
MS. SINISTERRA: He will be in momentarily.
Thank you, Madam President.
(Pause.)
MS. SINISTERRA: Madam President, just
before the Expert begins, I want to note briefly that
he will discuss at some point protected information,
just so Marisa can take that into account for purposes
of the video recording.
PRESIDENT HANEFELD: Good morning,
Mr. Hernández. Can you hear us well?
Welcome to this Hearing. I briefly
introduce ourselves. My name is Inka Hanefeld. I'm
the presiding arbitrator in this case. I'm sitting
here with my co-arbitrators, Professor Tawil and
[Page 2567]
Dr. Cremades.
You have been called by Claimant as the
Peruvian Tax Law Expert, and I kindly request you to
read out the Declaration that should be in front of
you.
THE WITNESS: Expert Declaration: I
solemnly declare, upon my honor and conscience, that
my statement will be in accordance with my sincere
belief.
PRESIDENT HANEFELD: Thank you. Do you have
your Expert Reports, CER-3, 8, and 13, in front of
you?
THE WITNESS: I do have three, but I do not
see the number of the document. But I have my three
Reports: The Expert Report, the Rejoinder Report and
the "Informe Pericial."
PRESIDENT HANEFELD: So, these are your
three Reports, and you can confirm that these are
yours?
THE WITNESS: Pardon?
PRESIDENT HANEFELD: So, you have your three
Reports in front of you?
[Page 2568]
THE WITNESS: Yes. I'm looking at them.
Yes, indeed, these are my Reports.
PRESIDENT HANEFELD: Perfect. And I
understand that you will now give us a presentation,
and afterwards you will receive questions from the
Parties and the Tribunal, so please start with your
presentation.
THE WITNESS: Good morning, Members of the
Tribunal. It is a pleasure to be here before you. My
name is Luis Hernández Berenguel, and I have been
called by Freeport as an Expert on Tax Law. That's my
specialty.
I am a lawyer with over 50 years, in fact,
over 52 years of experience in tax and corporate
matters. 30 years ago I founded the law firm called
Hernández y Compañía, where I currently work still. I
have been a professor of tax law at the Pontificia
Universidad Católica del Perú, the oldest university
that is private in Perú, and I've done that for
46 years.
During all my career, I have provided advice
[Page 2569]
to hundreds of companies on tax matters. I've also
participated in the drafting of draft laws or bills.
I have been the person in charge, primarily, of
preparing the Single Unified Text of 1982. I also was
part of the committee in charge of preparing
regulatory tax rules for the Mining Law in 1993.
In my presentation, I'm going to touch on
five topics specifically.
First, Cerro Verde incurred a loss only when
each Assessment became final and enforceable.
Two, Cerro Verde suffered a separate loss
with each final and enforceable Assessment.
Three, failure to waive Penalties and
Interest is not a taxation measure under Peruvian law.
Four, the Government should have waived
Penalties and Interest to Cerro Verde because there
was a reasonable doubt.
Five, SUNAT applied the Stability Guarantees
to the entire Economic-Administrative Units, UEAs, of
Yanacocha.
I'm going to talk about the first topic:
Cerro Verde suffered a damage only when each
[Page 2570]
Assessment became final and enforceable.
The assessment is only enforceable when it
becomes final. An assessment is also known as a
"assessment resolution or penalty resolution,"
according to the case, is only enforceable--that is to
say, is only coercively collectable--when it becomes
final. In Peruvian Law, an assessment becomes final
when it is not challenged by the taxpayer or, if
challenged, the SUNAT or the Tax Tribunal dismisses
the challenge.
And finally, it becomes--forgive the
redundancy--final when it was challenged and appealed
and the Tax Tribunal decides against the taxpayer.
The fact that the assessment is unenforceable until it
becomes final ensures that the Government does not
coercively collect the assessed amount while the
taxpayer challenges its legality. This is a
fundamental right in the Peruvian system.
Only when an assessment becomes final, the
amount assessed by SUNAT becomes "enforceable debt,"
and the taxpayer payment obligation arises. Before
the assessment becomes final, there is no payment
[Page 2571]
obligation. The debtor does not have to pay anything
and the creditor cannot request payment. Only when
the assessment becomes final, the amount assessed by
SUNAT becomes "enforceable debt," and the taxpayer's
payment obligation arises. When the debt becomes due,
SUNAT may coercively collect on the debt--that is to
say, enforce the assessment--if the taxpayer refuses
to pay it.
Article 115 of the Tax Code is the key
provision on this matter. The article establishes
when the assessment becomes enforceable. That is the
difference between the Peruvian system and other
systems. In the Peruvian system, the assessment
becomes enforceable only when we are dealing with the
provisions of Article 115 of the Tax Code. This
Article 115, says that: Only the enforceable debt is
due when it is established in a final assessment. And,
therefore, is enforceable at that time.
Here we see the provisions of Article 115 of
the Tax Code, and it says that: "An enforceable debt
will give rise to coercive actions for its collection.
To this end, the following are considered to be
[Page 2572]
enforceable debts:" a) A debt created by means of an
assessment resolution or penalty resolution that is
not claimed against within the legal deadline; c) the
one established under resolution that is not
challenged during the legal deadline or the one
established by resolution of the Tax Tribunal.
Perú's position is incorrect--I'm sorry, I
think I skipped one.
Cerro Verde suffered a damage only when each
assessment became final and enforceable. Then, and
only then, did the assessed amount become enforceable,
because it was determined with certainty, the payment
obligation arose, and, therefore, SUNAT could have
enforced the assessment if Cerro Verde refused to pay
it. Cerro Verde could not have suffered any damage
before the assessment became final because the
assessed debt was not enforceable and, therefore,
there was no obligation to pay.
The position of Perú is incorrect. Cerro
Verde, as we saw, could not have suffered a damage
when SUNAT notified each assessment because, as we
saw, the assessment was not yet final, and
[Page 2573]
consequently the amount of the assessment was not
enforceable debt. Cerro Verde had no obligation to
pay and SUNAT could not coercively collect on the
assessed amount.
The arguments by Perú do not support Perú's
position. Perú alleges that the prepayments and the
accrual of interest support its position, but Perú is
wrong. Prepaying an assessment is simply a taxpayer
right. It's not an obligation.
Also, the obligation hadn't yet arisen.
Interest accrues from the deadline for filing the tax
return, and not from the notification of the
assessment, as Perú's Experts say.
You can see here there is a timeline, and
according to Perú's position, interest began accruing
from the notice of the assessment. This has no
support in any legal provision whatsoever.
At any rate, if it were consistent, Perú's
position should have been that interest begins
accruing from the tax return filing that should have
been filed.
The second issue is that Cerro Verde
[Page 2574]
suffered a separate loss with each final and
enforceable assessment.
Each assessment is a unique and separate
administrative act. SUNAT conducted separate audits
for each fiscal period, and, as a result of these
audits, issued separate Assessments for Royalties, for
each type of tax, and for Penalties, for each tax
period. Each Assessment was based on different
accounting records, different purchases, sales of
assets, depreciation, and sales of mineral, and each
assessment resulted in different amounts.
Cerro Verde had to challenge each Assessment
independently before SUNAT and the Tax Tribunal. None
of SUNAT's Assessments or the Tax Tribunal's
Resolutions had binding effects on subsequent
Assessments, the ones that came after. SUNAT and the
Tax Tribunal had to decide on each of Cerro Verde's
challenges independently without being bound by their
prior decisions.
One could say, "Okay, the taxpayer is right
in Assessment 1, but in Assessment 2, on the basis of
the same tax or royalty for a different period, then
[Page 2575]
the decision could have been in a different way."
SUNAT and the Tax Tribunal never indicated that they
were bound to adopt the criterion of the first
Assessment in resolving Cerro Verde's challenges to
the subsequent Assessments.
After the 2006-2007 Royalty Assessments,
SUNAT applied Stability Guarantees to the entire EAUs.
SUNAT issued a Report in 2012, Report No. 084 of 2012,
in which it clearly stated, without any doubt
whatsoever, and it expressly said so, that the
Stability Guarantees applied to Concessions and EAUs.
It did not say that it applied only to Investment
Projects approved or included in the stability
agreement. It expressly indicated that the stability
agreements applied to Concessions and EAUs.
SUNAT and the Tax Tribunal had issued
Resolutions in other cases--Milpo, Yanacocha, and
Tintaya--in which they clearly applied Stability
Guarantees to the entire Concession and EAUs, unlike
what SUNAT did with Cerro Verde.
Let us look at a practical example. A
person signs a loan agreement with a bank without an
[Page 2576]
acceleration clause, and the person has to pay the
amount loaned in different installments and under
different deadlines. The fact that there is a breach
and there is nonpayment of one installment and the
creditor can enforce payment, that does not mean,
because there is no Acceleration Clause, that the
creditor is going to sue them for payments for the
other installments that are not yet due.
This debtor then does not pay the second
installment and is therefore sued, but pays, the third
and the fourth, and suddenly stops paying the fifth.
Then, the creditor can sue the debtor again, but for
the non-payment of the fifth installment.
So, this is the same that happens in tax
matters. In tax matters, SUNAT can issue assessments
on the same matter for different periods, and each
assessment is different. And SUNAT and the Tax
Tribunal, as I was saying, have the duty to look at
each assessment and to decide on each assessment and,
in practice, perhaps different positions may be taken
in connection with one assessment vis-à-vis another
assessment.
[Page 2577]
The third issue. The failure to waive
Penalties and Interest is not a taxation measure under
Peruvian law.
I understand that the phrase "taxation
measure" is a technical term under the Treaty, but not
from a Peruvian law perspective. In Peruvian law,
there is no definition of "taxation measure." There
is no provision that contains that definition.
What is absolutely clear and undisputed is
that Penalties and Interest are not taxes and they are
fundamentally different in their nature and purpose.
Taxes are the result of the power that the State has
to impose levies, and when exercising that power, the
State obtain revenues and can meet public needs and
provide public services. Penalties are sanctions.
They are punishments to those that break the law, and,
at the same time, serve to discourage people from
committing those infractions in the future.
But all of the scholastic definitions of
tax, without exception, and, in the Peruvian system,
the Constitutional Tribunal and the Tax Tribunal, have
clearly said that a penalty is not a tax because a tax
[Page 2578]
can never be a sanction.
Interest, of course, has to do with the
right that the State has to receive compensation for
having failed to obtain opportune payment of the taxes
that should have been paid. So, Penalties and
Interest, well, they are not taxes.
Article 28 of the Tax Code defines, however,
"tax debt," but it does so only as a legislative
technique.
Article 28 of the Code has this idea of "tax
debt" that includes Penalties and Interest only as a
legislative technique. This does not change the
nature of each one of these concepts. We have
Penalties, on one side, Interest, on another side, and
taxes, on another side. Because of legislative
technique and because SUNAT has the authority on
Royalties and GEM, Peruvian legislation has classed
Royalties and GEM as tax debts, but it is obvious that
they are not that.
Royalties are original revenue of the State.
The State collects money because natural resources are
going to be extracted from the soil, and these are
[Page 2579]
finite, and there is, of course, consideration. There
is consideration because the State is giving up a
portion of its assets to a third party under a
concession to exploit it, and then the State collects
this consideration. It is an original revenue. It is
not a derivative revenue, like taxes.
Nobody argues, and Perú agrees with that,
that Royalties and GEM are not taxes. But because of
the legislative technique and because the
administration of these concepts and their collection
is in the hands of SUNAT, well, they are included in
this concept of "tax debt," but this does not mean
that Royalties are taxes and that GEM is a tax.
It would be repetitive and inefficient to
mention Tax, Royalties, GEM, Penalties, and Interest.
The Tax Code mentions "tax debt" 124 times. Without
this concept, they would have had to say 124 times,
"Tax, Royalties, GEM, Penalties" and in the case of
the Tax Code "Tax, Penalties and Interest." And it is
simply a legislative technique that has been used to,
amongst other things, avoid repetition of concepts
such as Tax, Penalties, and Interest. So, what they
[Page 2580]
did is they grouped these concepts together under this
legal fiction of tax debt, to simplify procedures as
well, so that different procedures are not regulated
separately in connection with Taxes or Penalties.
This is, as I mentioned, only a legislative technique
issue.
Although these concepts of Penalties and
Interest are not taxes--they are not tax measures
under Peruvian law--evidently this term "tax debt" is
simply a shorthand for various concepts related to
SUNAT's authority. Although the concepts of Penalties
and Interest follow similar procedures in terms of
their administration, payment, and challenge, they are
not considered taxes, let alone taxation measures,
under Peruvian law.
Fourth topic. The Government should have
waived Penalties and Interest charges against Cerro
Verde because there was a reasonable doubt.
Article 83 of the General Mining Law and
Article 22 of its Regulation, I believe, were clear,
absolutely clear, but, at the very least, there was a
reasonable doubt.
[Page 2581]
My opinion is that Article 83 of the General
Mining Law and Article 22 of its Regulation were
clear. I think that they clearly established--you
simply have to read them--that the mining stability
agreements covered the whole of the EAUs. However,
even so, at the very least there was reasonable doubt
about their correct interpretation.
When there is reasonable doubt, the
taxpayers have the right to a waiver of Penalties and
Interest, this under (g) of Article 92 of the Tax
Code, according to which, if reasonable doubt exists
regarding the interpretation of a provision, taxpayers
have the right to a waiver of Penalties and Interest.
The purpose of the provision is to avoid
punishing the taxpayer for reasons fully attributable
to the Government because it issued an imprecise
provision and, therefore, there is more than one
reasonable interpretation of it. Perhaps the one that
the taxpayer applies is not the final one. So, if is
not the final one, the taxpayer cannot be imposed
Penalties or Interest because it acted under a
reasonable interpretation of an imprecise provision
[Page 2582]
passed by the Government. So, when the provision is
imprecise, the Government has the duty and the
obligation to clarify it.
What is important is that the provisions
are--even more, in connection with tax matters there
is the principle of certainty--what should not be is
that the taxpayer acts in a wrong manner because of
the imprecision of the provision. And, because, this
guarantees predictability or ensures avoiding
unnecessary challenges. So, the Government has the
obligation to issue the rule that clarifies the
imprecise provision.
Article 170 of the Tax Code is a peremptory
norm, and therefore the Government has the obligation
to issue a clarification rule when it determines that,
based on verifiable facts, based on facts that
determine that there is an imprecise rule and,
therefore, that doubt exists. So, the Government has
an obligation to issue a clarifying rule.
When Article 170 uses the term "may," it
simply does so to say that there are a number of
alternatives for the clarification rule to be issued.
[Page 2583]
One alternative is a law, and the other one is a
supreme decree, obviously when there is law or a
supreme decree there is no taxpayer who asks for it.
The Government simply says: "Okay, this law is
imprecise, and I'm going to pass another Law to
clarify it or a Supreme Decree to do so."
In other cases, the alternative is the
Resolution by SUNAT or the Tax Tribunal. In the case
of the Tax Tribunal, the Tax Code is allowing for it
to issue a clarifying rule, and the only way to do so
is through a Resolution on a specific case.
The Tax Tribunal doesn't issue norms with a
general scope. The Resolutions that the Tax Tribunal
issues are those that are heard by the Tribunal on
appeal. And in that case, the Tax Tribunal applies,
and has applied in countless opportunities,
Articles 127 and 129 of the Tax Code that allow it to
expressly rule on matters, although those matters were
not raised by the taxpayers.
So, this "may" only refers to the
alternatives for that clarifying rule to be issued.
The reasonable doubt exists from the moment that the
[Page 2584]
provision is not precise, and if that is the case, the
Government has to recognize it immediately and issue a
clarifying rule. It cannot refuse to issue a
clarifying rule; otherwise, the provision of
Article 170 would just be paying homage to the flag,
as we say it in our country. It would mean it
wouldn't have the purpose it's supposed to have.
So, here are some facts, several facts, even
7 facts, and more facts within those 7, that show
that, objectively, there is reasonable doubt. They
show that Article 22 of the Regulations and also
Article 83 of the General Mining Law were imprecise,
were inaccurate, at a minimum.
Finally, I will discuss Item 5: SUNAT
applied the Stability Guarantees to all of Yanacocha's
[Redacted]. Recently I have received some Resolutions that
Debevoise and Rodrigo's law firms received from Milpo,
Yanacocha, and Tintaya, and all of them clearly show
that SUNAT acted contrary to what they applied to
Cerro Verde.
In all the cases, stability was applied to
all of the EAUs at Milpo, Yanacocha, and Tintaya. And
[Page 2585]
even if there were investments after the execution of
the Feasibility Study, and that according to SUNAT's
position as applied to Cerro Verde's case they should
have been considered as not stabilized, [Redacted]
[Redacted]
[Redacted]
[Redacted].
If the Tax Administration had acted the same
way they did with Cerro Verde, they should have
reflected in their Assessment Resolution two different
results in each EAU, one showing the stabilized result
and a different one for the items that were not
stabilized. All of these Resolutions show that there
was only one result per concession.
In the case of Yanacocha, we have four
Concessions, each with a stability agreement. We have
the very first Economic-Administrative Unit,
Chaupiloma South; second one, Chaupiloma North; then
Chaupiloma 12; the third one, Carachugo South; and the
fourth one, La Quinua.
For each of those Agreements, Yanacocha--
rather, for each of those EAUs, Yanacocha entered into
[Page 2586]
a stability agreement, and all of those Agreements had
a 15-year duration.
SUNAT applied to each stability
agreement--applied a stability agreement to each of
[Redacted]. For example, in a Resolution of December
2008 of tax years 2002 and 2003, we clearly see how
SUNAT considered that each of the stability agreements
applied to the entirety of [Redacted].
There you see--there you see to the left the
EAUs, [Redacted].
[Redacted]. And we
see how SUNAT considered each of the--that each of the
stability agreements applied to [Redacted]. They did
not discriminate.
SUNAT expressly stated that each stability
agreement at Yanacocha applied to [Redacted]. When
assessing for the prepayments of 2002 Income Tax,
SUNAT expressly indicated that prepayments had to be
calculated separately for each of the EAUs that had a
stability--tax stability agreement signed, and they
cited as legal basis Article 72 and Article 82 of the
General Mining Law, Article 22 of the Regulations, and
[Page 2587]
the Stability Agreement for the "[Redacted]."
And so, it is almost impossible to get any clearer,
here SUNAT acted differently in one case with Cerro
Verde and in an absolutely contrary way in the other
cases.
SUNAT, indeed, determined the prepayments
for [Redacted]. If you look at the chart, you
will see the [Redacted] that are identified with
[Redacted]
[Redacted].
SUNAT had determined the results for each
[Redacted], and they also used for
those prepayments the coefficient for each of the [Redacted]
[Redacted], for each of the [Redacted], if SUNAT had
acted the same way they did with Cerro Verde, there
would be two results with Carachugo, two with Maqui
Maqui, two with Cerro Yanacocha and two with La
Quinua, because--
(Overlapping interpretation and speakers.)
MS. HIKAWA: It has been over 30 minutes
now.
MS. SINISTERRA: Madam President, we granted
[Page 2588]
the courtesy of an additional minute to both
Mr. Sarmiento and Mr. Ralbovsky. He has two slides
left. We ask for the same courtesy.
MS. HIKAWA: It's been 31 minutes.
MS. SINISTERRA: It's been 30 minutes.
PRESIDENT HANEFELD: So, we are not going to
waste time with discussing about minutes, please.
If you come to the end at some point.
THE WITNESS: Yes. I am getting to the end
of my presentation.
All in all, we see in the chart that, if
SUNAT had acted as they did with Cerro Verde and they
had said the investment project, as included in the
Feasibility Study for each EAU, only stabilizes that,
and the rest, whatever happens with that EAU does
not--is not protected by the Agreement, they would
have needed to show two different results per EAU:
Loss or profit based on the stabilized portion and
loss or profit for the non-stabilized portion. Each
Concession would have shown two different results, and
we do not see that in Tintaya's Resolutions,
Yanacocha's Resolutions, or Milpo's Resolutions.
[Page 2589]
SUNAT--and, with this, I conclude; I am
close to finishing--SUNAT also applied the Stabilized
Regime to [Redacted]
[Redacted]
[Redacted], in 2001, [Redacted]
[Redacted], Yanacocha
invested [Redacted] in the purchase of fixed assets
not contemplated in the underlying Feasibility Study.
Then, based on the position applied to Cerro
Verde, they should have considered the [Redacted]
as non-stabilized. And, then, in [Redacted], where
the investment took place, they should have reflected
two different results, because, if there are non-
stabilized operations within a Concession, it means
that, in connection with that Concession, there should
be two different accountings and results, and,
therefore, they would have had to show those
[Redacted], if you will, as "[Redacted] stabilized"
and "[Redacted] not stabilized."
To conclude, SUNAT should have applied
Stability Guarantees to the Concentrator, or at the
very least, waived Penalties and Interest due to
[Page 2590]
reasonable doubt.
In conclusion, without a doubt, SUNAT
applied Stability Guarantees to Yanacocha's entire
[Redacted], including to [Redacted] SUNAT and
the Tax Tribunal did the same for Milpo and Tintaya,
most recently in December 2022.
So, this is not something of one opportunity
where SUNAT acted in a different way.. SUNAT has been
acting differently between 2005 and 2022.
There are Tax Tribunal Resolutions where one
result per EAU is recognized. There are Resolutions
from 2022. SUNAT did not treat Cerro Verde in the same
way, excluding the Concentrator from the scope of the
Stability Agreement, despite it being part of its
single EAU.
Finally, SUNAT should have applied the
stabilized regime to the Concentrator, because
Article 83 of the General Mining Law and Article 22 of
the Regulation were clear. But, in the worst-case
scenario and at the very least, as I already
mentioned, it should have waived Penalties and
Interest due to reasonable doubt.
[Page 2591]
Thank you very much.
PRESIDENT HANEFELD: Many thanks for your
presentation, Mr. Hernández, and I take the
opportunity to ask some few questions, just in order
to get some concepts on the Peruvian tax law a little
bit clearer before we start with the cross.
MS. HIKAWA: Yes. I'm so sorry to
interrupt, but just before you move to your questions,
I want to note that in PO1 and PO4, it requires
demonstratives to have citations to references to the
sources of the information, and I didn't want to
interrupt the presentation, but the vast majority of
his slides do not, and no references to his Reports,
either.
PRESIDENT HANEFELD: We would kindly request
the Claimant to add in their references and resubmit.
MS. SINISTERRA: Absolutely, Madam
President. I believe it is only conclusion slides
that do not contain an exhibit, but we will
double-check, and, if needed--this is fully supported
by the record--we would be delighted to add additional
exhibit numbers to the presentation and recirculate.
[Page 2592]
PRESIDENT HANEFELD: I hope this solves the
problem.
MS. HIKAWA: Yes. Thank you.
PRESIDENT HANEFELD: Okay. Thank you.
PRESIDENT HANEFELD: And when we ask
questions as the Tribunal, they are certainly without
prejudice to our Decision, whether we have
jurisdiction or not on certain aspects.
And so, I have one really important thing to
better understand, which concerns the question whether
Penalties or Interest constitute taxation measures.
This Penalties and Interest Claim is 662 million, so,
for us, it's really important to understand the
Peruvian law concept on these Penalties and Interest.
And I understand your colleagues, the
Respondent's Experts, Mr. Bravo and Mr. Picón, saying
in their Second Report, in Paragraphs 259 and 260,
that they say Penalties and Interest are clearly
taxation measures under the Peruvian Tax Code. They
quote there Article 28 of the Tax Code, which states
that: "Components of the tax debt are Tax, Penalties,
[Page 2593]
and Interest."
And I see now on your Slide 18 of today that
you say, no, there is no definition of taxation
measures, and this is more a legislative technique
rather than a qualification.
Can you please explain again now what you
mean with this "legislative technique" rather than
qualification of the nature?
THE WITNESS: Would you please show me the
text that you are citing from Bravo and Picón?
PRESIDENT HANEFELD: It's in their Second
Report, RER-8, and it's their Paragraphs 259 and 260.
THE WITNESS: I don't have it here with me.
PRESIDENT HANEFELD: The Parties will show
it on screen, and please in Spanish and English
language.
MS. HIKAWA: We can show it. If we can get
control of the screen, we can show the Reports.
Paragraphs 259, did you say, to 260?
PRESIDENT HANEFELD: 259 and 260. It's
Page 137 in the English version of the Second Report.
MS. SINISTERRA: I would propose that you
[Page 2594]
please show Paragraph 260, which contains the text of
Article 28 of the Tax Code.
MS. HIKAWA: We'll show what the President
requests.
MS. SINISTERRA: Just make sure to show both
paragraphs.
I think there's a problem because the
Spanish and the English don't match. So, if it's 259
and 260 in the English, then it appears to be 260 and
261 in the Spanish, which is what Mr. Hernández will
look at.
PRESIDENT HANEFELD: And please look at,
then, the Spanish version, 260 and 261, including the
Footnote. There was reference made to an
Exhibit RE-328, an MEF press release.
THE WITNESS: Pardon. The number is 261? It
is 261, from my perspective...
MS. SINISTERRA: Can you please show 260 of
the Spanish? They are showing you Article 28 of the
Tax Code, Mr. Hernández.
THE WITNESS: Yes. This is Article 28 of
the Tax Code, that simply says that the Tax Authority
[Page 2595]
shall require payment of the tax debt that consists of
the Tax, Penalties, and Interest. And then it
establishes that there is a statutory interest for
late payment of the tax to which Article 33 refers.
Second, the statutory interest applicable to Penalties
to which Article 181 refers, and interest for deferral
and installment of the payments as provided for in
Article 38.
In other words, as I already pointed out in
my presentation, Article 28 of the Tax Code simply and
plainly as a matter of legislative technique
fundamentally adopts a legal fiction, under which the
concept--under the term "debt"--under the expression
"tax debt" groups elements, or components, that
clearly do not all refer to the tax itself. It's
distinguishing between Tax, Penalty, and Interest, and
then it groups them together under the concept of "tax
debt." So, the goal here is to avoid that, in the Tax
Code, every time there is a reference to the three
concepts globally, it is not necessary to discriminate
and mention Tax, Penalties, and Interest.
As I said it, there were over 100
[Page 2596]
references so they just say "tax debt," to make the
taxpayer understand, or a third party understand, that
that includes Tax, Penalty, and Interest. But clearly
the penalty is not a tax. As I mentioned before and
repeat now, in all the definitions of tax, I have
never found anything that says that a tax can be a
penalty.
By definition, a tax could never be a
sanction. Therefore, the penalty can never be part of
the tax. And, on the other hand, it is completely
clear under the Peruvian system that the interest to
which the law refers, has a compensatory nature, that
is the way in which the State compensates itself for
not having obtained the tax payment in time. It
imposes this kind of compensation called statutory
interest.
So, again, this concept of "tax debt," I
would say, is a legal fiction, and it is used, among
other things, not to mention in procedures, for
example, whenever facilities are granted for the
payment of a debt. There is no need to refer Tax,
Penalties, and Interest, when, under this concept as
[Page 2597]
"tax debt," that listing can be avoided.
And on the other hand, undoubtedly, this
also avoids having to have different proceedings.
For example, in the case of Royalties that
are clearly not taxes, because they are not.--Taxes
are derived revenue. Within public resources, we have
two kinds of revenues: original revenues and derived
revenues. The derived revenues are the ones that the
State obtains by going to the pocket of the
individuals, taxes are in here; but original revenues
come from the wealth of the State, the assets of the
State, the State is the owner. For example, the State
has real estate. They sell that real estate to me. I
pay a price, and that is an original revenue, not a
tax. That's why Royalties are not taxes, as it is
clearly stated in the Constitutional Tribunal's
Resolution.
The Constitutional Tribunal has said that it
is a consideration and that whenever we're talking
about natural resources that are in the hands of a
third party, the State will charge a consideration, or
a good-standing fee or a validity right, this last
[Page 2598]
specifically in the mining case. These have nothing to
do with taxes. These are ways in which the State, by
allocating the use and the enjoyment of assets that
belong to the State, obtains a consideration.
So, could someone really say that the
Royalties are a tax debt? But if the Royalties are
not taxes. The Royalties are an original revenue
obtained by the State by allowing a third party to
exploit natural resources, and since they will be
depleted, then they have the right to charge.
Then, the fact that the Royalty was
incorporated under the idea of a tax debt is clearly a
legal fiction. This does not respond to the nature of
things. This is a legislative technique that has
allowed them to simplify, to avoid, for example, the
existence of dispersed regulations.
Because of the legal fiction it was not
necessary to say, for example, "that this is the
process to challenge royalties" and to issue a whole
regulation about it. One goes straight to the Tax
Code. So, this has been a way, a legal fiction that
has allowed to simplify the legislation. And also,
[Page 2599]
this allows us to avoid unnecessarily mentioning these
three concepts separately--that is to say, Tax,
Penalties, and Interest, by putting them under the
same concept.
And I think that the case that most reflects
this situation is the Royalties and the GEM situation
because, in both cases, we are talking about original
resources. We're not talking about tax resources that
are derived resources.
I don't know if I am answering your
question, but, at any rate, this also leads me to say,
how about Tax Measures? While the concept of tax debt
that, once again, is a legal fiction, is part of the
code as to Tax Code; as to Tax Measures, there is
nothing like that. Keep in mind, that the Tax Code in
Perú is the one that gathers the main concepts to be
applied to tax issues for all sorts of levies.
When someone would like to introduce a key
issue in connection with taxes, they introduce an
amendment to the Tax Code by inserting whatever is
relevant. Neither the Tax Code, nor any other rule ,
includes this concept of "tax measures." And we are
[Page 2600]
going to find some regulations, such as the 30230,
cited by Bravo, and the 30506, also cited by Bravo,
which is a delegation rule, that refer to Taxation
Measures, but without it having a specific
significance.
PRESIDENT HANEFELD: Thank you.
Any follow-up questions by my colleagues?
ARBITRATOR TAWIL: I have one.
Good morning. In connection with the
Royalties, you said at Paragraph 86 of your First
Report that, for the purposes of the Royalty, the
extraction process is not relevant. Pardon, not the
extraction process, rather the contrary. The
processing of the ore is not relevant for the Royalty,
but the extraction.
Briefly, because I know that we don't have
much time. Could you please explain why, from the
point of view of Royalties and tax?
THE WITNESS: Yes, the Constitutional
Tribunal Judgment, given a claim, expressly
established that the Royalty Law, which created the
Royalty, was not unconstitutional.
[Page 2601]
So, the Constitutional Tribunal expressly
said that the Royalties levy the extraction of the
minerals. In other words, the exploitation of
minerals. Whenever we look at Article 8 of the Mining
Law, "exploitation" means "extraction," among other
things.
So, the judgment of the Constitutional
Tribunal clearly indicates that Mining Royalties are
paid--what it levies is the extraction. And,
therefore, if it's a levy on extraction, then the
processing is simply a way to calculate the amount of
the Royalty. But the Royalty is actually a levy on
extraction.
And so, even under the assumption that SUNAT
were right, and that the only thing stabilized here
was the investment project contained in the Agreement
signed by Cerro Verde, it wouldn't have to pay
Royalties under this clear clarification by the
Constitutional Tribunal and under the Law on Royalties
itself, which says that Royalties are paid for
extraction of ore, because in the case of Cerro Verde
all of the ore was extracted from the only Mining
[Page 2602]
Concession it had.
The problem here lies in establishing
whether the Concentrator did or did not enjoy
stability. But the Concentrator is at the
Beneficiation Plant. It's not a mining concession.
One doesn't extract ore from there. Ore is only
extracted from the only Mining Concession,
Concession "1, 2, and 3," to which reference is made
in the Stability Agreement in Annex 1, Cerro Verde's
Stability Agreement, and that's where all the ore
comes from. And that is stabilized.
So, to round out, the Law says that Royalty
is a levy only on extraction of ore. This is
reaffirmed by the Constitutional Tribunal in its
judgment, and the question of processing, well, that's
simply a way of saying, well, if I have to pay
Royalties because I'm extracting them from this
Concession, which is not stabilized, say in an ideal
example, then I have to, now, calculate the amount of
the Royalty, and that is what the law spells out.
How is it to be calculated? And that is
where processing comes in, because it is calculated
[Page 2603]
based on the value of the Concentrate or its
equivalent, says the Law in its original wording.
But even if somebody could extract ore and
must pay the Royalties, supposing it's not stabilized,
but they don't process it, well, as the Law says, that
Royalties are paid for extraction, nonetheless, in
order to calculate it, it says, what is of interest is
the processing because it's going to be determined on
the basis of the market value--pardon, on the basis of
the value of the concentrate or its equivalent.
Now, anticipating that somebody who extracts
must pay Royalties, but they don't process it, well,
the Regulation covers that possibility by saying "or
the value declared by the seller." It's not been
processed, but one must bear in mind the value that
you declare for the sale of that ore that you've
extracted, and upon which a Royalty is levied, but
it's not been processed.
So, processing, specifically, is simply the
way of calculating the amount of the Royalty. Notice
that--
ARBITRATOR TAWIL: That's--I think that's
[Page 2604]
fine. That's very clear.
THE WITNESS: Well, I would just like to add
one small point to say that as of 2011, the Law
changed, and to determine the amount of the Royalty,
one no longer had to look at the value of the
concentrate, but, rather, it was based on operating
profit.
PRESIDENT HANEFELD: Mr. Hernández, let me
ask on a different topic, this is this waiver of
Penalties and interest, if there was reasonable doubt
about the meaning of the relevant rule, you already
testified on that.
And let me just put a hypothetical to you.
Should the Tribunal--and it is really a hypothetical,
but should the Tribunal come to the conclusion that
the Stability Agreement and the rules were clear,
establishing a clear obligation, now, to pay Royalties
for the Concentrator, is there, nevertheless, room for
this reasonable doubt and now rule on Penalties and
Interest under Peruvian law, in your view?
THE WITNESS: Well, according to my view,
the Law and the Regulation were crystal clear. If we
[Page 2605]
could put them up on the screen.
PRESIDENT HANEFELD: I fully understand that
this is your position, but now I would like your
answer on my hypothetical. I really want to
understand.
THE WITNESS: Well, in the hypothetical that
you put forward, the Tax Tribunal, what I say, would
have held in the negative But I'm--I'm sorry, I don't
understand the question Madam President.
PRESIDENT HANEFELD: My hypothetical that I
put to you is: If the Tribunal came to the conclusion
that the Concentrator did not enjoy stability, and
clearly did not enjoy stability, but Royalties were to
be paid, is there, nevertheless, still room for this
reasonable doubt rule under Article 170 and 92 of the
Tax Code that Penalties and Interest should be waived?
THE WITNESS: The waiver of Penalties and
Interest takes as its assumption or as a starting
point that there is an imprecise rule. So, first we
have to determine whether or not there actually is an
imprecise rule because, if there is an imprecise or
vague rule, if there's a rule that allows for more
[Page 2606]
than one reasonable interpretation, then it's not
clear.
And the Government, in one way or another,
has accepted that Article 82, in its original version,
which was in force when Cerro Verde signed the
Stability Agreement, and Article 22 of the Regulation,
which was in force in its original version when Cerro
Verde signed the Agreement, the Government has
admitted that in 2014, it modified Article 82, and it
introduced Article 83-B. And in 2019, it amended
Article 22 of the Regulation.
And if you look at the Statement of
Legislative Intent for both of these changes, you will
be able to see that the Government has recognized that
the provision was not clear, and if it recognized that
the rule was not clear, it's because it accepts that
it's imprecise. Because what is not clear is
imprecise.
So, this is quite simply one of the facts
that I didn't want to read because of lack of time.
From what I read you in my presentation, I said here
there are a series of facts that show that,
[Page 2607]
objectively speaking, it was an imprecise rule, and an
imprecise rule automatically triggers reasonable
doubt.
And in that presentation, I said here, there
are up to seven different types of facts that I'm not
going to explain that objectively show the existence
of reasonable doubt. And among those is precisely the
change in the rule, in the Mining Law, which in 2014
was adopted by the Government through Law 30230, and
in 2022 when it amended Article 22 of the Regulation
through a Supreme Decree--I think it's 021/2019.
So, if one reads the statement of
Legislative Intent, the terms used clearly lead one
to see that--to the Government recognized that the
rules were not clear.
If the rule is not clear, then it's
imprecise, and if it's imprecise, then--I think that
in the hypothetical case that you put to me, Madam
President, the Tax Tribunal should waive Penalties and
Interest because there was reasonable doubt. And
because the rule, when solving, it had to adopt the
clarifying provision declaring that there was, indeed,
[Page 2608]
reasonable doubt, in the only way in which the Tax
Tribunal could do it, that is when solving the case
file, when solving the appeal.
PRESIDENT HANEFELD: Then I have only one
additional question. This relates to Paragraph 19 of
your Witness Statement where it's about the division
of accounts. So, it's about the question whether
there was a duty to maintain separate accounts for the
Leaching Facility and the Concentrator, and you state
there: "SUNAT itself could have divided SMCV's
accounting, as it already possessed all of SMCV's
accounting information."
And can you just explain to us where in
Peruvian tax law SUNAT is authorized to divide a
company's accounting and which criteria apply for
that? And now, the Experts for Perú say Article 63 of
the Tax Code contain only very limited and specific
sets of circumstances in which SUNAT can act this way,
and can you explain to us why you think SUNAT would
have, ex officio, so to say, had to separate the
accountings and do not charge their unstabilized
regime to the Leaching Facility?
[Page 2609]
MS. SINISTERRA: Madam President, can we
make sure that he has the paragraph in front of him?
Paragraph 19 of your first Report, Mr. Hernández.
PRESIDENT HANEFELD: It is the 17, 18, 19 of
his Expert Report 8, Number 8.
MS. SINISTERRA: Correct.
MS. HIKAWA: Of the Second Report. Correct.
That's what we have on the screen. We can put a
different paragraph, if you'd like.
THE WITNESS: 19; right? Paragraph 19. I'm
going to read it, please.
PRESIDENT HANEFELD: Yes, please.
THE WITNESS: Very well. First of all, this
Paragraph 19, it covers the situation in which, in
effect, Cerro Verde would have had to show separate
accounts in its accounting and separate its
accounting. What I have argued is that there was no
reason for it to separate its accounting.
It did not need to show separate accounts,
because Article 22 of the Regulation clearly states
that the Application to maintain separate accounts is
only triggered when one has more than one Concession
[Page 2610]
or Economic-Administrative Unit, which is not the case
of Cerro Verde. Cerro Verde had a single
Economic-Administrative Unit. And that clearly stems
from Annex 1 to its Stability Agreement.
So, in my opinion as an Expert, it did not
have to maintain separate accounts because the entire
Concession was stabilized.
Now, when in Article 19 I refer to "separate
accounts," this is where I'm saying, well, if SUNAT's
position was valid, that not the entire Unit was
stabilized, but only the project; in that
understanding, then Cerro Verde would not have been
able to act to comply with what the rule supposedly
said, because there were no methods for doing so.
Please bear in mind, Distinguished Members
of the Tribunal, that this aspect must necessarily be
expressly regulated in the law because depending on
the method or methods that the Law requires be
applied, one will obtain a different result. One is
going to reflect different profits, and, therefore,
the taxation will be different.
If I apply because I want to--but the Law
[Page 2611]
doesn't prescribe it--if I apply method X, then I
might come up with my tax obligation being 100. But
if I apply method Y, I might find that my tax is 40
and not 100.
So, necessarily, had the rule been applied
to Cerro Verde that said that it needed to maintain
separate accounts, which, when it comes down to it,
means separate accounting, one for the stabilized part
and the other for the non-stabilized part, had that
been the case, then the question is, where are the
rules that would have enabled me, Cerro Verde, to
determine with certainty, absolutely sure that the
Administration is not going to object. Where are the
offered methods--pardon, regulated methods?
Article 22 of the Regulation, in its
original version, which is the one that was stabilized
by Cerro Verde, well, the only method that it
establishes is the method of sales. But that is a
method that is established, based on sales, and based
on the hypothesis that Cerro Verde would have had to
have maintained separate accounts.
And the sales-based method would not have
[Page 2612]
sufficed. It would not have sufficed--and this is the
important point--even if Cerro Verde were under an
obligation to maintain separate accounts and separate
accounting and would have to apply the third paragraph
of Article 22 of the Regulation, that says that the
sales-based method must be applied; this would have
been insufficient.
That one method would have been clearly
insufficient to-determine a profit that would not be
subject to any objection at all by the Administration,
because what--how can I do, for example--well, if I
have X number of trucks, let's say, that are serving
indistinctly the leaching plant, which was what was
stabilized, the only part stabilized, according to
SUNAT, and the Concentrator.
Well, the Law would have had to have said,
in those cases, what--you'll have to have a
system--well, let's say, whereby each day how much
time was the truck working for the leaching plant and
how much time was it working for the Concentrator.
It's crystal clear that the single reference
in the third paragraph of Article 22 of the Regulation
[Page 2613]
to the sales-based method would not have been of any
use for a taxpayer to be able to determine, with
absolute certainty and free of any objection, what its
results would have been. The Administration would
have always been able to say: "Why did you apply this
for the trucks, and you're giving me different
statement of earnings?"
So, being the application methods--being
these methods elemental to be able to determine net
earnings with certainty, the profit, and, finally, the
tax, if we're talking, say, of Income Tax, it would
have had to have been expressly regulated, and that is
why Messrs. Bravo and Picón in their Report, well,
what they say is, for example, recognizing that the
provision did not say exactly how I had to establish
my earnings, if I had to maintain separate accounts.
Messrs. Bravo and Picón say: "Well, you
could have used, for example, the transfer pricing
method." And then the question is: "What does the
transfer pricing method have to do with this issue?"
The transfer pricing method is useful for determining
the Market Value of goods or assets, and is used when
[Page 2614]
the operation is between related Parties.
So, what does the transfer pricing method
have to do with this situation? Nothing at all, plus,
the question of transfer pricing wasn't current when
Cerro Verde signed its Stability Agreement. But not
only that, Bravo and Picón recognized that the
provision was incomplete and that it should have been
complete and sufficient. They recognized it so much
so that they say that one could have applied the
method of assignment of goods and services that the
Law establishes in cases of business collaboration
agreements.
But here, we're not talking about assignment
of yields--of goods and services, nor is there any
business collaboration contract. It's not that I can
say, well, this is similar and I'm going to apply it.
No, it has to be in the Law.
PRESIDENT HANEFELD: I read your Report and
understand your opinion.
My question was slightly different, but I'm
fine for the moment. So, I want to give Respondent,
now, the chance to cross-examine.
[Page 2615]
MS. HIKAWA: Thank you, Madam President.
BY MS. HIKAWA:
Q. We'll get started and circulating binders,
and I'll take the time--take advantage of the time to
introduce myself.
Hello, Mr. Hernández. My name is Courtney
Hikawa. I'm part of the legal team representing Perú,
and I'm going to ask you some questions about your
Reports today.
I'm going to ask my questions in English,
and I understand you're going to respond in Spanish;
correct?
A. Yes, that's right.
Q. Your CV says you speak English, though;
correct?
A. It's not my first language, and that's why I
prefer Spanish.
Q. Great.
So, wonderful, you're going to listen to the
translation. We need to agree to proceed slowly, in a
manner with lots of pauses in between my questions and
[Page 2616]
your answers, and that's for the translation and the
transcription. So, please, note that, if I don't
respond immediately or ask another question after one
of your answers, I'm not waiting for you to say more.
I'm just waiting for the transcription.
And, for the most part, as we've said repeatedly, we
have very little time, so I would be grateful if you
could keep your answers as concise as possible, also
so that I don't have to interrupt you, which I don't
want to do.
Okay. Do we agree?
A. Yes, fine. Perfect.
Q. Okay. Excellent.
Okay. Mr. Hernández, you provided a very
long and detailed CV as Appendix A of your First
Report. I just want to go through a few of those
points. So, it is correct that you graduated with
your law degree from Pontificia Universidad Católica
de Perú in 1967?
A. That's right.
Q. And you've been teaching there as a law
professor since 1974; correct?
[Page 2617]
A. Correct. That's right.
Q. And you also teach in a master's or tax law
program?
A. I taught in a master's program at the
Catholic University and at the University of Lima.
Q. Thank you. I'd like to look at Paragraph 2
of your First Report, just to confirm it. And I will
put it on the screen so you can see it.
In this paragraph, you say: "Since 1977,
I've held the position of Senior Professor at the
Universidad Católica." So, 1977 is a couple years
later than 1974. That's when you started teaching tax
law; is that right? And 1974 is when you started in
commercial law?
A. I recall not with total accuracy with
respect to the dates, that at some point in time I
gave a course on securities, and, therefore, when I
speak of tax law, I started in 1977, but I have my
certification from the Catholic University that I am a
Professor, not necessarily of this or that course
since 1974.
Q. I just wanted to clarify.
[Page 2618]
Okay. So, you further say in this paragraph
that you taught courses in master's or tax law
program, and then you say that several members of
Rodrigo, Elías & Medrano Abogados, Estudio Rodrigo,
Counsel to Claimant, and Estudio Navarro, Counsel to
Respondent, are also Professors at the same
university, but you have no social contact with them.
And several members of Studio Navarro have been your
students during the more than 40 years that you have
taught law in Perú; correct?
A. Correct.
Q. Thank you. Then at Paragraph 11, if you can
go down to Paragraph 11.
A. Umm-hmm.
Q. Sorry. You say you are being "compensated
in this matter at a rate of USD 350 per hour. Your
compensation is not contingent on the content of your
opinion, nor on the outcome of this matter. You have
no relationship with the Parties to this arbitration,
their Legal Advisors, or the Members of the Tribunal,
other than my engagement in this matter and the
aforementioned relationships."
[Page 2619]
So, the "aforementioned relationships" are
the students and the faculty at the university;
correct?
A. Yes, and coinciding, for example, at
different congresses, at conferences in institutes,
strictly a professional relationship.
Q. Thank you.
And do you confirm these Statements in your
Report?
A. Yes, I confirm them. Of course.
Q. You didn't mention, however, that you were
also professor to Ms. Olano, the President of the Tax
Tribunal; right?
A. I did not mention that. Actually, I
teach--as I said in my presentation, I've been a
professor for 46 years, and, quite honestly, I don't
remember who all my students have been.
Q. I imagine you had a lot of students. Yes.
Okay. So, you do not, yourself, have a
master's degree? It looks like you completed four
courses towards a master's degree in civil law in
1988, but you didn't complete the program; correct?
[Page 2620]
A. That is not correct. I completed the
master's in civil law, but I did not obtain the degree
because I had to present a thesis that I never did
present.
Q. Okay. Understood.
But you also do not have a doctorate degree;
correct?
A. No, and I do not have a doctorate. That is
correct.
Q. You are the founding partner of the Law
Office of Luis Hernández Berenguel; correct?
A. Yes, I'm the founding partner of that law
firm.
Q. And that law firm in 2001 became the law
firm of Hernández y Cía; correct?
A. Yes, at some point in time. Right now, I
don't--can't tell you the exact dates. At one point
in time it was just a law firm in Perú. You don't
need to be incorporated to operate as a law firm. And
then it became incorporated.
Q. And you are a managing partner of that law
firm, to date; correct?
[Page 2621]
A. No, I'm not the managing partner. The firm
today has 150 people, we are more than 90 lawyers. It
has its own management, its own administration. I'm
not manager or administrator of that law firm.
Q. Okay. Your CV, just to explain my
confusion, your CV says that you are a managing
partner from 2001. But, understood.
Okay. So, at this point in your long and--
A. I was, but I'm not.
Q. Yes.
A. It's been many years since--that I've not
been.
Q. Okay. Understood.
At this point in your long and, I would say,
very prolific career, I assume that you have
assistants or law clerks that help you in drafting
your Reports and your Articles; correct?
A. Are you talking about the drawing up of
these Reports, or other situations, generally
speaking?
(Overlapping interpretation and speakers.)
(Interruption.)
[Page 2622]
Q. These Reports specifically.
A. Fine. In these Reports, obviously, I had
the support of members from the law firm who work in
the taxation area, who have helped me, because of how
extensive the issues are that are involved. So, yes.
Q. Understood.
A. All of them lawyers from my law firm.
Q. So, the process, if I understand it, would
be your associates or junior associates or law clerks
would write the first drafts of your Reports and, in
collaboration with you, would go on refining the
Reports until the final version, which you review and
sign; correct?
A. Let's say that they have assisted me in the
preparation in connection with certain topics. The
determination of background information, the review of
provisions that have to do with this issue, and then
the drafts started to be drawn up, which, in the end,
I have drafted and they fully express my position.
Q. You did not explain that process in the
Reports, though; correct?
A. I didn't think I had to. Nobody told me
[Page 2623]
that I had to explain how I prepared my Report or who
assisted me.
Q. That's okay, I'm just confirming that you
did not explain that process in Reports, because it
was, you felt, not necessary; correct? Because the
information is--you take full responsibility and
ownership of what's in the Reports; correct?
A. That's exactly right. I assume full
responsibility in my Reports because the contents of
my Report are the expression of what I've done, in the
end.
Q. Understood.
Okay. I'd like to turn back to your
Appendix A--excuse me, your CV. And this goes through
your appearances at conferences and the like, and it
goes through 2021; correct? The year 2021.
A. Umm-hmm.
Q. I assume the list of your publications,
then, also goes through the year 2021; correct?
A. Yes. I'm not sure that all of the
publications that I have prepared are there, but the
idea was to have a CV that was closest to all the work
[Page 2624]
that I've done.
Q. Well, I thought that was strange because it
doesn't look like you published anything since 2008,
based on your CV, what's there. The last things are
in 2008. So, I think that is incomplete because, in
fact, I found several publications by you later on,
which are not included in your CV. So, I have the
names in Spanish, I'll just read the names if you can
confirm that you did--
A. Well, probably the CV may be incomplete, but
I don't think that has much relevance. After 2008 I
have not many, but some publications.
Q. Okay. Let me confirm with you. I'll say
them in Spanish, determination of the tax obligation
that was presented in due course and the statute of
limitation of the action to demand payment?
A. Yes, I remember that.
Q. Delivery of goods to contractors for
self-consumption and its tax effects?
A. Yes, I remember.
Q. Responsibility expenses--
MS. SINISTERRA: Excuse me. Are any of
[Page 2625]
these documents on the record?
MS. HIKAWA: They are not. He has not
included them in his CV, and I'm just confirming that
they're missing from his CV.
PRESIDENT HANEFELD: Would this be a good
time for a break for the Court Reporters, or do you
want to continue this line of questions and then we
have our 10-minute break?
We promised the Court Reporters.
MS. HIKAWA: I can break now. I was going
to read a few more titles that were missing from his
CV, but I can break now. That's fine.
PRESIDENT HANEFELD: Yeah.
(Brief recess.)
MS. HIKAWA: Thank you.
BY MS. HIKAWA:
Q. Hello again, Mr. Hernández. I'm not going
to go through and read any more titles that are
missing from your CV, since we've already established
it's not complete. But there is one more thing that
I'd like to ask about that is not on your CV.
You were author and director of a legal
[Page 2626]
publication called "Informativo Legal Rodrigo y
Hernández Berenguel"; correct?
A. That's right. That's correct.
Q. And that was an annual subscription
publication known in the market as "Informativo
Rodrigo"; correct?
A. That's exactly right. That's correct.
Q. I understand it was published in 1961 and
ran for more than 40 years; right?
A. If memory serves, in 2002 the publication
stopped and the company dissolved itself; 2001, 2002.
Q. And your partner in that Company was--the
Company that published Informativo was Mr. Luis Carlos
Rodrigo Mazuré; correct?
A. The Informativo was always the property of
Mr. Rodrigo, and then in 2001, I bought some stakes in
it, and I became a partner in it, and I ceased to be a
member until 2002. So, I only had it for only a year,
before selling my participation.
Q. In addition to being co-director of the
Informativo with you, Mr. Rodrigo Mazuré was also the
founding partner of Estudio Rodrigo, the Claimant's
[Page 2627]
Counsel in this case; correct?
A. That is indeed right.
(Overlapping interpretation and speakers.)
(Interruption.)
(Stenographer clarification.)
BY MS. HIKAWA:
Q. And Mr. Rodrigo Mazuré is the father of
Mr. Luis Carlos Rodrigo Prado, who is Claimant's
Peruvian Counsel in this case, participating in this
Hearing; correct?
A. That's exactly right. We are talking about
a publication, or a company, rather, that I was a
partner of 22 years ago.
Q. And Mr. Rodrigo Mazuré is also the
grandfather of Ms. Lucia Rodrigo, who is a foreign
lawyer in the international arbitration practice at
Debevoise, Claimant's Counsel in this case, who is
also participating in this Arbitration; correct?
A. Yes, but I repeat: This relationship that I
had is 2001, 22 years ago.
Q. Well, Mr. Rodrigo Mazuré and you are both
members of the Peruvian Institute of Tax Law and the
[Page 2628]
International Fiscal Association of Perú chapter,
sorry, sorry, Perú chapter; correct?
A. Yes, as are Mr. Bravo and Mr. Picón, who are
Experts of Perú. That is to say, all tax lawyers
registers with the Institute.
Q. So, you've interacted with Mr. Rodrigo in
social and academic events organized by those
associations; correct?
(Overlapping interpretation and speakers.)
(Interruption.)
(Stenographer clarification.)
BY MS. HIKAWA:
Q. So, you've interacted with Mr. Rodrigo in
social and academic events organized by those
associations; correct?
A. Well, this relationship was exclusively on
the basis of this company, and, I recall that in my
participation as a partner there was a social
gathering where people were invited to indicate that
we were coming together in this Company.
(Overlapping interpretation and speakers.)
Q. --a Perú chapter granted you the distinction
[Page 2629]
of Honorary Member in 2009; correct?
A. The Perú chapter recently did that, an
Honorary Member, quite recently. In a session two
weeks ago, when I wasn't in the country. So, it's not
2009. It is 2023, very recently, at a meeting that
was held, if memory serves, in early April this year,
or perhaps in April this year, I should say, not in
2009.
Q. I'm referring to the 25th anniversary of IFA
in Perú, which took place in September of 2009, and I
know this because I found a video on the internet
where Mr. Rodrigo gave a speech about you.
A. That is a different institution. Initially
you talked about the Peruvian Institute of Tax Law,
and that's the one that gave me a Notary title in
April. The other one, it's the International Fiscal
Association, Peruvian chapter.
Q. Thank you.
A. That is a different institution.
Q. I think you answered my question. Thank
you.
So, do you remember Mr. Rodrigo referring to
[Page 2630]
you in that speech that he gave as "an unforgettable
character," and he talked about your frugal eating and
drinking habits and your appreciation for feminine
beauty, referring to your first and your second wife?
Do you remember that?
MS. SINISTERRA: Madam President, objection.
What is the relevance to the Merits in this
Arbitration?
MS. HIKAWA: Mr. Hernández has declared that
he has no relationships with Counsel or advisors in
his Report, and he recently confirmed that, and I'm
asking him questions to impeach that statement.
MS. SINISTERRA: How are any eating or
drinking habits relevant to what is being discussed in
this Arbitration? You have one of the most
authoritative--
(Overlapping speakers.)
MS. HIKAWA: It's not about his eating or
drinking habits. It's about his relationship with
Mr. Rodrigo Mazuré, which was clearly very close.
MS. SINISTERRA: You have one of the most
authoritative tax lawyers in Perú in front of you. I
[Page 2631]
think you should ask questions that are relevant to
the case, and not selective--
(Overlapping speakers.)
MS. HIKAWA: This is my cross examination,
and I'm examining statements that he has made here in
this Arbitration, and I'm testing them and impeaching
his credibility based on his statements.
PRESIDENT HANEFELD: But, indeed, such more
private remarks we do not need to learn more about.
MS. HIKAWA: Understood. I'll move on.
THE WITNESS: Also, I don't drink, just
saying, in passing.
BY MS. HIKAWA:
Q. Okay. So, Mr. Hernández, I'd like to
discuss the process you undertook in writing your
Reports.
In Appendix C of your Report, you include
the factual background on which you base your Legal
Opinions; correct?
A. That's exactly right.
Q. You state that Claimant's Counsel provided
you with this set of facts; correct?
[Page 2632]
A. That's correct.
Q. So, you did not prepare that document?
A. No. I received it and obviously verified
everything that was included there. That is to say, I
verified whether what was indicated there was correct.
Q. That document, I believe, is identical to
the one attached to Reports by Mr. Otto, Mr. Bullard,
Ms. Vega.
Did you coordinate with Mr. Otto,
Mr. Bullard, or Ms. Vega on your Reports?
A. Never. Never. I didn't speak to any of the
three in this connection.
Q. You say, though, that you reviewed the
Exhibit Appendix C that Claimant gave you.
So, did you check or verify that the facts
included in that appendix were correct or supported?
A. Yes, of course I did.
Q. That appendix does not include an assertion
that Cerro Verde's Stability Agreement covered the
Concentrator Project as well as the Leaching Project;
correct?
A. Are you asking me whether those events were
[Page 2633]
not there written? Is that what you're asking?
Well, yes, but I saw other documents:
Obviously the Agreement, the approval of the profits
reinvestment regime, and other documents that were not
necessarily there. But I tried to include everything
that was relevant.
Q. Yes. Actually, we'll get to that point.
You made an assumption on which you based
your analysis of Cerro Verde's Royalty Assessments.
So, at Paragraph 51 of your First Report, you state
that: "To evaluate these Assessments, I have assumed
that the Mining Law established that Stability
Guarantees apply to the entire production unit in
which the mining concession holder carries out the
Investment Plan described in the Feasibility Study
required to enter into a Mining Stability Agreement."
Do you see that?
A. I'm going to look at it.
MS. SINISTERRA: Doctor Hernández, your
Reports are printed out if you can't look at the
screen.
THE WITNESS: Yes. Yes. I can look at the
[Page 2634]
screen. I can see the screen.
(Pause.)
THE WITNESS: Yes. That's correct.
BY MS. HIKAWA:
Q. So, you do not provide an analysis on the
scope of stability agreements in your Report; rather,
you state this as an assumption based on what you
include here in this paragraph. Correct?
A. Yes. Let's see. But I indicate that I have
analyzed those Assessments and I have, of course,
examined the relevant Regulations, the Mining Law and
the Regulations. The relevant ones, because I'm not an
Expert in Mining Law.
Q. The citation here to this sentence cites to
Articles 83 and 86 of the Mining Law.
So, I understand from your testimony, then,
that you reviewed Articles 83 and 86, and this is what
you understood from them.
And you did not review--
A. That's right.
Q. --the other article--
(Overlapping interpretation and speakers.)
[Page 2635]
(Interruption.)
(Stenographer clarification.)
BY MS. HIKAWA:
Q. Articles 82, 84, or 85 of the Mining Law?
A. In general, obviously, I saw all of the
relevant articles of Title Nine of the Mining Law and
the Regulations.
Q. So, you do not cite them here? So, you
considered that they were not relevant for your
analysis; is that correct?
A. I do not cite them here
because I didn't feel that they were to
be considered in connection with the
central matters that I had to look at,
whether the Concentrator was stabilized
or not.
(Overlapping interpretation and speakers.)
(Interruption.)
(Stenographer clarification.)
BY MS. HIKAWA:
Q. In the next sentence there at Paragraph 51,
you qualify your assumption by saying that you are not
[Page 2636]
a mining lawyer and that you were honorary external
advisor to the Ministry of Economy and Finance in
1993, when the Ministry was preparing the Mining
Regulations; correct?
A. That's correct.
Q. So, I understand when you say that you are
not a mining lawyer, that means you are not an Expert
in the Mining Law and Regulations; is that right?
A. As a Tax Law Expert, of course I know the
relevant portion that refers to tax matters, but I'm
not an Expert in Mining Law.
Q. Okay. And you say "honorary external
advisor."
Does "honorary" mean that that was on a
pro bono basis?
A. That is exactly right. I received no
remuneration whatsoever. As I was ad honorem--for
example, from '81 onwards I was a consultant for the
Ministry of Economy and Finance and I never received
any kind of remuneration.
Q. As an honorary external advisor in 1993, and
that was when the Ministry was preparing the
[Page 2637]
Regulation, does that mean that you were specifically advisor on the preparation of those Regulations?
A. Exactly, this was a committee that was not appointed by a Resolution. Simply, a number of individuals was included, including, my former partner that participated a lot in this topic, Mr. Alfonso Rubio Feijó, who has passed away. And I was called a number of times to provide information in connection with specific tax matters related to the Title Nine of the Law that were going to be included in the Supreme Decree, regulatory provision of that title.
Q. Despite that experience at MEF, you do not cite to the Mining Law and Regulations in this sentence in Paragraph 51 to support your assumption; correct?
A. That was the Regulations; right?
The Supreme Decree--well, Article 22, which I have mentioned so many times, is part of that set of Regulations. It is part of those Regulations, but I did not author it. I did not write it.
Again, I was consulted in connection with
[Page 2638]
certain tax provisions of that set of Regulations that finally was the approved set of Regulations.
Q. For your assumption in Paragraph 51, though, you do not cite to the Regulations. So, I understand that to mean that your assumption is not based on an interpretation of the Regulations; correct?
A. Obviously, when I offer my opinion, I am interpreting the provisions, so I don't know specifically what your question is.
Sorry. I don't think I understand.
Q. You did not provide the Regulations as a citation to support this statement, so I understand that to mean that your assumption in this paragraph is not based on your analysis or understanding of the Regulations themselves. But I believe you've answered my question, so we can move on.
So, you state from that moment in 1993 when you were external advisor, you formed this assumption regarding the scope of the stability agreements and you've held that assumption since 1993; correct?
A. What I state is that I participated as an advisor in the preparation of these provisions, but I
[Page 2639]
also say that, in particular, I did not receive any requests for an opinion in connection with Article 22 of the Regulations specifically.
Q. So, 1993 was before Cerro Verde conducted its Feasibility Study for the Leaching Project and before it entered into a Stabilization Agreement for that Project.
And you do not cite here in Paragraph 51 where you state your assumption, you do not cite Cerro Verde's Stabilization Agreement; correct?
A. At Paragraph 51, no. I do not cite it, no.
Q. So, I understand your assumption is not based on a review of the Stabilization Agreement; correct?
A. To draft my Report, as I said before, obviously I had to review the Stability Agreement and obviously I had to review Article 22 and also the provisions.
So, my opinions are not based on the lack of knowledge of one document or the other, or the Regulations that you cite. Quite the contrary: The fact that I didn't cite them is just because I didn't
[Page 2640]
think it was relevant to cite them. But I did review the Agreement, the Law, the Regulations, and everything that could be relevant to the case.
Q. Okay. So, you reviewed all of those things and you did an analysis, but none of that is described here in your Report; correct?
MS. SINISTERRA: You're talking about one paragraph, just to be clear, not his entire Report.
MS. HIKAWA: This is the paragraph in which he states his assumption on which he bases his review of the Royalty Agreements, and there is no other analysis on his assumption.
MS. SINISTERRA: There's an annex of the documents, legal documents, that he relied on. So, it is misleading to base those questions on one paragraph and not the entire Report.
MS. HIKAWA: I'm referring him specifically to where he states what his assumption was based on.
PRESIDENT HANEFELD: But I think we heard the Expert testifying that he has reviewed the Stability Agreement and the Mining Law and Regulations. I think this is what is now the
[Page 2641]
testimony.
BY MS. HIKAWA:
Q. Okay. So, I understand you reviewed the Stability Agreement, although you didn't cite it here in your analysis, to come to an assumption.
Did you review the Supreme Court Decisions in order to come to this assumption or to reinforce or challenge the assumption that you made in 1993?
A. Yes, of course. I reviewed the Decision by the Supreme Court of Justice as to 2006-2007 Royalty Case. That was the only one issued on the subject matter of Royalties for Cerro Verde.
Q. You're aware that the Supreme Court in the 2000 Royalty Case interpreted the Mining Law and Regulations and found that they were limited to the scope of an investment project, and specifically the Cerro Verde Leaching Project; correct?
My question is: You are aware of that; correct?
A. I must--but that requires an explanation, because the Decision of the Supreme Court of Justice--the Chamber that decided this, has five
[Page 2642]
vocales. Two of those vocales said that the point of view of Cerro Verde had not been analyzed.
Q. I'm speaking about the 2008 Royalty Case. I'm speaking about the 2008 Royalty Cases.
There was no dissent.
A. I apologize, then. I was talking about 2006-2007. Okay, but let's see--
Q. Please answer my question. Thank you.
A. We're talking about Royalties, and the positions are contradicting, to say the least.
Q. You're aware that a cassation ruling like that of the Supreme Court has the purpose of providing the correct application and interpretation of the law and the unification of domestic jurisprudence; correct?
A. That is the theory. I can show you several examples. I can show you. Unfortunately, I haven't brought them, but, for example, the Supreme Court recently, this same Chamber, in two case files that were exactly the same in which a taxpayer is requesting the reimbursement of a tax paid on losses as a result of the liquidation of financial
[Page 2643]
derivatives, asks for the reimbursement for fiscal year 84, pardon, 2004--
Q. Mr. Hernández, we don't have time. My question was simply: You're aware of that; correct?
A. But it does not agree with Peruvian situation and what I am trying to clarify. There are different Decisions by the same Chambers of the Supreme Court, and this is not infrequent.
Q. So, you were aware that the Supreme Court in the 2008 Royalty Case interpreted the Mining Law and Regulations and found it limited to investment projects.
And, despite the fact that you're not an Expert in Mining Law and that Court's Opinion, you did not--this did not affect the assumption that you came to in 1993; correct?
A. Exactly. And the same one that I reach in my Report.
Q. And that assumption also was unaffected, I take it, by your review of the facts of the case--for example, Mr. Isasi's Report? You reviewed Mr. Isasi's Report?
[Page 2644]
A. Yes. I can tell you that Dr. Isasi has a Report of April 2005, if I recall correctly, that says exactly the contrary. And I can also mention that when Dr. Isasi presented before the Congress Commission, I think it was, on May 3, May 4, 2006, even though he changed his position, he said there that the companies that have stability agreements only stabilize investment projects, he also said something very important on the subject matter of Royalties, because he confirms that, for example, in the case of Royalties, only the ore extracted from the relevant Concession shall be levied.
Therefore, basically, what he's saying in 2006, a year after, when he has changed his criterion and said that in principle--rather, that stability only covers the investment project, he ends up saying that Royalties are not levied for Cerro Verde because all of the mineral has been extracted from the Concession that has been stabilized.
Q. Yes. Okay. So, you've referred to Mr. Isasi's Report, not on the subject about which I was asking you, but since you've referred to it, we'll
[Page 2645]
show you a paragraph from his Report.
And my question would be--
MS. SINISTERRA: Is that in the binder? Can you direct him to the document, please?
MS. HIKAWA: It's not in the binder, I believe. It is not in the binder.
We are showing it on the screen. You can see it.
ARBITRATOR TAWIL: Could you identify the exhibit for the record?
MS. HIKAWA: Yes. It's 494, CE-494. And we'll highlight the relevant part on the screen for you.
THE WITNESS: May I please see the document? Because I only see here a conclusion, but that doesn't allow me to see the context.
BY MS. HIKAWA:
Q. Yeah. Sorry, we do not have a printed-out copy of this for now, but you've already made clear that you're familiar with Mr. Isasi's Report.
So, I just want to understand: You saw this conclusion, and that didn't affect your opinion--the
[Page 2646]
conclusion on the screen didn't affect your opinion--
MS. SINISTERRA: He asked for the document, Madam President, and under the Rules we've established, if he asks for the document and he's going to be cross-examined on specific language, I believe it's fair for him to be able to look at the document.
MS. HIKAWA: Certainly we can print out a copy for him.
BY MS. HIKAWA:
Q. But, since we don't have much time, I will move on. We'll give you a copy of the document for you to review.
Okay. So, just to make sure I understand, summarize your testimony, you made an assumption in which in your Report you only explain as deriving from your analysis of Articles 83 and 86 of the Mining Law, yet you reviewed everything and nothing that contradicted that opinion affected the assumption that you made in 1993; correct?
A. Indeed. That is correct.
Q. Okay. I'd like to return to Paragraph 51 of
[Page 2647]
your First Report, and there in the last sentence of that paragraph, you say: "Additionally, I have worked for more than 30 years on tax matters involving mining companies, and, in my experience, mining companies typically kept a single set of accounts for each of their production units, since each unit was governed by the same legal regime (some mining companies, such as SMCV, have only one unit, but other mining companies, such as Southern Perú Copper Corporation, Perú branch, have several)."
Here you say "typically"; correct?
Q. Typically, kept a single set of accounts.
(Overlapping interpretation and speakers.)
(Interruption.)
BY MS. HIKAWA:
Q. Typically kept a--in English, the English translation is typically--
(Overlapping interpretation and speakers.)
THE WITNESS: I do not find expression "typically" here. You are telling me that here it says "typically." Or generally?
BY MS. HIKAWA:
[Page 2648]
Q. In Spanish it says "normalmente."
A. Yes. That is correct. That's what I said.
Q. So, that does not mean "always" kept; correct?
A. That is in--based on my experience, this is what I have been able to verify, and we see it with Tintaya Resolutions, Milpo--
Q. Please, just answer my question, briefly, if possible.
A. Umm-hmm.
Q. Okay. So, you give an example of Southern as a Company that kept a single set of accounts for their production unit; correct?
A. I only mention that in the case of one Company that had more than one Concession, or more than one Economic-Administrative Unit.
Q. Okay. So, you are speaking here in this sentence as from your experience as a Legal Advisor to mining companies; correct? So, you were a Legal Advisor to Southern; is that right?
A. No. No. No. I was not an advisor. I was never Southern's advisor. Simply--but I knew that
[Page 2649]
Southern had more than one Economic-Administrative Unit, that this why I mentioned it. But I'm not saying that I was Southern's advisor. The only purpose of that paragraph is, basically to mention that, contrary to Cerro Verde, there are some other companies that have more than one Economic-Administrative Unit.
Just like Southern I could have mentioned others like Tintaya, Yanacocha, Milpo. Simply--but I am not Southern's lawyer.
(Overlapping interpretation and speakers.)
BY MS. HIKAWA:
Q. So, your example in this paragraph of Southern--
A. but I am not Southern's lawyer.
Q. Mr. Hernández, please. So, your example of Southern, in this paragraph, is to show that companies have multiple production units; correct?
A. Yes. That there are companies that have more than one Unit, unlike Cerro Verde.
(Overlapping interpretation and speakers.)
Q. So, it's your assertion here that Southern kept a single set of accounts for each of its mining
[Page 2650]
units?
(Interruption.)
BY MS. HIKAWA:
Q. Is your assertion here that Southern kept a single set of accounts for each of its mining units?
A. No. That's not what I said. I am going to read the paragraph. Also, I have been working--
Q. Thank you. I have already read it.
Okay. So, are you saying, then, that Southern--
(Overlapping interpretation and speakers.)
THE WITNESS: Yes. But what it--yes.
(Overlapping interpretation and speakers.)
Q. did not keep a set of accounts.
(Interruption.)
BY MS. HIKAWA:
Q. Yes, sorry. Please wait for my question, Mr. Hernández.
A. What I am simply saying, and what I would like to repeat and reiterate is that in my experience, mining companies only had one accounting for each of their Production Units, since each Unit had to be
[Page 2651]
ruled by the same legal regime. Some mining companies have only one Unit, such as Southern, but others have more. So, I do not share the Opinion that you just said.
Q. So, is your assertion here--Is your assertion here that Southern kept separate accounts--or a single set of accounts for each of its mining units? Yes or no.
A. My conclusion here--my reference here is just to say that if Southern has more than one Concession, clearly, they should have a set of accounts for each Unit.
Q. Okay. I'd like to show you Exhibit RE-355. This is a letter from Southern Perú to MINEM, explaining its position on the scope of its Stabilization Agreement. It's Tab 15 in your binder.
A. Yes. I've got it.
Q. Okay. So, if we can put on the screen the paragraph, and highlight the paragraph where it says: "For this reason, the contractual guarantees."
And I'll read the Paragraph.
It says: "For this reason, the Contractual
[Page 2652]
Guarantees will benefit Southern Perú exclusively for the construction Project of the Leaching-Electrowon Plants, (ii), the additional production that will be obtained from the operation of the aforementioned Plants and (iii) the income it obtains from the exportation and sale of said additional production of SX/EW Cathodes."
Do you see that?
A. Yes, I do see that.
Q. In the text, it's clear that Southern--Southern's understanding is that its Stabilization Agreements apply to its Project of the construction of the Leaching-Electrowon Plants?
A. As I stated already, I am not Southern's lawyer, and, indeed, I am reading what you are mentioning. But, at the end the day I do not know what this paragraph is referring to, what was concluded as a consequence of the request presented before the Minister. I do not have any evidence, so I do not know what to tell you about this.
Q. Southern also had Concentrator Projects under beneficiation concessions that were separate
[Page 2653]
from the beneficiation concession for their Leaching Plant?
MS. SINISTERRA: The Expert has already confirmed that he's not aware of the factual circumstances of Southern Perú Copper, so if you want to ask him questions, please direct him to specific documents and specific exhibits in the record supporting what you're saying.
MS. HIKAWA: I will. I am directing him to the document that supports what I'm saying.
BY MS. HIKAWA:
Q. Let's take a closer look at the Paragraph. "In consequence," and I'll read it. It says: "In consequence, and in application of the provisions included in the second paragraph of Article 22 of the Supreme Decree Number 24-93-EM, Southern Perú, to determine the results of the operation of the Leaching-Electrowon Plants, will keep separate accounting, and will reflect in separate results the operations of the sales of the other products resulting from its mining activity."
Do you see that?
[Page 2654]
A. Yes, indeed. That's what Southern says by means of his President, but, once again, I am not aware of the result of this request or this letter.
Q. Yes, Mr. Hernández. Thank you.
Would it surprise you to know that Southern paid Royalties on its Concentrator Plant? Plants?
A. I would be surprised, let's say, if we are talking that with just one mining concession, Southern had an investment project that was stabilized, and Southern interpreted that the stabilization did not cover all of the Mining Unit because what I have seen--and this is what I said in the paragraph that you mentioned before--that I have not known of cases of companies that have stability agreements that, by having just one Concession, they would establish the separation.
Q. Thank you.
I just want to--one last question, because the President had asked you about separating accounts, and you had referred to Article 22. And I would like--you didn't mention at all Article 25, and I'd like to just look at Article 25, briefly.
[Page 2655]
A. Umm-hmm.
Q. We'll put it on the screen. It's Tab 6 of your binder, if you'd like to look.
A. Okay.
Q. I'll read the English.
(Comments off microphone.)
Q. I'll read the English for the record, starting with: "The Mining Activity Titleholder must submit in cases of expansion of facilities or new investments that contractually enjoy the guarantee of legal stability, said Titleholder must make available to the Tax Administration the Annexes that demonstrate the application of the tax regime granted to the aforementioned expansions or new investments."
So, does that--my question is very small, short, concrete: Does that change your analysis or your response to the President's question?
A. Here it is referring to Demonstrative Exhibits, and I would like to mention that when the Tax Administration is requesting this, it's not referring to separate accounts, and neither to separate accounting. In current audits, SUNAT may
[Page 2656]
tell a taxpayer "please show your demonstrative annexes," and the taxpayer prepares them at that moment. It does not demonstrate that they keep separate accounts or different accounting systems. A Demonstrative Annex is something that I prepare, as an accountant, in a specific point in time, if I am requested certain information.
Q. I understand. Thank you.
MS. HIKAWA: No further questions at this time.
PRESIDENT HANEFELD: Thank you.
Ms. Sinisterra, questions in redirect?
MS. SINISTERRA: One moment. Thank you, Madam President.
(Pause.)
MS. SINISTERRA: No further questions.
Madam President, thank you.
PRESIDENT HANEFELD: Thank you. The Tribunal has no further questions either. So, you are released with thanks as Expert in these proceedings.
THE WITNESS: I thank you, Madam President, Members of the Tribunal. Goodbye.
[Page 2657]
(Witness steps down.)
PRESIDENT HANEFELD: So, we continue now with the Respondent's Experts?
MS. HIKAWA: Yes. We'll try and make transition as quick as possible.
JORGE ANTONIO BRAVO CUCCI and JORGE LUIS PICÓN GONZALES, RESPONDENT'S WITNESSES, CALLED
PRESIDENT HANEFELD: Welcome, Mr. Bravo, and Mr. Picón. You have already followed, now, the questioning of Mr. Hernández, so I think we do not repeat much. Now, it's just about on you to make your Declarations, if you could, in turn, please read out the Declaration for us.
THE WITNESS: Good afternoon, Madam President. I'm going to read Expert Declaration.
SPANISH REALTIME STENOGRAPHER: Could you identify yourselves first?
THE WITNESS: (Mr. Bravo) Yes. I am Jorge Bravo. I'm a Professor of Tax Law, and I appear before this Tribunal as an Expert in Tax Law on behalf of the Peruvian State.
So, I will read out the Expert Declaration.
[Page 2658]
I solemnly declare upon my honor and conscience that my statement will be in accordance with my sincere belief.
THE WITNESS: (Mr. Picón) Good morning. My name is Jorge Picón, and I solemnly declare upon my honor and conscience that my statement will be in accordance with my sincere belief.
PRESIDENT HANEFELD: Do you have your Expert Reports, RER-3 and 8 in front of you?
THE WITNESS: (Mr. Picón) Yes, we do.
PRESIDENT HANEFELD: And I'm sure that Counsel has advised you of the process of examination, and so that the cross-examination questions will be directed primarily to one Expert, so please go ahead with your presentation.
THE WITNESS: (Mr. Picón) Thank you.
MS. SINISTERRA: Can we receive a cору, please.
SPANISH REALTIME STENOGRAPHER: I'm the Stenographer. Let me take this opportunity to let you know, if you're going to switch speaking, since I can't see you, since I'm sitting behind you, if you
[Page 2659]
could just let me know when that happens so I can register it in the minutes.
THE WITNESS: (Mr. Picón) Of course.
PRESIDENT HANEFELD: Are we ready? Good. Please go ahead.
THE WITNESS: (Mr. Bravo) Thank you very much, Madam President, Distinguished Arbitrators, Members of the Tribunal, all lawyers present.
DIRECT PRESENTATION
THE WITNESS: (Mr. Bravo) Good afternoon to all. As I've indicated, my name is Jorge Bravo Cucci. I'm a Professor of Tax Law. I'm accompanied by Jorge Picón, who is also a Professor of Tax Law, and both of us are going to make a very succinct presentation of the main conclusions that we've reached in our two Reports, which have been submitted to this Tribunal.
The topics we're going to cover are basically what you see here in the table of contents, and given time considerations, I'm not going to read through it right now. I'm going to go straight into the presentation of the first topic, and I give--yield to Jorge Picón.
[Page 2660]
THE WITNESS: (Mr. Picón) The first topic we're going to discuss is to determine whether the Stability Agreement did or did not cover the Primary Sulfides plant. To understand stability agreements, it's important to understand the context in which this legislation was adopted. This topic has been addressed by several Experts.
In the 1990s, Perú had a major crisis, and in order to attract investors, it adopted a number of Measures. The tax stability agreements were one of these, but it's important to bear in mind that not only is there Mining Stabilization Agreement, there were three types of Stabilization Agreements, legal stabilization, mining stabilization, and hydrocarbon stabilization.
This will be important at a certain point in time, because the reading of the Mining Law in that context, well, we'll see that there are several mentions in the Mining Law of the Company that receives the investment. Nonetheless, the logic is quite simple. As State, I'm going to give you guarantees, that means I'm going to waive my capacity
[Page 2661]
to change the tax regime in exchange for you making a commitment to a certain investment.
That investment should always be contained in the Agreements that granted the benefits, whether it was mining, legal, or hydrocarbons. The sequence of the legal provisions adopted in the 1990s, as has been discussed, the Constitution gave constitutional rank to what are called "contratos-ley." As the name indicates, these are contracts in which the State undertakes to something which often goes beyond what the law could change afterwards.
So, the Single Unified Text and the Regulations have a sequence. They say the Mining Titleholder has to have a minimal level of investment, has to present a stability agreement to me, and then I'm going to grant the stability in a stability agreement. And it's important to mention that the first clause of the Cerro Verde Agreement is incredibly specific.
It says, expressly, that the Agreement guarantees the benefits, specifically for the Cerro Verde Leaching Project. As other Experts have
[Page 2662]
indicated, it is mentioned more than eight times in the Contract, these specific words. And that is corroborated by Article 82 which says, that in order to promote the investment, the Mining Titleholder shall enjoy stability, which is granted by the State through the Agreement signed.
Now, it's important to clearly understand that, when the law speaks, it speaks of investment, it doesn't talk about mining unit, it doesn't talk about Economic-Administrative Unit, it doesn't talk about Concession. And we understand, as a matter of logic, that the Mining Project is the investment project that is contained in the Feasibility Study, because that's what the Agreement says. Any other interpretation would expand the effect of said Agreement.
Now, specifically, Article 83 is determinant to figure out the scope of the Agreement. If Article 83 says the Mining Activity Titleholders, well, the effect of the contractual benefit shall apply exclusively to the activities of the mining company and in whose favor the investment was made.
So, it was asked a moment ago, why does the
[Page 2663]
Law make mention such as this? And the thing is, when you see provisions adopted in tandem, the legal stability agreement could guarantee the Company that makes the investment or the investor behind the investor, so two types of agreement were signed for each investment.
In this case, in the case of mining, stability was only given to the company that received the investment, not the investor as such.
As happened in--as was the case of the legal stability agreement. In Article 82, which regulates this is extremely clear.
The contractual guarantees shall benefit the Mining and Titleholder exclusively for the investment that it makes in the Concessions.
When one interprets tax issues, one interprets it in a very literal and exact manner. Had the legislative wanted to say the contrary, they would have said activity--the Mining Titleholder for the activities on the Concession.
And then one would have clearly understood this applies to the Concession or to the Unit. But in
[Page 2664]
this case, it's quite the contrary, it's for the investment, and the investment has to be made in some place. Now, I'm not going to give one a Concession or, rather, a stability agreement, if someone buys a building for $10 million. No. The investment has to be made in some place. Specifically, in the Concession or in the Economic-Administrative Unit.
Basic conditions.
In our understanding, the Stability Agreement applies only to the Leaching Project. It cannot be extended to any other investment made by Cerro Verde, independent of said investment being carried out in the Concession or the Economic-Administrative Unit or the mining unit.
Now, Mr. Bravo will take it at this point.
THE WITNESS: (Mr. Bravo) Thank you.
On this second point we're going to analyze and develop our conclusion as to why we argue that SMCV was required to pay Mining Royalties with respect to the activities that it carried out at the Primary Sulfides Plant.
And the first thing--and this is very
[Page 2665]
important to bear in mind and to develop and to explain--is that Mining Royalties are not a tax. We agree on this point with the Claimant's Expert.
Here one must explain the relationship of taxes to Mining Royalties. In both cases, one speaks of State revenues. Therefore, we are talking about public finance. State revenues, and this has also been said by Claimant's Expert, may be original revenues when they are obtained from the wealth of the State; in this case, natural resources and exploitation thereof by a third party. And, on the other hand, we have the revenues--the derivative revenues, which are those that the State collects from the wealth of private persons. So, we understand here that these are not taxes, but, rather, original revenues.
The Constitutional Court more than a decade ago resolved a discussion about whether Royalties are or are not a tax, and what they said is that this is a--this is consideration for the usufruct that the mining concession holder obtains from the resources which are State-owned and that are extracted from
[Page 2666]
mining concessions.
Mining Royalties have their own rules. They are similar in many ways to or related to the rules for taxes, but they are not taxes. So, first of all, Law 28258--which is the Mining Royalty Law, the law that creates them, this was modified in a fundamental way in2011, but it continues to be the same law--Supreme Decree 157-2004 Mining Royalty Law Regulations, and another third provision which is very important, Law 28969.
This Law has a series of procedural articles, operational articles, that make it possible to audit or oversee this State Resource. Article 3 specifically of this Law builds a bridge to the Tax Code, and this also has a point of connection with what has been indicated by Claimant's Expert, the context of tax debt.
This Article 3 specifically states what the provisions of the Tax Code are that apply to Royalties, and it notes--and this must also be indicated--that Royalties fall within the concept of tax debt. This is a--is this a legal fiction? Well,
[Page 2667]
I take issue with what has been indicated by the Claimant's Expert, that it's not a legal fiction.
It's a Regulation that is specifically stated in the Mining Legislation.
Very briefly, the definition of "Mining Royalty" is set out at Article 2, but it's important to bear in mind what Article 3 indicates. During the time of the Assessments by SUNAT of Cerro Verde, years 2006to 2011, this was the text that was in force, and basically what it said was that Royalties shall be paid on the value of the concentrate.
So, if what we are talking about is a use of a natural resource, it is true that the act that gives rise to the Royalty is extraction, but it's not just extraction, but also the usufruct that the Concession holder makes of that ore, and that usufruct, that value, that earning or profit, is going to be generated at the moment of sale.
That is why, tying into what Article 3 says, the value of the concentrate, the interpretation up until 2004 was that it was necessary for what to be sold, not to be specifically the unprocessed ore, but,
[Page 2668]
rather, the mineral concentrate or its equivalent, which is what the legislation about Royalties states.
Now, to conclude, Mr. Picón already explained, our Opinion is that Cerro Verde had stability only in respect of the Leaching Plant, not the investment made in the Primary Sulfides Plant--I'm not going to go on with the arguments in this regard; I think you've already heard them--and, therefore, the investment project for the Primary Sulfides Plant, which was never included in the contractual guarantee, in our view, did not have the--was not covered by the Stabilization Regime, and, therefore, Mining Royalties were applicable to the sales of the processed ore, which obviously had the--was the value of the concentrate.
And I will now yield back to Mr. Picón to take up the next point.
THE WITNESS: (Mr. Picón) In the Expert Report, it's indicated--imagine I have to pay the royalty. At least one would not charge interest and they raise--he raises three--we have three arguments in response. I will develop two of them and Mr. Bravo
[Page 2669]
the third one.
The first argument is that, look, Article 33 of the Tax Code says that you have to apply to the inflation if the Tax Tribunal takes time or is delayed in providing its Resolution.
Now, what the Expert fails to analyze is that the Law 28969, which regulates which provisions of the Tax Code are applicable to Royalties, expressly indicates that Article 33 does not apply. That mention has no legal basis. And, to the contrary, Article 7.3 of the Royalties Regulation expressly states you are going to apply an interest as from the moment when you were supposed to pay. This reference to article 33 has no legal basis, contrarily it runs against what is contained in the Regulation on Royalties.
The second argument: He says, well, imagine that one has to pay Royalties. Don't apply interest to me, because the Constitutional Court has already stated in some Judgments that--
(Interruption.)
SPANISH REALTIME STENOGRAPHER: If you could
[Page 2670]
speak a little more slowly, please.
THE WITNESS: (Mr. Picón) Of course.
The second argument is that there are Judgments of the Constitutional Court that indicate that one should suspend the application of interest in tax cases. Is the background that's been cited applicable? Are the Judgments of the Constitutional Court for violation of reasonable terms for the Royalty Cases?
No, first because they are issued only with respect to taxes, and as we clarified a moment ago, Royalties are not a tax.
Second, they are not general judgments. They are judgments for particular situations. And, according to the Constitutional Court itself, they require an analysis of the criteria that are set forth in the overhead: The complexity of the case, procedural conduct of the Company, conduct of the public administration, and consequences of the delay.
Only when one analyzes that on a case-by-case basis can one reach the conclusion of waiving interest in the particular case.
[Page 2671]
It's important to note that among the documents submitted by the Claimant are some videos from a YouTube channel that I handle with--that I run with Mr. Bravo where we touch on interest, and I would just clarify that these videos are made for the general public and in colloquial language and bear no relationship whatsoever to our Expert Reports which address the specific case of Cerro Verde and not generic public statements that have been made for nonspecialists in any event.
And, Mr. Bravo will handle the next topic.
THE WITNESS: (Mr. Bravo) Thank you very much, Jorge.
On this next point, we are going to address a conclusion that I think is crucial for this proceeding, which is the Claimant's allegation that the exemption of Penalties and Interest under Paragraph one of the Article 170 of the Tax Code wasn't applied. Reference is made to this in relation to reasonable doubt. I put that here because of the text of the Article 170 that I'm going to refer to is important. It's relevant.
[Page 2672]
The Claimant and its Expert have indicated that there would be an obligation by the State to apply, or to waive, rather, on its own initiative, Penalties and Interest at the request of one who alleges that there is a vague provision or ambiguous provision.
We need to note that Article 170, section 1 sets forth a power of the State, and it's relevant because we are talking about Interest and Penalties that have accrued, that have arisen, and that, therefore, are part of the expectation in respect of collection of revenue on the part of the State. We're talking about revenues for the public fiscal, and we're talking about a general principle which is the waiver of State--of interest for the State.
Once there is revenue that the State is not collecting, then there needs to be a very good justification for this. It's been indicated throughout this process that the base--the basis for applying this Article 171 is the ambiguity of a provision. And there's a big mistake there, and I'd like to indicate it.
[Page 2673]
In the article--and you have the first paragraph highlighted in yellow--it speaks more of a misinterpretation. Now, this is important, because a misinterpretation is not necessarily going to flow from an ambiguous provision. Here, we are all lawyers except the Interpreters, and the lawyers know perfectly well that we in our day-to-day work life face ambiguous provisions, because the language with which the provisions are drafted is human language, and there may be evident ambiguity. Nonetheless, we don't always get confused when it comes to interpretation.
Now, behind this mechanism or this power of the State there's not just a vague or ambiguous provision. There might be provisions that are excessively convoluted--I'm not going to get into more examples, but basically what one requires is a misinterpretation. That means that one who alleges, one who seeks to have interest waived, is based on an assumption that their interpretation was mistaken; it wasn't the correct one.
If we analyze Article 170, what is actually
[Page 2674]
required for the State to implement this power and not charge Interest and Penalties, well, there needs to be a misinterpretation, first of all; second, there must have been failure to pay by the taxpayer; three, what is required is that the State decide whether to apply the exemption of waiver and to do so through a clarifying provision, a clarifying provision which could be a law.
Obviously, we are talking about State revenue. So, it would have to be a law of the Congress or a provision of similar rank, which we would call a legislative degree in Peruvian law; a Supreme Decree from the Ministry of the Economy and Finance; a SUNAT Resolution, at Superintendency level.
It would have to be that, or, at any rate, an observation by the Tax Tribunal of similar rank.
We reiterate: This is a question of availability of public revenues, and, therefore, there need to be very well-founded reasons for the State to apply this mechanism of waiver, and not simply the interest of a private company.
Now, analyzing some of arguments that are
[Page 2675]
put forward when it comes to this sua sponte application of Article 170, well, the lawyers for Claimant, such as its Expert in Tax Law, argue that this is, indeed, an obligation. They say that it is a right, and, therefore, if one exercises that right--and this is in the Tax Code, and we don't fail to recognize that--automatically the State should waive the corresponding interest and Penalties.
And, for this, they rely on two articles, 127 and 129, which I'm going to try to explain in very summary form.
What Article 127 indicates that the bodies that resolve an administrative dispute have the power--once again, it's not an obligation; it's the power--to review the facts and the law. So, it's not a pure legal review, but it's also a review of the facts. Is that sufficient legal basis for saying that the State, SUNAT, or the Tax Tribunal should sua sponte have applied the mechanisms set out in Article 170? No, it is not.
And then Article 129, which they cite, well, it says that administrative rulings must address all
[Page 2676]
the questions raised by the parties as claims in the case. And they cannot--an administrative body cannot rule on issues that have not been put before it.
In the specific case of Mining Royalties analyzing the Claims and appeals on Royalties, we note the following: That the Claims and Appeals from 2006-2009, well, Cerro Verde has argued that waiver of interest before the Tax Tribunal. What the Tax Tribunal responded was that it is not appropriate at that point to rule on an issue that has not been raised from the outset.
Now, in the 2010-2011 request for reconsiderations, Cerro Verde did raise from the beginning a request that such interest be waived. And what both SUNAT and the Tax Tribunal responded was that, for them, there is no reasonable doubt. Their arguments are set out in the respective Resolutions, and, therefore, they do comply with Article 129.
In conclusion, there is no obligation to exempt one who seeks a waiver of interest or penalties because of the doubt one may have in the interpretation. There is not necessarily an
[Page 2677]
obligation of the State to do so.
And, to conclude, I will give the floor back to my colleague.
ARBITRATOR TAWIL: Let me ask for clarification, please.
THE WITNESS: (Mr. Bravo) Of course.
THE WITNESS: (Mr. Picón) Now, was Cerro Verde under an obligation to maintain separate accounts for its stabilized and nonstabilized investment project in this case?
Our understanding is that the answer is yes.
One of the big arguments raised by the Claimant's Expert was that the State should have given Cerro Verde the rules for being able to exercise such separate accounting, but this makes no sense, because all mining companies--construction companies, education companies; we work with all these types of companies--end up keeping records of their costs based on accounting rules.
Cost accounting has its own accounting rules. Financial accounting has its own accounting rules. The Income Tax provision at Article 33 in the
[Page 2678]
Regulation says that you should pay your taxes based on general accounting principles, and if I at the Tax Tribunal see otherwise, then we'll so indicate, but in principle one should apply accounting standards.
So, in this case the determinative articles for determining the obligation, well, it would be Article 22 of the Regulation, which expressly indicates that, if you make new investments--or Article 25, rather, that have different tax implications, well, Article 25 speaks of investments, not Concessions, not Economic-Administrative Units. It doesn't talk about mining units. It talks about new investments, expansions of investments, and it says you have to have control so that you can be audited by the SUNAT. That's obvious, because the Tax Administration in any country faces more than a million taxpayers, and the premise is that everyone needs to respect the rules in force at that time.
Now, if you tell me that they don't apply to you to keep--maintain these controls for determining obligations based on the tax regime, then you're saying it explains to you--that it pertains to you,
[Page 2679]
and that's what should happen here. Since there could not be in a review of a tax situation, well, they carried out--they abided by these controls.
It's important to point out that when citing the background, the Claimant--and Mr. Hernández mentioned this a moment ago. He spoke of three companies. Well, if you review these rulings, you see that the Tax Administration never had a different criterion, and we can easily determine this, but we don't really have enough time. And so, we will leave that to any questions we have on the subject matter.
And Mr. Bravo will take up the next point.
THE WITNESS: (Mr. Bravo) Very well.
Mindful of the time, which we understand is quickly running out, I'm going to get into our conclusions with regard to taxes, no Royalties.
We obviously conclude, and based on our conclusions, that all the Assessments made by SUNAT of the activities carried out with the Primary Sulfides Plant, which was not stabilized, were correct. That is basically it.
And I'd like to conclude my presentation on
[Page 2680]
the analysis made in this proceeding of the supposed or alleged nonexistence of an obligation to payment until such time as the administrative stage for tax matters culminates.
It's been said here, and repeatedly, that the debtor only has an obligation once the proceeding before the Tax Tribunal concludes, obviously against its interests, and actually that's not correct, and I'm going to explain it.
The graph that you have up on the screen summarizes very briefly where a tax obligation arises and how it is that it becomes effective and enforceable.
The first thing we need to realize is that, for there to be a tax obligation, there needs to be a triggering event. The triggering event in respect to both Royalties and tax obligations is the law. The law sets what is levied--subject to levies and what is not.
And once the triggering event occurs, the tax obligation arises, the taxpayer or the administration has the obligation to determine the tax
[Page 2681]
or Royalties, as the case may be. If the taxpayer doesn't make the determination, it's the Tax Administration that must do so or that may do so.
The determining act by the Tax Authority, well, which it does after an audit, which is to provide guarantees, well, if it determines that there's a debt, if it determines that there's an obligation that wasn't paid, then it indicates that the obligation exists, and not only that, not only does it determine the existence of something that has been omitted, but, rather, it quantifies the obligation, turns it liquid, and it--which makes it due on the taxpayer.
And, not only that, but from that moment it begins to generate the effects particular to an administrative Act, that efficacy that the determination Act has in the Peruvian case is suspended for 20 days, which is the time frame indicated in the Tax Code for the taxpayer to be able to make use of the right to defense, to decide whether or not to file a request for reconsideration.
Now, if the taxpayer who's been notified
[Page 2682]
with an Assessment Resolution decides not to challenge the act of assessment, then it gives rise to an obligation that is enforced coercively. There is no major discussion a relevant issue in that scenario.
Now, let us look at the possibility of the taxpayer challenging the determination Act at both levels.
So, first does the obligation exist? Yes, it exists. Is there an obligation in which the debtor has the legal duty of performance. Here, we the lawyers perfectly know what that is, the legal duty of performance, i.e. the content of the obligation, and on the side of the creditor, what exists? a right to require performance. That right to require performance, which is called " exigibilidad" in Peruvian law, is suspended.
That right is suspended, but what that does not mean is that there is no obligation, nor that there's no legal duty of performance. What does this mean? Well, if during the request for reconsideration and appeal stage, the debtor of the Royalty or taxes opts not to pay, it's not that they don't have an
[Page 2683]
obligation not to pay, but, rather, they are deciding to fail to comply, and that failure to comply creates damage for the State which is compensated you know how? With the statutory interest.
The Expert for the Claimant--and we fully agree on this point--has indicated that the legal nature of statutory interest is a compensatory nature. Why? Because there's a default, and what is that default? It is the failure to pay the tax obligation in the time frame indicated. If it were true that there's no payment obligation until it is subject to coercive enforcement, then how could statutory interest in respect of that event arise?
So, here, what we're indicating is that one must draw a distinction between the existing obligation and the exigibilidad, which is different.
I know that I'm running short on time, and basically what I want to indicate is that from our standpoint as Tax Experts, we're not Damages Experts and we don't claim to be so, if there is some harm, that which can be gauged through the statutory interest, which may--compensates for harm, has arisen
[Page 2684]
from the moment of determination act.
And as Tax Law Experts--and Mr. Hernández knows this perfectly well as well, a company doesn't recognize harm in its Financial Statements, only when they are coercively forced to pay. All attorneys, even those of us who are not Tax Law Experts, and to whom represent clients in proceedings, know perfectly well that there are contingencies, there are degrees of contingency, and those contingencies must be reflected by a company depending of, the IAS 37 points it out, I'm talking about the International Accounting Standards, if it's remote, likely, or possible. If there is a probability of greater than 50 percent that the case will not turn out favorably, however good we consider our arguments to be, there is an obligation to recognize a contingent liability in the Company's books, and to not wait for there to be coercive collection.
And with that, I conclude. I beg your indulgence, Madam President, if I've gone on so long. This is now Tax Measures--it's been said with respect to Tax Measures that there's no concept, it's--such
[Page 2685]
concept in Peruvian law. There isn't. But that doesn't mean that we cannot interpret what a "Tax Measure" is?
Well, I disagree with that. I disagree with the other Party's Expert. Measure is an action, is a decision by the Government. Decisions by the Government don't tax matters.
Well, how are they shown regularly? By a--regulations, procedures, rules. These are Acts of power. The Government decides on tax matters, whether it's going to create taxes, apply interests, waive interests, apply penalties, et cetera.
Why is it that we need to reduce the concept of tax to the tax itself? That resists no analysis. I'm not saying, and I've never said that Statutory Interest or Penalties are taxes. That's not acceptable. What is the nature of the statutory interest? Evidently, they are compensatory element that the State applies due to the not compliance of the tax obligation. Is part of the tax regulations? Yes, of course. Tax regulations and the Tax Code is one of them, the Tax Code in particular, do not create
[Page 2686]
any kind of a tax. Is the Tax Code not a tax rule, not a tax measure? We have to think about this.
From our standpoint, the breach--and I will finish with this, I'm not an Expert in Damages--but I would think that with the exhibition of the opinion that the State would have, the alleged harm, I insist, in considering that the Concentrator was not guaranteed, that would mean that there was, hypothetically, a breach.
Thank you for your attention.
PRESIDENT HANEFELD: Thank you very much to the two of you. We would like to proceed as we did with the Claimant's Expert and ask some initial questions, and then the Parties will enter into their set of questions.
PRESIDENT HANEFELD: And I start, and I know you will not be surprised by my questions, they are very similar to the ones I had for Mr. Hernández. So, my first question relates to the question whether the Penalties and Interest constitute Taxation Measures.
And just to better understand, if one takes
[Page 2687]
the position--and this is undisputed. You just confirmed it--that Royalties are not taxes, one could arguably think, okay, Penalties and Interest, which are also a civil law, whatever, in our concept, are separate, and like an Annex only to this nontax. So, there can be no Taxation Measures if one imposes Penalties and Interest. And I understand you saying, oh, no. They are, nevertheless, taxation measures.
Do I understand correctly that you base this on Article 3 of the Mining Royalty Law? Because you say--and now on your last slide, this is the term "Tax Measures refers to decisions of the State that may hand it down through its legal or regulatory provisions," and Article 3 of the Royalty Law exactly constitutes such legal provisions?
THE WITNESS: (Mr. Bravo) Yes, Madam President, indeed. What we said is that one must not confuse a "tax" with Taxation Measures. There's something that needs to be clear, first and foremost. Royalties, in principle, are not taxes. That's true. They're not taxes.
Does that mean that there are no tax
[Page 2688]
regulations that govern certain aspects of Royalties?
No, because they exist. And you made mention of them.
Article 3 of that Law indicates, expressly, what the tax rules of the Tax Code are that are applicable to the Royalties, and that transforms the Royalties in taxes. Of course not. But there are certain tax rules that apply to Royalties, and that is the explanation.
ARBITRATOR TAWIL: Let me see if I understand you correctly. You say that there are tax rules, and you're saying that Royalties are not taxes.
Those tax provisions turn Penalties and Interest into Taxes?
THE WITNESS: (Mr. Bravo) No, we're not saying that at all.
ARBITRATOR TAWIL: Okay. So, they are not taxes either?
THE WITNESS: (Mr. Bravo) No, they're not.
PRESIDENT HANEFELD: They are not taxation measures; right?
THE WITNESS: (Mr. Bravo) Please repeat your question. Repeat your question. I think that there
[Page 2689]
was an issue with the translation.
PRESIDENT HANEFELD: My apologies. Now, I think you said they are not taxes, the Penalties and Interest, but, nevertheless, they qualify as Taxation Measures. Is my understanding correct?
THE WITNESS: (Mr. Bravo) Yes, you understood that correctly. That is what I was saying. Although they are not taxes, taxes may not exist by themselves. They need, for example, procedural rules, a penalty regime. They need also other kinds of rules so that the tax may be complied with. And formalities may comply with. And they had that nature as taxation norms.
ARBITRATOR TAWIL: I don't think that this is clear. We have to clarify this. What you are saying is that they need a penalty-imposing regime and regulatory norms, but this does not change the nature of the Penalty. They're not taxes.
Some tax regulations may be applied in the periphery, as to how something is calculated. But the nature is not changed. They are not taxes?
THE WITNESS: (Mr. Bravo) No. They're not
[Page 2690]
taxes, because, fundamentally, they are trying to bring compensation for a breach but, we're not saying that they are taxes.
ARBITRATOR TAWIL: Okay. They are accessories. If Royalties are not taxes, penalties neither could be taxes.
THE WITNESS: (Mr. Bravo) Yes. In the case of Income Tax, it is not. So, that is not the discussion. It is clear to us that there are provisions that regulate "the periphery," so the periphery of the tax phenomenon, with the existence of the Income Tax and Value-Added Tax Law, well, then a tax regime wouldn't really be possible.
PRESIDENT HANEFELD: My second question relates to Article 170. You explained that in your view, Article 170 of the Tax Code does not only require an existence of an ambiguous rule, but much more, so you do not consider it applicable in this case. But let us also ask to the hypothetical that we already posed to Mr. Hernández.
So, just going on the purely hypothetical assumption that the Tribunal would get to the
[Page 2691]
conclusion that the Concentrator was not stabilized and so--and now a payment of Royalties were due, on this purely hypothetical assumption, would a waiver of Penalties and Interest be even an option under the Peruvian Tax Code, or would such misinterpretations or reasonable doubts in that become obsolete by this Decision?
THE WITNESS: (Mr. Bravo) So, the first element would be complied with--that is to say, that a conclusion was reached, that the interpretation that the Company had was erroneous. It was an erroneous interpretation. The first element is met.
The second element would be, did the taxpayer pay the debt? If it did so, then the Government cannot really get what has been paid already-or condone it. If these are debts that were not paid because of whatever circumstance, then we would have a third level of analysis, the State's decision.
The Peruvian State would assess the situation, and it would have to decide whether there is room for failing to collect Penalties and Interest
[Page 2692]
from this Company. The law does not state this, but evidently, it has to go through a matter related to provide support for the grounds of the State's decision. The State cannot issue through a law, a benefit addressed to a single company. It would have been necessary to have an abstract group of people that have misunderstood the law. This is quite important since we are talking about disposing of the funds of the State. When a State authority decides through a resolution or law not to collect something that had accrued in favor of the State, then it's going to have to justify to the State oversight agencies, why is it that a collection was not made? So, you have to have good justification for your actions, and I think that Claimant's Expert understands this the same way as we understand it.
These are very specific situations. It's not like the taxpayers are able to get this effect at all times. Sometimes the Decision is automatic. There is no need to ask for anything else.
ARBITRATOR TAWIL: In connection with Article 170, what you are saying is that Penalties and
[Page 2693]
Interest do not proceed here.
Is this the only case? Only if these requirements are met, then the Penalties and Interest are not going to be applied? Has there been no other case in Perú in connection with the application of Interest and Penalties if it doesn't meet these assumptions?
THE WITNESS: There are some cases in which the case law has indicated that there is a waiver of these interests when there is an act of God or force majeure. This is not the case. It's just an example, a pandemic situation.
ARBITRATOR TAWIL: So, these are not the only cases. These are the ones regulated, regulated by Article 170.
THE WITNESS: (Mr. Bravo) Yes, that's right.
ARBITRATOR TAWIL: But there could be other cases.
THE WITNESS: (Mr. Bravo) Yes.
ARBITRATOR TAWIL: Act of God or force majeure, for example.
THE WITNESS: (Mr. Bravo) Yes, for example.
[Page 2694]
PRESIDENT HANEFELD: Now let me come to the last set of questions which concerns this double accounting. On Slide--let me see which slide this is--Slide 24 of your presentation, you said there are precedents in Perú mining companies that keep independent accounts for the different tax regimes they apply to investment projects, and here you refer to the example of Tintaya.
We earlier heard today that there seems to have been also an example for Southern Perú. So, please explain in more detail what are these examples that you refer to?
THE WITNESS: (Mr. Picón) Of course. The idea of oversight helps us determine the tax regime to be applied. Stability agreements create an atypical situation. Taxpayers are governed by a single law, but there are certain taxpayers that have signed stability agreements, and they have a number of tax regimes that they need to apply; for example, they have different Income Tax rates and other tax rates for other taxes.
So, the law says you have to separate the
[Page 2695]
accounting out, because how I at SUNAT will know what to apply to each stability agreement? Article 25 of the Regulations of the Mining Law, Title Nine, specifically indicates that, when new investments are made that are subject to a tax regime that is different, the taxpayer must keep the accounts, so it can explain to SUNAT why is it that it is paying taxes differently in connection with one project versus another project.
Mr. Hernández said that it is not keeping of accounts, but for those controls to take place, they have to be accounting controls in nature.
So, in the case of Southern, what we have is, in a single administrative unit, you can have two projects with different tax regimes applied to each of them. If that's the case, the Company is going to have separate accounts. And he asks himself: How can this be done? Well, cost accounting is very simple, and the Experts on the matter have indicated this. Cost accounting identifies indirect costs, direct costs, and shared costs that should be assigned. That's basically what you do to separate things out.
[Page 2696]
So, identifying direct costs and indirect costs in each Project will need additional oversight.
But is it possible to separate these things out? Yes.
Were they obligated to do that? Well, if there were two different tax regimes applied to them, yes, of course they were obligated to do it.
Again, the Tax Administration is always going to start from the premise that the general rule applies, and the taxpayer is the one who is going to have to say, "Okay, no. This is governed by Agreement A, this by Agreement B, and this is the manner in which things are determined."
In none of the cases that we cited has there been Regulation, because we're talking about accounting rules. If SUNAT disagrees with the application of the accounting rule, that's going to be the matter of a different dispute. But the possibility of separating out accounts, well, that is ruled--that is governed by accounting rules, general accounting rules.
PRESIDENT HANEFELD: But Claimant made the argument that SUNAT should have divided somehow, then,
[Page 2697]
between leaching and Concentrator. And so, is it then on SUNAT to apply some sort of a split to the best of its estimate, or is there no legal basis for this and this does not happen in practice?
THE WITNESS: (Mr. Picón) Both in practice and in the Regulation of the Agreements, if a company has a number of tax regimes--and, in this case, the Agreements allow for this--the Company is obligated to show why is it that it's not applying the general regime.
So, SUNAT is going to say: "How have you calculated Project A, B, or C?" And SUNAT is going to say: "I'm going review this." Of course the Tax Authorities are not going to do the accounting for the Company. They are only going to put forth a request. And this happens every day in the tax fields.
We, our practice is, we normally work against the Tax Administration--more of 95 percent of what we do has to do with cases against the Authority in connection with cases where they say: "Okay, well, provide support about the deductions of this expense."
"Ok, look, I have brought papers and additional
[Page 2698]
support" "You didn't do it in a compelling way so I will not recognize it." And this applies to all tax obligations.
So, tax obligations start from the premise that the taxpayer must show the Tax Authorities the reasons why it's doing A or B. If it doesn't do so, the Tax Authority of Perú or for any other country is going to say, "Okay, look, I asked you the question. You either didn't really provide support for this, or the support you provided did not convince me, and that is why I am applying this tax effect to you."
PRESIDENT HANEFELD: Thank you. This concludes my questions.
Dr. Cremades, do you have questions?
ARBITRATOR CREMADES: I simply would like to ask a question in connection with this concept of reasonable doubt, ambiguous provisions. You also talk about Franciscan rules. I never heard that expression before; "Franciscan rules," you said. That's something that I never heard before.
In this specific case, Articles 82 and 83 of the Law and 22 of the Regulations allow for Claimant
[Page 2699]
to have a reasonable doubt, or is it simply that they didn't want to comply and then, as they breached they said, "Okay, well, I'm going to try to defend myself if something comes against me before the Tax Tribunal"?
Was there a reasonable doubt or not in this case?
THE WITNESS: (Mr. Bravo) I think that the law was interpreted in the wrong manner. So, 170.1 talks about a wrongful interpretation, an erroneous interpretation.
In lawyer parlance, I spoke about Franciscan rules that means very brief wording, in this specific case that we're talking about, the tax lawyers talk about "reasonable doubt," because we're saying that the interpretation of the provision was erroneous.
On the basis of these explanations, I think that the interpretation by Cerro Verde was erroneous. And that is why they try to say that the State has to waive interest, and also Penalties.
THE WITNESS: (Mr. Picón) And I would like to supplement the answer.
[Page 2700]
In the private activity we do, we look at different operations, financial institutions, and right now we have a case pending for hundreds of millions of dollars, and the Tax Authority, we believe that there should be a waiver, the audit companies believes that should be a waiver, the company believes that should be a waiver, but it seems that SUNAT considers that no waiver is applicable, and SUNAT is asking for information. And we have told the Company, "Okay, you can believe whatever you want to believe, but you need to support everything," because the tax law is quite rigid. The article 141 of the Tax Code states: "If you do not provide the evidence when I required it, then you cannot do it later, unless you pay the tax debt first." And the taxpayers know that that that's the rule.
We are convinced that we should really pay no taxes. In this case, it is clear that the Tax Administration thinks the opposite.
So, should I not submit anything and go to the Tribunal? No, no, no, of course not. So, we tell our clients, "Submit all the supporting documentation
[Page 2701]
and everything can then be analyzed by the Tribunal to be able to put up a good fight," because if I do not submit documents during the audit, later on I cannot submit them.
And the article 141 of the Tax Code is a very strict rule, and all of the Tax Code in Latin America have--and in other countries as well--have rules like that.
ARBITRATOR CREMADES: Okay. I'm sure that the Franciscan order wouldn't want to be included in this discussion.
ARBITRATOR TAWIL: How would you respond to the arguments in connection with the 2014 and 2019 reforms? If things were so clear, why was there a reform?
THE WITNESS: (Mr. Bravo) When you're talking about the reforms, are you talking about the reforms in connection with Royalties and tax regime created under the Humala Administration?
ARBITRATOR TAWIL: Yes, I'm talking about the Mining Law, Article 83(b), and then Article 22 of the Regulations.
[Page 2702]
THE WITNESS: (Mr. Bravo) Okay. So, you're talking about the amendment of the Single Unified Text and the Regulations. Okay.
What we have indicated in our Report is that these are rules that broaden the scope of the tax regime. It's not that these regulations, you know, specify something or provide restrictions.
Effectively, there you have a different opinion.
I think Jorge wants to say something.
That's his issue.
THE WITNESS: (Mr. Picón) Working in the tax administration, I have worked for over six years in connection with the preparation of tax rules for Income Tax, Tax Code, value added tax, et cetera.
I frequently have this kind of discussion: "We need to include something in the legal provisions since taxpayers are acting in this particular way."
So, the fact that, you know, I have issued a rule in '98 or '99, does that change things before? No. I have to interpret the rules at that time. So, why do I do that? Well, because I don't want any more problems, because I know that there are a couple of
[Page 2703]
taxpayers that think the opposite and I would like to avoid problems in the future.
ARBITRATOR TAWIL: Well, if things are so clear why the change? What we are discussing here is whether things were clear. You're saying, okay, if you didn't want problems, the problems existed because things were not clear. If things were clear, you didn't really need any kind of change.
We're not saying if this is correct or incorrect. We're talking about if this is clear or not.
THE WITNESS: (Mr. Picón) One of the provisions that was cited by the Claimant has to do with: Since when is it that the SUNAT Reports are binding? And it was said 2012 as stated in the Tax Code. False, the Tax Code may have indicated that in that moment in time but there are rules in the 1990s that said that there was a hierarchy. There are more than 100 Reports that were signed by me as well, but the hierarchy was mandatory.
(Overlapping interpretation and speakers.)
(Interruption.)
[Page 2704]
THE WITNESS: (Mr. Picón) The fact that, in 2012, the binding nature of SUNAT's Report was incorporated, did that mean that they were binding?
No. They were binding since 1990.
ARBITRATOR TAWIL: No. We are talking about something else, sir.
THE WITNESS: (Mr. Picón) The same applies to taxes. Oftentimes, when you have legislation, you do not think about the five taxpayers in the past, but the thousands of taxpayers in the future.
So, you would want to have a rule that's crystal-clear, but that does not mean that there is a reasonable amount.
ARBITRATOR TAWIL: But if you need crystal-clear situations, it means that in the past it wasn't crystal-clear.
THE WITNESS: (Mr. Picón) Well, when clarifying a language, there's a difference between crystal-clear and the concept of reasonable doubt according to the Tax Code. We could have doubts in many cases.
Again, the tax regulations are specific in
[Page 2705]
nature because they apply to millions of situations.
It is impossible for a provision to regulate everything that happens in the economy and every single event that the taxpayer does, but of course there are effects; right?
So, you need to adjust the provision. And those adjustments cannot be chalked up to the fact that the other rule was vague. Simply, the legal provision must be clarified taking in consideration future situations. You must think about the hundreds or thousands of cases you're going to have in the future without setting a precedent saying, well, whatever happened in the past was wrong.
PRESIDENT HANEFELD: No further questions from the Tribunal for this moment.
So, it seems to be a perfect time for a lunch break, and we will see us back at 1:30.
(Luncheon recess at 12:59 until 1:30 p.m.)
PRESIDENT HANEFELD: Are we ready to continue? Yes? Claimant and Respondent?
[Page 2706]
MS. SINISTERRA: I think people might be trickling in, but we are happy to start, Madam President.
PRESIDENT HANEFELD: Okay. Then we hand over to the Claimant for cross-examination.
MS. SINISTERRA: Thank you, Madam President. I'm going to turn to Spanish.
BY MS. SINISTERRA:
Q. Good afternoon, Mr. Bravo, Mr. Picón.
I don't know if you recall me. My name is Laura Sinisterra, and I represent Claimant in this case. I will be asking you some questions.
Just to remind you of two very important rules: First, today is the last day for cross-examination. We don't have much time. I apologize ahead of time, but if you don't answer briefly and precisely I need to interrupt you because, simply, we do not have the time. Your attorneys will have the time to ask you additional questions. So, if you want more context, more details, you are in the hands of your attorneys, but I need to be quite strict
[Page 2707]
and have brief answers.
The other rule that I ask you to remember is that only one can answer each question. When the Tribunal asks you questions, both of you answered; you supplemented the answer. Those were the questions by Tribunal, but the rules say that when I'm asking you questions, it is one person, the one who responds.
Okay?
A. (Mr. Picón) Agreed.
Q. Do you have your folders?
MS. HIKAWA: Sorry, just to clarify, if they do want to add to one's response, they can request leave from the Tribunal.
MS. SINISTERRA: Correct.
BY MS. SINISTERRA:
Q. We are going to start with an extremely basic question. I asked you this question during the Hearing of Sumitomo in February.
Your presentation, the one you gave us today, says--
PRESIDENT HANEFELD: My apologies, I will be ready in a second.
[Page 2708]
(Comments off microphone.)
MS. SINISTERRA: No need to apologize. We apologize for the large binders.
PRESIDENT HANEFELD: Sorry. Please go ahead.
MS. SINISTERRA: Thank you, Madam President.
BY MS. SINISTERRA:
Q. In your presentation today, you introduced yourselves as Experts on Tax Law. Your Reports, as we can see, the cover page also says "Experts in Tax Law."
But you also have several sections in which you analyze the General Mining Law and also opine on the scope of a Stability Contract in the mining sector.
Are you Experts on Mining Law?
A. (Mr. Picón) We are not Experts in Mining Law.
Q. But, in spite of that, you have two sections in your Reports opining exclusively on the scope of a Mining Stability Contract?
A. (Mr. Picón) As we said in the previous
[Page 2709]
session, we are Experts on the application of the Tax Law, and often cases we have seen legal stability cases, tax stability cases, and hydrocarbon stability cases.
Q. And mining, too?
A. (Mr. Picón) Well those are the second category. Tax stability is for mining.
Q. So, it is valid to ask you about mining--tax Mining Law; correct?
A. (Mr. Picón) We are not specialists in Mining Law, but I imagine you can ask the questions.
Q. I just wanted to clarify for the record that you are not specialists in Mining Tax law and this is clear now.
Second question. I don't know if you recall, but in February I explained to you that the date when the regime was stabilized--that is to say, the tax regime applied--is relevant. It is important because it determines the provisions that apply based on your stabilized regime.
Do you recall that discussion?
A. (Mr. Picón) Yes.
[Page 2710]
Q. In February--and here we have the Transcript--it was clear that there was a small confusion, and you contradicted yourselves, and finally it seems that you said the date, the relevant date to determine when that stabilized regime was fixed, is the date of the Contract. And that is what you say in your Reports, but at that Hearing I showed you that 9.5 of the Contract, the General Mining Law, Article 85, and also the Regulations, state the opposite.
They state that the relevant date to determine the regime that was stabilized under the Agreement is the date of approval of the Feasibility Study of 1996, and then in February you said that, indeed, that was the case. It is black and white in the Agreement.
My question is: Why is it that you didn't correct that in this Report? Why don't you tell the Tribunal: "You know what? I need to introduce a correction, because my Reports say that the relevant date and the date that I considered is the date of the Agreement, but the Agreement itself and the Law state
[Page 2711]
that the relevant date is the date of approval of the Feasibility Study"?
Did you consider that there were mistakes that were not important to correct, or why is it that you did not correct your Report considering that in February we established that there was a mistake?
A. (Mr. Picón) I think that you're misinterpreting what you are saying, because our Reports at 12 and 21 indicate the date for stability.
Indeed, given the mechanics, our system in which we work, there was a problem, a communication problem, but the Reports are quite clear.
Just to clarify, there are three relevant dates.
Q. My question was very clear. So, you consider that there is no mistake in your Reports.
For example, at Paragraph 196, it says: "At the date of the signing of the Agreement, February 1998, the provision to be applied was, for example, IGV of Decree 775, and then this was the legal provision stabilized."
We're not going to discuss this--we can all
[Page 2712]
watch the video, read the Transcript--but at that Hearing, you recognized that maybe there was a clarification we needed.
So, you thought it was not important to make that clarification here?
A. (Mr. Picón) As I mentioned before, at 2 and 21 we state the date of the Feasibility Study.
Q. Yes, but there are other paragraphs that state the opposite, and you are not correcting those paragraphs.
Let me help you. And we are going to look at this on the screen.
You reviewed your Reports, and did you make sure that there are no other mistakes that need to be corrected?
A. (Mr. Picón) Is that a generic question, or are you speaking about something in particular?
Q. In my opinion, there is a clear mistake. In the February hearing you recognized that.
So, I want to know: Did you review your Reports and are you certain that there are no other mistakes?
[Page 2713]
Did you review and are you certain that there are no other mistakes? Yes or no.
A. (Mr. Picón) The mistakes you found were corrected in the Second Report, such as the IGV provision.
Q. So did you correct all of the mistakes?
A. (Mr. Picón) Yes, before the Hearing.
Q. Let us talk again about the Hearing.
During the Hearing, I asked you about the Feasibility Study. You told me--and here I am citing what you said--that "the detail of the Feasibility Study was not relevant," "the detail of the Feasibility Study was not relevant for the conclusions you reached."
A. (Mr. Picón) Would you please show me?
Q. Yes. This is at Tab 3. This is my question to you.
A. (Mr. Picón) What page?
Q. 2554 in Spanish; Tab 3, Page 2554, Line 20.
A. (Mr. Picón) Here it says in the tab--but the question is very easy.
Q. Yes, I will be reading this to you.
[Page 2714]
I asked you: "Do you assert that the scope of the Contract is defined by the Feasibility Study"?
And then my question is: "Did you review the Feasibility Study to define the scope? Yes or no."
And this was your answer: "We reviewed all the information that we had been given, including the Feasibility Study, but"--and my question is going to be about this part of the answer--"but the detail of the Study was not relevant to our conclusions."
Do you see that?
A. (Mr. Picón) Yes.
Q. Do you maintain that, that the Study, the Study was not relevant?
A. (Mr. Picón) The Feasibility Study has 223 pages, and the last 73 pages include graphs and pictures, and we are talking about the study in detail, we were referring to a large amount of information that was not going to change our opinion.
Q. What parts, then, were relevant to you? What did you review to share your opinion about the scope of the Stability Contract?
A. (Mr. Picón) The Feasibility Study was
[Page 2715]
reviewed completely--
Q. My question is specific. What portion--
(Overlapping interpretation and speakers.)
SPANISH REALTIME STENOGRAPHER: You need to space and you need to slow down.
BY MS. SINISTERRA:
Q. I understand that your position is that not everything is relevant in the graphs. I understand all of that, but what portion did you think was relevant? What part of that Feasibility Study was reviewed to reach the conclusions in your Report in connection with the scope of the Agreement to make sure that the Concentrator was not covered?
What is it that you reviewed?
A. (Mr. Picón) My colleague Mr. Bravo will answer that part.
A. (Mr. Bravo) Thank you.
The portion that we reviewed is not technical, an engineering part that, as lawyers, we do not understand. But, all in all, we saw the purpose of the Investment Plan, what is it that was presented for approval as an Investment Plan, and what is it
[Page 2716]
that the General Mining Office or General Mining Directorate later on approves?
This is what we were referring to when Mr. Picón indicates that it was not relevant to determine the detail, he is referring to the technical portion, not the object of the plan.
This is what I wanted to say.
Q. The technical portion may be important. So, my colleague is sharing with you the Feasibility Study. You are saying that you read it. You are citing this in your Report. You are saying that it is important.
Would you tell me what is it that you reviewed and what you think is relevant to reach your conclusions?
I just what to know what portion. You don't need to describe it or sum it up.
What portion?
A. (Mr. Bravo) To begin with, 1.1; 1.2; the Executive Summary is something that we reviewed; 2.1, 2.2; 2.3.
Q. How can you be certain that this Feasibility
[Page 2717]
1 Study does not refer to the Concentrator or nothing
2 related to the Concentrator, if you just reviewed the
3 Executive Summary, some pages, you don't seem to be
4 familiar with this document, or in detail as you
5 mentioned?
6 A. (Mr. Bravo) Well, this is a
7 cross-examination. We don't have much time. We are
8 giving a document that we did review. It is long.
9 Yes, we did review. We did review. Some
10 issues we do not understand--they are of a technical
11 nature--but, clearly, with the review of the document,
12 the plan proposed to be approved is the one that does
13 not include the Concentrator, but only the leaching.
14 Q. Let us explore what you just said, that, at
15 any rate, I think you said it is evident or it is
16 clear that it was for the Leaching Project, rather
17 than the Concentrator. That is what you told us.
18 You are saying something similar in your
19 Report when you're analyzing the scope, and you
20 conclude that it did not cover the Concentrator, but
21 let me tell you that I read every detail extremely
22 carefully, both of your Reports from beginning to end,
[Page 2718]
1 and honestly, it is not completely clear what your
2 position is. It is not clear what your specific
3 position is as Experts regarding the scope of
4 Stability Agreement under the General Mining Law and
5 the Regulations.
6 So, let me ask you something very specific.
7 I will be facilitating this for you. I thought that
8 you were saying one of four things upon reading your
9 Reports, and I am going to read to you. I think we
10 gave you English and Spanish. These are the four
11 potential positions that I think would be viable from
12 your Report.
13 MS. HIKAWA: I'm sorry, this also doesn't
14 have any citations. Could you tell us the paragraph
15 numbers and the Report numbers, where you got this?
16 MS. SINISTERRA: One second. I will
17 specifically point them to the specific sort of
18 paragraphs in the Reports, but here I'm not citing to
19 the Reports. I'm just asking generally what's their
20 position.
21 MS. HIKAWA: What is the source of this
22 information on the slide?
[Page 2719]
1 MS. SINISTERRA: Well, it's mostly based on
2 Paragraph 35 of the Report, but I'm not asking them
3 about the Report specifically. I'm asking a general
4 question. I just want to know what their
5 understanding generally is about the Mining Law.
6 MS. HIKAWA: So, this slide is not from
7 their Reports?
8 MS. SINISTERRA: No.
9 MS. HIKAWA: Okay.
10 BY MS. SINISTERRA:
11 Q. So, Mr. Bravo and Mr. Picon, again to
12 understand. You are here appearing as Experts. You
13 have shared your Opinion as Experts, Mining Tax
14 Experts, on the scope of the Stability Agreement, and
15 you're saying that it did not cover the Concentrator.
16 And I said your opinion is not clear. And I
17 would like to understand it, because you are the
18 Experts that Perú called for on this issue. I would
19 like to know, based on your Expert Opinion, what your
20 position is, given the General Mining Law and the
21 scope of a stability agreement.
22 I would like to ask you about four
[Page 2720]
1 possibilities.
2 Possibility 1: Stability agreements under
3 the General Mining Law only cover the specific amount
4 in the Investment Program included in the Feasibility
5 Study--that is, the amount of the Investment Program.
6 That is possibility Number 1.
7 Possibility 2: Stability agreements also
8 cover not only the amount in the program, but any
9 replacement of the assets listed in the Investment
10 Program. That includes the replacement of the assets
11 listed in the Investment Program.
12 Possibility 3: Stability agreements under
13 the General Mining Law cover all of the investments
14 related to the investment project included in the
15 Feasibility Study.
16 Or, possibility 4: What investments are
17 covered by stability agreement depending on various
18 factors must be decided on a case-by-case basis.
19 And so, as Experts, which of those four is
20 your position, or is there a fifth one? And, in that
21 case, which one is it?
22 MS. HIKAWA: I would just like to clarify,
[Page 2721]
1 you keep referring to them as Experts in Mining Law
2 and they clarified they're not specialists in this.
3 So, they can give you their view from a Tax Expert
4 perspective.
5 MS. SINISTERRA: Two entire sections of the
6 Report are about the scope of stability agreements,
7 and they interpret the Mining Law. So, I'm happy--
8 MS. HIKAWA: From the perspective of Tax
9 Experts, yes.
10 MS. SINISTERRA: Fine. From the perspective
11 of Tax Experts. They are the Experts you have
12 presented in this case on the scope of the Stability
13 Agreement.
14 THE WITNESS: (Mr. Picón) Are you going to
15 show us where this is cited in our Reports?
16 BY MS. SINISTERRA:
17 Q. I am not saying this cited. I just want to
18 understand your opinion in general terms.
19 Your opinion as an Expert is that the scope of the
20 Contract -- I mean under the General Mining Law, what
21 is the right position? What is it that the stability
22 agreements cover and do not cover? Is your Opinion
[Page 2722]
1 Position 1, 2, 3, or 4?
2 A. (Mr. Picón) Our position is that this was
3 included in the Stability Contract--that is to say,
4 the investment made--and that it is described as part
5 of the Stability Contract or Agreement.
6 As we said, this is a "contrato-ley"--that
7 is, whatever the Contract says is to be applied.
8 Q. Yes. But what does it mean in practice? I
9 saw that in the Report. Are you describing
10 Positions 1 or 3?
11 A. Let me read what you are saying to be able
12 to answer.
13 Here you are saying that the Contract only
14 covers the specific amount in the investment, but then
15 it says, in 3, all investments related to the
16 investment project included in the Feasibility Study.
17 Q. Because--what is the difference, in your
18 Opinion? Because one has to do with the specific
19 amount and the other one with the concepts.
20 (Overlapping interpretation and speakers.)
21 (Interruption.)
22 (Stenographer clarification.)
[Page 2723]
1 MS. SINISTERRA: I thought it was a simple
2 question.
3 (Overlapping interpretation and speakers.)
4 (Stenographer clarification.)
5 BY MS. SINISTERRA:
6 Q. A mining company presents an Investment Plan
7 for $100 million, and that it is the amount in the
8 Investment Plan and, according to the General Mining
9 Law and according to your understanding, that Contract
10 would only cover those 100 million? That is position
11 1. The position 2 is the 100 million, but if that
12 Investment Program included many assets-and those
13 assets, for example, are replaced, or there is a new
14 technology and a better asset was bought but it is a
15 replacement, an improvement of the assets listed under
16 the Investment Program, is that covered?, Or, if new
17 investments are made, but they are linked to the
18 investment project. Let's say, in the case of Cerro
19 Verde, Cerro Verde makes new investments, but they are
20 related to the leaching project, are they covered, or,
21 once again, we need to analyze these on a case-by-case
22 basis, because there are several factors to consider?
[Page 2724]
1 A. (Mr. Picón) When we indicate the Position 4,
2 that you state here, that we need to analyze case by
3 case, we need to analyze the contents of the
4 Agreement. So, in a hypothetical case as the one you
5 are saying--
6 Q. Well, let's bring it back to Cerro Verde.
7 In the case of Cerro Verde, you said that
8 you read the Contract and that you read the
9 Feasibility Study.
10 In the case of Cerro Verde, which of these
11 four positions is the one that you are presenting the
12 Tribunal? Which one is the right one?
13 A. (Mr. Picón) The Contract is referring to the
14 leaching process--Project.
15 Q. Yes, and you say that in the Report, but I
16 want to know what it means in practice.
17 The "Leaching Project" includes new
18 investments related to the leaching project? Or does
19 it only include 237 million, as reflected in the
20 Investment Program?
21 What is your Opinion?
22 A. (Mr. Picón) In principle, and strictly, as
[Page 2725]
1 we said before, the method to interpret the Agreement
2 has to be restricted and literal.
3 Q. Please let me know: I think that you are
4 Tax Experts. I'm asking you something valid. I would
5 like to understand. I would like to understand what
6 your position is so that we can have a conversation
7 today.
8 I'm asking you: Be specific, because you
9 were not in your Reports. Be specific. I want to
10 understand your position.
11 Only the amount, only the 237 million, or
12 new investments but related to the Leaching Project
13 would they be included because it is the same project,
14 or do we need to understand this investment by
15 investment, or only if it is a replacement of the
16 assets listed there?
17 I would like to understand your position.
18 Is it 1, 2, 3 or 4? Please be specific.
19 A. (Mr. Picón) The literal interpretation is
20 the one that would lead us to say that it is a project
21 and any investment would have to be analyzed.
22 Q. So, that means that it is 1, 2, 3, or 4?
[Page 2726]
1 That it is case by case?
2 It is not a difficult question. You have
3 opined on this topic. I see you are confused, and I
4 want you to answer my question.
5 Be specific. Which of the four positions is
6 your position as an Expert?
7 A. (Mr. Picón) As drafted here, I would say
8 Position 3: investments related to the investment
9 project included in the Feasibility Study.
10 Q. Okay. So, Position 3. Understood. In
11 fact, other individuals have said that. And so,
12 Position 1 is wrong, according to you? That is, that
13 it is only the 237 million? That is not correct, in
14 your Opinion, because you just told us that Position 3
15 is the one that is correct?
16 A. (Mr. Picón) Investments related to the
17 investment project included in the Feasibility Study?
18 It seems reasonable to think that that is what the law
19 says. But if you have a specific case, clearly we can
20 analyze it.
21 Q. We are talking about Cerro Verde. And I
22 would like to confirm that, and this is also similar
[Page 2727]
1 to what you said in your Reports.
2 Your position is Position 3?
3 A. (Mr. Picón) Yes.
4 Q. And the other positions, again, I imagine
5 you confirm that your Position is 3 and you do not
6 agree with the other ones?
7 A. Well--
8 Q. They are mutually exclusive positions. You
9 already told me that your Position is Number 3. If
10 you want, we can continue, but just to confirm, is 3
11 and not the other ones?
12 A. (Mr. Picón) Position 3. Unfortunately, I
13 need to clarify, when one looks at tax issues, we look
14 at the timeline and case by case, as indicated, tax
15 matters looks a million possibilities, and when you
16 are--have a case you have to compare with--against
17 another case.
18 Q. But in the case of Cerro Verde, it is
19 Number 3?
20 A. (Mr. Picón) Yes, it is.
21 Q. And I understand that, regarding tax issues,
22 there are a million possibilities, and a high number
[Page 2728]
1 of cases, but we are talking about a law and some
2 specific articles, it shouldn't be that difficult, but
3 Position 3, understood. Thank you for clarifying your
4 position.
5 Now, the other Party asked me to--opposing
6 Party asked me to explain whether there was support in
7 the record for the other Positions that I was
8 representing to you. And I would like to share with
9 you that this week we heard these four Positions from
10 various Witnesses, including Perú's Counsel.
11 Ms. Bedoya told us that it was Position 1,
12 Mr. Polo told us it was Number 2, Perú's Memorial says
13 it is Number 3, that at least coincides with you, and
14 Mr. Cruz told us it was Number 4. But even Perú and
15 its own Witnesses--we're not even talking about all of
16 the documents and all of the evidence submitted by
17 Claimant, but just--
18 (Overlapping interpretation and speakers.)
19 MS. HIKAWA: This is way outside the scope
20 of their Reports.
21 MS. SINISTERRA: Their Report is about the
22 scope of the Stability Agreement.
[Page 2729]
1 MS. HAWORTH MCCANDLESS: The Report is not
2 about the scope of the Stability Agreement. The
3 Report goes into issues with respect to tax. That's
4 the main essence of their Report. You keep on
5 mischaracterizing that. It's not appropriate.
6 MS. SINISTERRA: I mean, the fact that I
7 have to take you to the Report to show what they've
8 analyzed, and that we saw it on the slides this
9 morning, I mean, you are impeaching your own Experts,
10 which I just find a little puzzling, but I'm very
11 happy to refer you to the sections of the Reports that
12 I am basing this on.
13 So, Section 3 of the First Report is called
14 the Stability Agreement of Cerro Verde did not cover
15 the Concentrator. And they analyzed: Stability
16 Agreement generally, stability agreements under the
17 Mining Law, Analysis of the specific case: the object
18 of the contract of the Stability Agreement. This
19 morning, they made a presentation about that the
20 Stability Agreement did not cover the Primary Sulfide
21 Project.
22 THE WITNESS: (No interpretation.)
[Page 2730]
1 MS. HIKAWA: Yes, we can all read what is in
2 their Reports, and it's clear that they've said what
3 their specialty is, what their expertise is, and their
4 perspective that they're giving as Tax Experts on
5 these issues.
6 MS. SINISTERRA: Are you saying that we--can
7 we go back to the Report, please? Are you saying that
8 we can strike from the record the sections of the
9 Report that refer to the Mining Law, and that analyze
10 the Stability Agreement with reference to provisions
11 exclusively in the Mining Law?
12 MS. HIKAWA: No, I'm not.
13 (Overlapping speakers.)
14 MS. HIKAWA: I'm saying that they can
15 analyze that as Experts in the application under taxes
16 of those laws.
17 MS. SINISTERRA: Okay. So, then they can
18 answer based on their understanding, just on taxes.
19 (Overlapping speakers.)
20 MS. HIKAWA: The question is not the scope
21 of their knowledge here. It's that this is outside
22 the scope of their Expert Reports, these questions,
[Page 2731]
1 this table.
2 PRESIDENT HANEFELD: I think I agree. I
3 mean, and it does not appear too helpful for us if the
4 Experts now comment on the testimony and Witness
5 Statements that we have heard the last day.
6 MS. SINISTERRA: So, I'm not going to ask
7 them to comment on the different positions. I just
8 wanted to understand what their position is, because
9 they have submitted an Expert Report on the scope of
10 the Stability Agreement, and they have opined as
11 Experts that it excluded the Concentrator. And they
12 say in the Report the Stability Agreement was limited
13 to the Project, to the Leaching Project, and I'm
14 trying to understand what that means.
15 They have now specified what it is that they
16 mean, and I'm just showing them that others have
17 interpreted the Mining Law differently. But we do not
18 need to go into a detailed discussion of what other
19 sort of Witnesses have said.
20 PRESIDENT HANEFELD: Yeah. It would be
21 appreciated. We take note of your argument, but I
22 think we are to hear the Experts.
[Page 2732]
1 MS. SINISTERRA: Yeah. Though I do think
2 it's fair, Madam President, with all due respect, to
3 confront their Tax Experts on the scope of the
4 Stability Agreement with inconsistent positions that
5 we've heard in the Hearing to try and clarify,
6 ultimately, what position is it that we're sort of
7 being confronted with, when it comes to the right
8 reading of the Mining Law.
9 But let me ask my next question.
10 BY MS. SINISTERRA:
11 Q. Gentlemen, Messrs. Picón and Bravo, I asked
12 you your opinion. I showed you that we have heard
13 different opinions. In our view, we have heard and we
14 have been presented with different interpretations.
15 And so, we have been presented with what our--what, in
16 our view--well, we are categorically in disagreement
17 with those positions, to be clear, but we have been
18 presented, at least, what appear to be different
19 interpretations of a single law.
20 So, the question I wish to put to you is
21 related to Tab 10, if you could please turn to Tab 10.
22 For the record, this is CE-823.
[Page 2733]
1 Indeed, the Tribunal put questions to you
2 about this document. We are looking here--once again,
3 for the record, CE-823, is the Statement of Reasons of
4 the Law that incorporated 83(b) into the Law of Mining
5 in 2014. I'm going to read a paragraph there, and
6 then I'm going to show you the Supreme Decree that
7 amended the Regulation, and then I'm going to put a
8 question to you.
9 So, here--okay. I'll slow down. I wanted
10 to take you to Page 11. You can also see it up on the
11 screen. And I want us to take a look at exactly what
12 the Legislature said.
13 They said: "The effect of the various
14 proposed changes to the General Mining Law will make
15 it possible to establish a clearer Regulatory
16 Framework in accordance with the principle of legal
17 certainty in favor of the investor." That is what is
18 there, textually. And now I'm going to put my--I'll
19 be putting my question to you in just a second. I'd
20 ask you to first, please, turn to Tab 11.
21 For the record, this is CA-246, Page 9. And
22 this is the Supreme Decree that modified the
[Page 2734]
1 Regulation of the General Mining Law in 2019. It'll
2 be up on the screen in just a second. Point 1 under
3 issues says: "The literalness."
4 This is at Tab 11. Sorry. Tab 11. Do you
5 have it? Very well.
6 At B(1) it says, "the literal reading of the
7 text, or the literalness of the text of the first
8 paragraph of Article 22 could misleadingly lead one to
9 consider that the contractual guarantees benefit the
10 mining activity titleholder for any investment it
11 makes in the Concessions or the
12 Economic-Administrative Units." And if you, then,
13 turn to Page 10, at C(6). It's Page 10.6, tell me
14 when you have it.
15 A. (Mr. Picón) Yeah, we have it.
16 Q. Okay, perfect, it says-this is a Supreme
17 Decree of 2019 that amended the regulations of the
18 General Mining Law, and it reads: "The amendment,
19 this amendment will contribute to clarifying"--
20 clarifying-"what emerges from the rules contained in
21 the Single Unified Text of the General Mining Law and
22 its Regulations."
[Page 2735]
1 And so, we just saw, expressly, that the Law
2 and the Decree used the words "to establish a clearer
3 framework" and they used the words "juridical
4 security" or "legal certainty" and they used word
5 "clarify." And we saw that different Witnesses have
6 provided us with different interpretations, and
7 interpretations that vary with your own, or are
8 different from your own views as Experts.
9 So, my very specific question--please be
10 honest in your response--at a minimum, are we not
11 looking at a provision that might be subject to
12 different interpretations and which, therefore--well,
13 and, therefore, a clearer framework is needed, greater
14 legal certainty is needed, and clarification is
15 needed? Yes or no.
16 Is this based on what I have showed you and
17 the different interpretations we've been given and the
18 statement of purpose, in your opinion, is--are these
19 provisions that might be subject or could be subject
20 to different interpretations and, therefore, need to
21 be clarified? Yes or no.
22 A. (Mr. Picón) The interpretations that you've
[Page 2736]
1 showed us did not reach different conclusions in this
2 specific case, to be quite sincere.
3 Q. Truth be told, they do, but could you answer
4 my question?
5 A. (Mr. Picón) As we were saying when asked by
6 the arbitrator, the amendment of a legal provision
7 cannot be used to interpret the past.
8 Q. No, Mr. Picón, please don't go off on a
9 tangent. My question is very specific.
10 The Legislature, in a Decree--well, they are
11 saying that they're going to amend it because "there's
12 a need to establish a clearer framework," "there's a
13 need for legal certainty," "there's a need for
14 clarification." If one clarifies, it's because
15 there's a provision that is ambiguous or imprecise and
16 requires clarification; correct?
17 A. (Mr. Picón) Not necessarily.
18 Q. It doesn't one, clarify--one clarifies
19 what's already clear?
20 A. (Mr. Picón) One clarifies in the face of new
21 situations. As I have mentioned, I have prepared the
22 legislation for years, and the adjustments to legal
[Page 2737]
1 provisions which are made every year aren't always
2 made because--well, the provision was obscure, but,
3 rather, we were thinking about taxpayers of the future
4 so that they not have potential doubts that some might
5 have or said they have.
6 But I don't think that's enough to reach the
7 conclusion that the provision was obscure, if that's
8 what you say.
9 Q. So, you were saying clarifications with
10 respect to new issues, and here this Law and this
11 Decree are clarifying provisions that already existed
12 in the General Mining Law and the Regulations, and to
13 do so, they're using the words:-"there's a need to
14 establish a clear framework," "there's a need for
15 greater legal certainty," "there's a need to clarify."
16 So, my question is quite basic. You're here
17 as Experts. Here, the Peruvian Legislature, is he not
18 telling us that they want to clarify a provision
19 because the provision wasn't clear; correct?
20 A. (Mr. Picón) To characterize this as the
21 position of the Peruvian Legislature, well, is
22 important to have clear that the Peruvian Legislature-
[Page 2738]
1 -these are drafts that are presented by the Executive?
2 Yes, and when they are then presented to the Congress
3 and Congress debates them. That's how it's been done
4 thus far.
5 Q. So, your opinion is that in the Supreme
6 Decree, when they said that Article 22 could
7 mistakenly lead to--one to consider the contractual
8 guarantees benefit the Mining Titleholder for any
9 investment carried out in the Concessions,
10 Economic-Administrative Units, when it recognizes that
11 it could lead to such an interpretation, and then it
12 says "clarify."
13 You're saying your position as an Expert is
14 that they were not clarifying?
15 A. (Mr. Picón) Well, let's see. These
16 statements of purpose--and these have been done for
17 many years--do not have as their aim to being the key
18 document for interpreting the provision in the future.
19 Q. Mr. Picón, if you don't want to answer my
20 question, no problem. Let's continue looking at other
21 documents.
22 A. (Mr. Picón) Fine.
[Page 2739]
1 Q. So, to recapitulate, I've showed you what
2 the Witnesses have said, I've showed you what the
3 Peruvian Legislature has said with respect to these
4 provisions, I've highlighted three or four times that
5 they use the word "clarify."
6 Now, if you maintain that there was nothing
7 to clarify, then let us take a look at it. Perhaps
8 the SUNAT and--were the SUNAT and the Tax Tribunal
9 consistent in their application of the provisions?
10 Let's see.
11 (Overlapping interpretation and speakers.)
12 MS. SINISTERRA: Marisa, I am now going to
13 refer to protected information, for the record. I'm
14 going to refer to protected information.
15 SECRETARY PLANELLS VALERO: That is well
16 noted. We don't have any representatives in the
17 hearing room, or in the individual hearing rooms.
18 So, you can proceed.
19 (End of open session. Attorneys'
20 Eyes Only information follows.)
21
22 CONFIDENTIAL SESSION
[Page 2740]
1 BY MS. SINISTERRA:
2 Q. I would like to put up on the screen this
3 Paragraph 123 of your First Report. No, Paragraph 123
4 of your First Report, please.
5 This is your Report, and these are your
6 words: "Specifically, Article 83 of the Mining Law
7 and Article 22 of the Regulation of the Mining Law
8 were clear." So, we saw that the Legislature said
9 there was a need to clarify, but then you said that
10 they're clear. "So, much so that the Tax
11 Administration and the Government always maintained
12 the same interpretation."
13 Do you see that?
14 A. (Mr. Picón) Yes.
15 Q. Okay. I was just waiting for the
16 interpretation.
17 Recently in this case, documents were
18 introduced relating to the Companies Milpo, Yanacocha,
19 and Tintaya. These are SUNAT resolutions and Tax
20 Tribunal resolutions.
21 Did your attorneys provide you with those
22 documents?
[Page 2741]
1 A. (Mr. Picón) Yes.
2 Q. Did you review them?
3 A. (Mr. Picón) Yes.
4 Q. And do you maintain your opinion that both
5 the Tax Administration and the Government always
6 maintain the same interpretation?
7 A. (Mr. Picón) Clearly, we've not only reviewed
8 the resolutions, we've looked at what they're about
9 and we've reached the conclusion that they're not
10 relevant.
11 Q. We'll see. So, do you maintain this
12 assertion that they've always--always--maintained the
13 same interpretation? Yes or no.
14 A. (Mr. Picón) As far as we know, yes.
15 Q. Based on the new documents that you
16 reviewed, do they maintain it or not?
17 A. (Mr. Picón) The antecedents don't go to the
18 issue.
19 Q. I don't know what antecedents you are
20 referring to.
21 A. (Mr. Picón) Oh, the resolutions of the SUNAT
22 regarding Milpo, Yanacocha, and so forth, we've
[Page 2742]
1 reviewed them and they don't touch on the issues that
2 are present in this Arbitration.
3 Q. We'll see. But they are resolutions of the
4 SUNAT and the Tax Tribunal. You've reviewed them, and
5 you continue to maintain that that's always been the
6 position of the Tax Administration and the Government,
7 correct?
8 A. (Mr. Picón) We don't know any pronouncement
9 different from these.
10 Q. So, you maintain your position?
11 A. (Mr. Picón) Yeah, having reviewed
12 these--this background, yes, we maintain our position.
13 Q. And I told you this at the outset, but I
14 want to be very clear: Unfortunately, we have very
15 little time. And so, I would be delighted to review
16 in detail all of these documents with you. But
17 because of time considerations I can't do so.
18 So, I'm going to show you certain documents
19 and certain Statements by SUNAT and the Tax Tribunal,
20 and if your lawyers would like to go back to those
21 documents and get into more detail and discussion of
22 factual issues, then they're free to do so on the
[Page 2743]
1 redirect. But I am going to ask you specific
2 questions about statements that you're going to see on
3 the screen, and, once again, you'll have an
4 opportunity to discuss it in greater detail. I would
5 be delighted for you to do so.
6 The first document that we are going to see,
7 for the record, is CE-1124. It's an Assessment
8 Resolution of the Company, the Mining Company Milpo
9 from 2005.
10 Do you see it on the screen?
11 A. (Mr. Picón) Yes.
12 Q. There, SUNAT said the El Porvenir Mining
13 Unit has a Tax Stability Agreement. "The El Porvenir
14 Mining Unit." It doesn't say "the Milpo Project." It
15 doesn't say "the El Porvenir Project." It says "the
16 El Porvenir Mining unit."
17 And now let's look at another document. For
18 the record, this is CE-1128. It's also an -Assessment
19 Resolution in respect of Milpo from 2014. Now, what
20 did SUNAT say here? It makes reference to the
21 Agreement of Guarantees and Measures for the Promotion
22 of Investments in the Cerro Lindo Project, and then it
[Page 2744]
1 says: "The law applicable to the appellant to
2 calculate the income tax is in relation to the Cerro
3 Lindo Economic-Administrative Unit, and it is," and
4 they cite a particular Decree.
5 For the record, this is Page 11 of the PDF,
6 and Footnote 5 is also relevant--and, once again, this
7 is CE-1128.
8 Now let's look at another document.
9 For the record, this is RE-415. This is an
10 Assessment Resolution in respect of Yanacocha from
11 2006, and we'll see it in just a second.
12 Perfect. This is Page 1 and, I think,
13 Page 2 of the PDF, for the record.
14 And what does SUNAT say here? I'm going to
15 read it. "The assessment of the taxes must be done
16 separately for each of the Economic-Administrative
17 Units for which a Tax Stability Agreement has been
18 signed."
19 "Each of the Economic-Administrative Units
20 for which a Legal Stability Agreement has been
21 signed."
22 It nowhere says "for each of the investment
[Page 2745]
1 projects for which a Tax Stability Agreement has been
2 signed." It says, once again, "for each of the
3 Units."
4 Now let's look at another document.
5 For the record, this is RE-382. This is an
6 Intendency Resolution with respect to Yanacocha from
7 2008, Page 56 or 57 of the PDF. And here it
8 says: "Article 22 of the Regulations indicates that
9 the Mining Titleholder independently calculates the
10 results obtained for each of the Concessions or
11 Economic-Administrative Units."
12 Now, once again, it doesn't say "the results
13 obtained for each investment project." It says "for
14 each of the Concessions or Economic-Administrative
15 Units." And now let us look at yet another document.
16 For the record, this is CE-1132.
17 This is a Tax Tribunal Resolution with
18 respect to Milpo from 2022.
19 MS. HIKAWA: I assume when you're done
20 reading all this you are going to have a question.
21 MS. SINISTERRA: Absolutely.
22 MS. HIKAWA: Okay.
[Page 2746]
1 BY MS. SINISTERRA:
2 Q. Pages 9 and 10 of the PDF. And it says:
3 "The Cerro Verde and El Porvenir Economic-
4 Administrative Units are subject to the Income Tax
5 Regime in force on the aforementioned dates."
6 So, once again, it refers to the
7 "Economic-Administrative Units Cerro Lindo and El
8 Porvenir," and does not say "investment project."
9 And let us look at yet another document. For
10 the record, this is CE-1132, a Tax Tribunal Resolution
11 in the Milpo Case from 2022.
12 So, this is a recent document, after the
13 Cerro Verde resolutions. This is in 2022.
14 What is the Tax Tribunal saying? And just
15 to clarify, this is with respect to stability
16 agreements to which the same General Mining Law
17 applicable to Cerro Verde applied. What does it say
18 there? The Tax Tribunal recognizes the Stabilized
19 Regime for each Economic-Administrative Unit. The
20 exact words are: "The Cerro Lindo and El Porvenir
21 Economic-Administrative Units are subject to the
22 Income Tax regime in force on the aforementioned
[Page 2747]
1 dates."
2 Once again: "The Cerro Lindo and El Porvenir
3 EAUS."
4 So, we have just seen six documents, at
5 least six documents in the record, but there are many
6 more, but we don't have so much time, that expressly
7 say that the stability agreement applies to
8 Economic-Administrative Units without making any
9 mention of "investment project"; correct?
10 A. (Mr. Picón) The phrases that you have taken
11 out say what you say, but you've taken them out of
12 context. But, yes, what you say is what is up on the
13 screen.
14 Q. Now, a specific question. You can search
15 for context. When you read these Resolutions, at
16 anywhere did they say the General Mining Law does not
17 apply to Economic-Administrative Units, it applies
18 specifically to investment projects? Yes or no.
19 A. (Mr. Picón) When I read these resolutions,
20 the first I can say is that they don't address the
21 subject matter you're talking about, none of them.
22 And we could review all of them, and we could show you
[Page 2748]
1 that none of them address the issue that you're
2 talking about.
3 Q. Well, fortunately the Tribunal has them in
4 the record, and I've just shown that they refer
5 expressly to stability agreements, and they expressly
6 state that they apply to Economic-Administrative
7 Units.
8 A. (Mr. Picón) I would need four or five
9 minutes to explain why they are relevant and how the
10 Tribunal can easily reach that conclusion.
11 (Overlapping interpretation and speakers.)
12 BY MS. SINISTERRA:
13 Q. You can do that on the redirect, but I
14 suppose that you would agree that when the SUNAT
15 carries out an assessment in respect of a Company and
16 mentions the stability agreement, it looks at the
17 stability agreement and renders its assessment mindful
18 of what it says?
19 A. (Mr. Picón) I think that you are confused
20 about what exactly SUNAT does. Let me put it as
21 follows: if--
22 Q. So, your position is that when the SUNAT is
[Page 2749]
1 going to assess a taxpayer, and you say--when they
2 have a stability agreement, SUNAT asks to see it;
3 right?
4 A. (Mr. Picón) They might not.
5 Q. So, what you are affirming before the
6 Tribunal is that the SUNAT sometimes audits a taxpayer
7 without even knowing whether it has a stability
8 agreement? Is that your opinion?
9 A. (Mr. Picón) If you review what SUNAT is
10 discussing in these cases, such as bonuses for
11 managers or characterizing investment in a building as
12 an asset or not as an asset, the Agreement is not
13 relevant.
14 Therefore, if what you want is to establish
15 the scope of the Agreement, obviously it's going to
16 review it. But these are totally different issues
17 that are raised in these cases.
18 Q. We have seen--and I see this is an attempt
19 from you to take out of context, but this should be
20 clear for the record--but in these documents SUNAT
21 made express--it made express reference to the
22 stability agreements and it made a reference to Income
[Page 2750]
1 Tax to know what tax would apply.
2 To know what tax applies, what is the
3 applicable regime, it needs to bear in mind the
4 stability agreement; correct? Is that correct?
5 A. (Mr. Picón) In some of the cases that you
6 cite, yes, it mentions the different rates.
7 Q. So, we've just seen resolutions that clearly
8 speak of the Economic-Administrative Units, and not
9 investment projects; correct?
10 A. (Mr. Picón) I should note that the subject
11 matter of the litigation is that the investment lies
12 outside--and here there's no litigation about an
13 investment being outside of the
14 Economic-Administrative Unit that is not covered by
15 the agreement.
16 SUNAT has not ruled on what you've just said
17 in any of these cases, which is what is at issue here.
18 Q. Very well.
19 The Tribunal, once again, has the documents,
20 and will be able to see specifically what they say and
21 what they don't say.
22 You told us in your Reports--and it's
[Page 2751]
1 Paragraph 115, to be specific.
2 A. (Mr. Picón) First or Second Report?
3 Q. Second. Very specific; I just want you to
4 confirm your testimony there.
5 You say that when a primary legal provision
6 is drafted in an obscure, ambiguous, imprecise, or
7 contradictory fashion, making it difficult to
8 accurately interpret it or its scope, that it could
9 apply Article 170 of the Tax Code; correct?
10 It's a very simple assertion. I'm asking
11 you: Do you confirm what you said in Paragraph 115 or
12 not?
13 A. (Mr. Bravo) Well, if you look carefully,
14 there's a footnote on that paragraph, which is of the
15 author that we've cited.
16 Q. But can you confirm what you've said in that
17 paragraph?
18 A. (Mr. Bravo) Yes. That is correct.
19 Q. And I also would suppose that you confirm
20 what you told us this morning regarding Article 92 of
21 the Tax Code, that taxpayers have a right to waiver of
22 interest in cases of reasonable doubt.
[Page 2752]
1 You said this at minute 12:21, that you
2 recognize that, under Peruvian law, taxpayers have the
3 right to waiver of Penalties and Interest where--in
4 those cases where there is reasonable doubt.
5 Can you confirm what you told us this
6 morning? Yes or no.
7 A. (Mr. Picón) They do have the right, yes,
8 indeed. But there is a power that has to be
9 exercised.
10 Q. I just wanted to confirm that you ratified
11 that that right exists.
12 So, you just mentioned the power of the
13 State. Let us turn to that point. I'm going to take
14 you, to try to be quick, to Paragraphs 153 and 154 of
15 your Second Report.
16 There you refer to the power of the State
17 that you've just mentioned, and you say: "The power
18 of the State should be exercised under the parameters
19 of the law and the legal principles set forth in the
20 Political Constitution."
21 And at Paragraph 154, you said that the
22 power of the State and the exercise by the State of
[Page 2753]
1 those powers should be respectful of the
2 constitutional tax principles and the laws.
3 Do you confirm this part of your testimony?
4 Yes or no.
5 A. (Mr. Picón) I'm sorry. What paragraph is
6 it?
7 Q. It's up on the screen, Paragraphs 153 and
8 154. And I can repeat for the record.
9 There you say that a power of the State
10 should be exercised under the parameters of the law
11 and the legal principles set forth in the Political
12 Constitution. That's Paragraph 153. And at 154, you
13 say the power of the State, the exercise by the
14 Government of this power, should be respectful of--or
15 must be respectful of constitutional tax principles
16 and the laws.
17 Do you confirm this testimony? Yes or no?
18 A. (Mr. Bravo) That is right. And, as it also
19 indicates there, the power mustn't be understood as an
20 arbitrary act of Government without objective
21 criteria.
22 Q. Thank you, Messrs. Bravo and Picón.
[Page 2754]
1 MS. SINISTERRA: I have no further
2 questions.
3 PRESIDENT HANEFELD: Thanks.
4 Do you have questions?
5 MS. HIKAWA: I do. If I could just have one
6 minute to confer with my colleagues.
7 (Pause.)
8 MS. HIKAWA: Thank you. Just a few,
9 hopefully very brief, questions.
10 REDIRECT EXAMINATION
11 BY MS. HIKAWA:
12 Q. The President and Arbitrator Tawil asked you
13 about the application of Article 170 of the Tax Code
14 and the waiver of interest and Penalties.
15 Do you remember that?
16 And there was some discussion about a
17 clarifying provision, one of the requirements of
18 Article 170 in order for it to apply.
19 I'd like to show you in your Reports--sorry,
20 your First Report at Paragraph 73, what you said about
21 the requirements for a clarifying act.
22 If you could explain to us what you are
[Page 2755]
1 saying in this paragraph.
2 MS. SINISTERRA: I don't really--is this in
3 response to the cross?
4 MS. HIKAWA: It's in response to the
5 Tribunal's questions and several of your questions
6 regarding clarification.
7 MS. SINISTERRA: Well, it is not
8 specifically with regards to my cross, but if the
9 Tribunal wishes for them to address it, given the
10 questions, then of course go on.
11 MS. HIKAWA: Thank you.
12 BY MS. HIKAWA:
13 Q. Please. So, it's on the screen. You can
14 see the section of your Report.
15 Could you explain what you're saying here
16 about the requirements for a clarifying provision for
17 Article 170 to apply?
18 A. (Mr. Bravo) Yes. Article 170 establishes
19 requirements for the State to be able to exercise that
20 power, and those requirements presuppose first that
21 there is a mistaken interpretation of the provisions;
22 second, that the debt has not yet been paid; and,
[Page 2756]
1 three, that there is a clarifying provision.
2 But not just any clarifying provision. It
3 has to be a clarifying provision that says that
4 Article 170(1) applies, and it has to be a provision
5 through one of the vehicles expressly indicated by
6 Article 170, Legislative Decree Supreme Decree--or
7 Resolution of clarifying observations.
8 Q. Thank you.
9 Now, my second question is also in response
10 to one of the President's questions. She asked you
11 about the example of the Company Tintaya, about
12 keeping separate accounts. And I'd like to bring you
13 to your Reports again, your Second Expert Report at
14 Paragraph 57 to Paragraph 59.
15 Here you cite and quote from a SUNAT
16 Resolution in the case of Tintaya. And if you could,
17 just explain to us why you quote to that Resolution
18 and what is relevant there.
19 A. (Mr. Picón) Right. In the case of Tintaya,
20 when you have an Economic-Administrative Unit, you
21 could find more than one investment project with
22 different tax regimes applied to them.
[Page 2757]
In this case, it was established that, since the benefits were different, the accounts had to be--had separately to make sure that you knew what tax regime was applicable to each one of the Projects.
MS. HIKAWA: Thank you.
No further questions.
PRESIDENT HANEFELD: Thank you.
From the Tribunal's side, there are no further questions, so you are released as Experts in these proceedings.
So, thanks. Thank you.
THE WITNESS: (Mr. Bravo) Thank you.
THE WITNESS: (Mr. Picón) Thank you.
(Witnesses step down.)
PRESIDENT HANEFELD: Shall we, then, right away continue with the Claimant's Damages Expert, or would the Court Reporters prefer that we have a short break? Because they will probably have a presentation again and this will extend the 90 minutes of our Court Reporter. So--
(Comments off microphone.)
PRESIDENT HANEFELD: Then we make the
[Page 2758]
10-minute break now and continue at a quarter to 3:00.
MS. SINISTERRA: Thank you, Madam President.
(Brief recess.)
PABLO S. SPILLER AND CARLA CHAVICH,
CLAIMANT'S WITNESSES, CALLED
PRESIDENT HANEFELD: Good afternoon. We come to the final part of our evidentiary Hearing for today, the Quantum.
Welcome to our Quantum Experts nominated by Claimant, Mr. Pablo T. Spiller--so, Mr. Spiller--and Ms. Carla Chavich.
Do I pronounce it correctly? Okay.
You have seen us, I think, before on screen; otherwise, I introduce ourselves. My name is Inka Hanefeld, presiding arbitrator; Professor Tawil; Dr. Cremades.
Can you please be so kind to read out the Declarations under Article 35(3) of the Rules?
THE WITNESS: (Mr. Spiller) Good afternoon. My name is Pablo Tomas Spiller. I solemnly declare, upon my honor and conscience, that my statement will be in accordance with my sincere belief.
[Page 2759]
THE WITNESS: (Ms. Chavich) Good afternoon. I'm Carla Chavich. I solemnly declare, upon my honor and conscience, that my statement will be in accordance with my sincere belief.
PRESIDENT HANEFELD: Thank you very much.
I expect you have your Expert Reports, CER-1 and 6, in front of you.
Is there anything you wish to correct?
THE WITNESS: (Mr. Spiller) No, nothing at all.
PRESIDENT HANEFELD: Perfect. Then we can proceed with the presentation.
THE WITNESS: (Mr. Spiller) Okay. Very good. First of all, good afternoon, Madam President, Members of the Tribunal. Pleasure to share a few minutes with you.
In today's presentation, which you have in front of you, we will start with a description of how we assessed Damages in this case and then about--the rest to talk about our agreements and disagreements with Ms. Kunsman, the Expert of Respondent.
[Page 2760]
So, if we go to Slide 3 there, you have--there you have our instructions, main instructions. Claimant, as you know, filed Claims on its own behalf and on behalf of SMCV, and we were instructed to compute Damages at the level of SMCV.
Now, the--there are two Claims in this Arbitration presented by Claimant, the Main Claim and the Alternative Claim. All these Claims come--arise from a series of Assessments or Royalties on New Taxes, Penalties, and Statutory Interest that Perú imposed on SMCV.
The Main Claim consists of all those Royalties and New Taxes, Penalties and Statutory Interest, while the Alternative Claim focuses on the Penalties and Statutory Interest, as well as incorrect calculations of tax assessment, as well as unreimbursed GEM overpayments related to the Concentrator.
There are, in total, USD 1.2 billion in Assessments--and when I talk about Assessments, it always includes Royalties and New Taxes--as well as there are Penalties and Statutory Interest; a bit more
[Page 2761]
than half on the latter, and Royalties and New Taxes around 600 million.
Now, as it relates to the Alternative Claim, there are unreimbursed GEM expenses for 64 million and 19 million and what--some inappropriate or incorrect tax calculations.
Now, as you may have heard, SMCV already paid 97 percent of the Assessments, remaining only 33 million in PTU obligations.
Now, let's move to the next slide.
In this Arbitration, given the equivalence in financial-economics of two ways of measuring the value of a firm, whether via the lost Cash Flows to the Firm or via the accounting identity that says that the value of a firm equals the sum of its debt and its equity, we implement Damages by looking at both sides of the equation. We assess Damages on the left side, on the right side, and we'll tell you in more detail on the next slide.
In the prior Arbitration where the--the Sumitomo Arbitration, SMCV Arbitration, the Claimant was a Shareholder, and here the difference is that the
[Page 2762]
Claimant is claiming for itself and also for SMCV.
But in the prior Arbitration, we only assessed Damages based on equity.
Now, why do we do this here as well?
Because the Assessments had no impact on the value of SMCV debt. SMCV continued making its payments in a normal fashion. It never entered into arrears or default. And, as a consequence, the Measures had very little impact--had no impact on the value of the debt, and, as a consequence, all the impact of the Measures translated into a reduction in, essentially, the equity component, and, therefore, we can assess Damages to SMCV by looking at how the reduction in the equity component of SMCV came; in other words, by reduction in cash flows to equity.
Now, in this Arbitration we also look, in the next slide, at the reduction in cash flows to SMCV. And, as the identity will suggest, the two results should be very similar; in theory, identical. They are, in practice, similar, and very little difference between the two, as we'll show soon.
So, let's--in the next slide, let's go to
[Page 2763]
how we go from Assessments to Damages.
As mentioned, there are $1.2 billion in Assessments, but not all $1.2 billion translate into Damages. Why is that?
Well, because the payment of such Assessments, it has tax savings. When you pay Royalties, you deduct that from your Income Tax. As a consequence, that--there is a substantial reduction--given that the Income Tax is 30 percent, is a substantial reduction in that component. At the same time, Perú reimbursed some of the GEM payments associated with the Concentrator, not all. So, that's GEM mitigation.
And some of the Income Tax Assessments that SMCV had had a consequence that started with those Assessments, or, later on, the SMCV was able to--was forced to depreciate some of its assets on 20 years rather than 5 years, and that implies that there is some depreciation mitigation down the road.
In sum, from $1.2 billion in Assessments, in the--the nominal cash that they had, they would have saved but for the Measures, is 400--813. In other
[Page 2764]
words, there are $400 million that do not translate into Damages.
Now, when looking at the lost--the loss in the equity component of SMCV, we focus on when the--the money saved in the But-For Scenario, when these payments would not be done, we assume that SMCV would have distributed those in terms of dividends or available for dividend distribution in the next time that SMCV actually distributed dividends, which started in 2018, and that, in the interim, we assume that SMCV would put that money into short-term instruments, obtaining a return, a very short-term deposit rate. So, that brings you 813 to 819 as of the date at which those cash available would have been distributed or available for distribution.
Now, this 819 are at a very different point in time, and since we have been instructed to value Damages as of date of the Award, which is a proxy in our Reports by the date of our Report, we bring forward these undistributed dividends to the date of--the putative date of the Award at the Cost of Capital of dividends, which is the Cost of Equity of
[Page 2765]
SMCV. That gives us Damages for 942 million.
Now, if we look at the cash flow, those Cash Flows to the Firm Approach, we start with the same--in the next slide, 8, we start with the same 1.2 billion. We get the same tax savings, depreciation, GEM mitigation, to move from 1.2 billion Assessment to additional cash available as 813.
Now, this additional cash available are as of the date that the payments took place. To bring those 813 to date of valuation, we bring it at the relevant Cost of Capital of Cash Flows to the Firm, which is the Weighted Average Cost of Capital, and we obtain, therefore, Damages of 1.43 billion, slightly different from what we obtained under the Free Cash Flow to Equity approach.
Now, in Slide 9, we compare these two Measures and these two Damage Assessments, and also provide some sensitivities to the--and lost Cash Flows to the Firm Approach by bringing forward the payments at two different update rates, the reimbursement rate--these are SUNAT reimbursement rates that would have been applicable to the payments affected by SMCV,
[Page 2766]
and, as you can see, the average reimbursement rate, which is normally for involuntary payments, is very close to the WACC, to the WACC of 7 percent, and that would, as a consequence, lead to Damages very similar to what we estimated for this approach.
If we bring those payments to date of valuation using Perú's Cost of Debt, which for that period was 3.1 percent, then Damages are 4.6 less than our Best Case of 942.4.
Overall, as I mentioned, the Damages assessed by one or the other way ought to be very similar. They are. Our Best Case is the lost Cash Flows to Equity approach.
Now, we--this is done for the Main Claim. We also do the same exercise for the Alternative Claim. I won't repeat everything, but you get that in Slide 10, which is where--one application of the lost Cash Flows to Equity approach where we look at Damages from the perspective of looking just at the equity component of SMCV. The Damages are 17-- 719 million--720 million.
Looking at the lost Cash Flows to the Firm
[Page 2767]
Approach, we see, Slide 18, we get 785 million--again, 10 percent above or so--and in Slide 12, we provide the same comparison that we did for the Main Claim, and the results are qualitatively the same. The Damages are around the Assessment under the Cash Flow to Equity approach of 720.
Okay. That deals with how we compute Damages, our two approaches.
Now let's move to agreements and disagreements.
In this slide, 13, we show you that, essentially, there are not a lot of disagreements between the Claimant's and Respondent's Experts, between both sides. We both agree on what the Assessments are and the dates. We agree on the payments, the magnitude and the dates. We agree on the netting of tax savings, both Income Tax and PTU savings. We agree on the applicability of the depreciation and the GEM mitigation. We agree on the Damages Methodology: Lost Cash Flow to Equity to SMCV. And we also agree on the term deposit rate that will be used until dividend declaration.
[Page 2768]
So, there isn't much that we disagree. And, in fact, in the next slide we show you that the only significant differences are two, economic differences, but let's start with the very minor differences.
There are three very minor differences, those that appear in the bottom relating to Ms. Kunsman claiming that the outstanding liabilities are not Damages, that the tax corrections that we implement are not applicable, and that the mitigation depreciation--the depreciation mitigation ought to be discounted at a different rate.
Overall, even the three together have around 3 percent. It's not really a significant difference, and I'm not going to spend more time on that.
There are two economic differences that relate to, essentially, either the updating rate or the date of the dividend distribution.
Ms. Kunsman claims that, in the Cash Flows to Equity approach, the reasonable assumption is that SMCV would have distributed the but-for dividends, or would have these but-for dividends for distribution, as of the date of the Award, meaning sometime in the
[Page 2769]
future, which will explain to you why this is economically wrong.
In the case, Ms. Kunsman says that you, the Tribunal, accept our approach to dividend distribution as reasonable; then she disagrees on the application of the Cost of Equity from the date of distribution, dividend distribution, to the date of the Award, and instead advocates for a one-year Treasury bill plus 2 percent. Now, that has around a 10 to 12 percent reduction in the Damages. We say it's significant, but it's not extreme.
The way that Ms. Kunsman reduces Damages significantly is by--in two ways, which are not economic, but rather legal.
One is that she introduces what she calls a "Treaty Claim," which means that taxes cannot be claimed in this Arbitration, and, therefore, that would lead to a reduction in Damages of around 40 percent; and also that SMCV should have mitigated Penalties and Interest by paying all the Assessments much sooner, which has the significant implication that our Damages are reduced by 60 to 70 percent,
[Page 2770]
which means that Perú would retain 60 to 70 percent of the Damages.
Now, my colleague Ms. Chavich will continue with the presentation.
THE WITNESS: (Ms. Chavich) Thanks, Professor Spiller, Madam President, Members of the Tribunal.
I will cover the areas of disagreement, starting first with these two adjustments that have the larger impact and are related to legal issues, but just to see the implication on the economics. The third argument relates to the mitigation scenario.
Ms. Kunsman assumes that Cerro Verde could have saved most of the Penalties and Interest, and, that Perú should not reimburse that amount to Cerro Verde. In particular, she assumed that over 90 percent of the Penalties and Interest already paid should not be refunded to Cerro Verde.
As we see here, that implies that Perú will retain $572 million, and will only refund Claimant's with 44 million of the Penalties and Interest paid.
While this is an economic issue, it has also
[Page 2771]
an economic argument behind, and it has its flaws.
The idea of mitigation in this context is for Claimant to take actions that would reduce harm that, if compensated by Respondent, it would result in a harm for Respondent, Respondent paying a compensation higher than the damage inflicted. But that is not the case here. Perú is not going to be harmed. Perú is already in possession of this money. Perú is already in possession of this 572 million here.
Thus, Kunsman's adjustment in this mitigation of Penalties and Statutory Interest will just result in a windfall in Perú retaining that money paid by Cerro Verde.
The second difference refers to Ms. Kunsman's Treaty Claim. In this Claim, and in this Treaty Claim, per legal instruction, Ms. Kunsman removes all the New Taxes and the related Penalties and Statutory Interest.
As Ms. Kunsman notes, this adjustment will not apply to the Main Claim, if the Tribunal finds a breach in the Stability Agreement.
[Page 2772]
We don't opine on this issue. We compute Damages based on the Main and the Alternative Claim, as defined by Claimant and as explained by Professor Spiller before.
Now, getting into the economic differences, I will start with the issue of the update. And the update has two sides of it: One is when the dividends would have been distributed and until when we start updating those dividends, and the other discussion is alternatively, is the update rate to use.
So, the first position of Ms. Kunsman is that Cerro Verde would have not disputed as dividends the additional cash it would have had but-for the disputed payment. Her assumption is that Cerro Verde would just upkeep all this additional cash with no use in a certain deposit until a future date, until the date of Award, getting around 1 percent per year of interest.
But that is not reasonable for a business to do. And let's look into this in Slide 18.
First, it's important to note that the Shareholders of Cerro Verde, or any investor, will
[Page 2773]
expect to receive a return; otherwise, they wouldn't invest in a company. They are not going to accept for a company just to hold cash, excess cash with no use, for a number of years without getting a reasonable return for it.
And this is consistent with Cerro Verde's history. As we see here, the blue bar shows when dividends were paid by the Company. We see that Cerro Verde actually paid dividends, with the exceptions of periods in which it was saving and for undertaking a big investment--for example, the expansion between 2011 and 2016--that would generate a return in the future, giving that expansion to the Shareholders.
Cerro Verde didn't distribute dividends also in 2020, due to COVID uncertainty, and then resumed dividend distribution in 2021.
So, we know that between 2019 and 2022, despite the disputed payments, Cerro Verde was distributing dividends. That means that Cerro Verde set aside the cash that it needed to operate and distribute that excess cash as dividends, despite making these payments.
[Page 2774]
There is no reason to assume that in the but-for, but for the disputed payment, this additional cash could not have been distributed to the Shareholders.
For that reason, in our Free Cash Flow to Equity approach, we assume that Cerro Verde would have distributed the additional cash in the dates when it actually distributed dividends. That's why we don't do any second-guessing on when that dividend would have happened; we just follow the actual dividend. But the additional cash would have been distributed on that date.
Alternatively, Ms. Kunsman says that, even if you assume that dividends could have been distributed in the dates in which dividends were actually distributed, as we did for the reasons discussed before, those dividends should be updated to the date of Award, to the Date of Valuation, at a one-year Treasury bill plus 2 percent.
This rate, however, fails to compensate Claimant.
In Slide 20 we show the difference where it
[Page 2775]
is discussed in this case. As we mention it, the impact of the assessment is to relay dividends to Shareholders. Cerro Verde was not able to pay this additional cash as dividends in the dividend distribution dates, and it will be--we update--
(Interruption.)
(Stenographer clarification.)
THE WITNESS: (Ms. Chavich) I can repeat. Sorry about that.
Cerro Verde was not able to distribute the additional cash as dividends at the time of the dividend distribution.
And, thus, we update those dividends to the date of Award and the Cost of Equity.
This is the minimum return that the Claimants could have--or the Shareholders could have accepted for that delay in the dividends. The Shareholders of Cerro Verde would have only accepted a delay in their dividends for a return that is at least the Cost of Equity. It's the minimum return a Shareholder requires to invest in a Mining Project such as Cerro Verde.
[Page 2776]
In the Free Cash Flow to the Firm approach, we consider the WACC--that is the Weighted Average Cost of Capital. So, we considered both sources of financing, the equity and the debt.
As we see here, those rates are in line with SUNAT's statutory rate. That is the rate that SUNAT has to pay to refund companies that made overpayments due to SUNAT's improper assessments.
On the contrary, Ms. Kunsman's rate--that is the U.S. Treasury bill plus 2 percent; that was around 3.4 percent during the 2018-2022 period--fails to compensate Claimant, and it does not reflect the Financial Cost faced by the Company.
And now let me touch briefly on two minor differences that have less than 3 percent of impact in Damages.
The first one is the outstanding liabilities. Ms. Kunsman excludes them from Damages.
The outstanding liabilities are PTU--that is the employee profit-sharing, and it refers to 33 million. That implies around 3 percent of all the Assessments. These obligations are regarded in Cerro Verde's WACC
[Page 2777]
and still pay interest until paid.
We understand further that they are enforceable and that Cerro Verde would have to pay them regardless of the outcome of this Arbitration, and thus we continue to include them as Damages to the Company.
The second minor difference affects only the Alternative Claim. In this claim, Ms. Kunsman, based on the Opinion of Perú's Tax Experts, excludes the tax corrections and doesn't include them in this Claim. That results in the leaching facilities being affected by the New Taxes.
So, we understand that there is no disagreement that the leaching facilities were stabilized and should not be affected by the New Taxes. However, some of SUNAT's Assessments were applied to the whole activity of Cerro Verde, affecting also the leaching facilities. For example, the Complementary Mining Pension Fund was assessed over Cerros Verde's taxable income entirely, including the income of the Leaching Facility.
To correct for that, in this scenario, we
[Page 2778]
applied the same criteria that SUNAT applied to separate between stabilized and allegedly non- stabilized activities for Royalties and Special Mining Tax based on the percentage of sites.
So, to conclude, Claimant presents two claims, the Main and the Alternative Claim. We assessed Damages based on the lost Cash Flows to Equity, which is in line with the Damages that arise from applying the lost Cash Flow to the Firm and its sensitivities. We assessed damages as of the date of Award; in our Second Report, we present Damages as of September 22, that as a proxy of the date of the Award.
We have agreement with Respondent's Expert on the value of the Assessment at 1.2 billion on the disputed payments that are over 90 percent of this Assessment and how we go from those Assessment to Damages.
We have minor difference, that are less than 3 percent, as the last issues that we discuss. We have a difference that have around 10 percent impact that relates to the updating, the rate or the timing,
[Page 2779]
but the main difference that we have in the scenarios is the Penalties and Interest mitigation, that has an impact of 60 and 70 percent, in which Ms. Kunsman assumes that Perú should retain money that was already paid by Cerro Verde.
And, with that, we conclude our presentation.
PRESIDENT HANEFELD: Thank you very much for your presentation. This was very helpful, and it summarized in a--very well the main areas on which also our questions now would focus.
PRESIDENT HANEFELD: So, just in order to get it in a--precise, a very big economic difference now lies in the Penalties and Interest in our Claim under the alternative scenario; right?
So, in the Main Claim, and now there is at least no jurisdictional debate.
And in the Alternative Claim, if I understand it correctly--and now Ms. Kunsman states that taxes are not allowed for Damages Claims under the Treaty, but this exclusion does not apply under
[Page 2780]
Article 22.3.6 to the breach. So, I understand Main Claim has no jurisdictional issue; Alternative Claim has, according to Mrs. Kunsman, but you did not opine on that; right? Is this correct?
THE WITNESS: (Mr. Spiller) We didn't opine on legal issues, no.
PRESIDENT HANEFELD: Okay. And then there is another, a major question that I would have, and this concerns the double-recovery aspect with regard to the other arbitration. I wonder, is it your position that we should award Claimant 100 percent of those Damages that you identified, if any, or is it just 53.56 percent shareholding?
THE WITNESS: (Mr. Spiller) Okay. As it relates to the double recovery, my experience in arbitrations where there are multiple claims is that the Tribunals issue Decisions that condition the payments so that double recovery will not take place.
So, it's completely up to you how to do it, and I believe that's the appropriate way, as each arbitration is on its own, but you can condition.
Now, as it relates to the Claims and how to
[Page 2781]
compute that, the--here, they are making--Claimant is claiming on its behalf, but also on behalf of Cerro Verde.
On behalf of Cerro Verde, obviously you could say that there could be, if you make an award on behalf of Cerro Verde, it could be double recovery, if the other arbitration also grant one Shareholder a particular award for that. But you can stipulate in your Decision how to prevent that.
So, that if the other--you can condition your award, or you can stipulate some monies will be held on escrow, and depending on the other award, et cetera, et cetera. You can do that.
But my understanding is that, here, Claimant is claiming on SMCV, on their behalf of SMCV. So, you have to determine whether that's an appropriate Claim, independent of the double recovery, and then you can make a stipulation concerning double recovery.
As it relates to the Claimant itself, obviously he has a share of the equity, and this is, I imagine, would complete your discretion. I won't--I don't know exactly what the legal ramifications are.
[Page 2782]
We were not instructed to compute Damages to 54 percent. We were going to assess, as we say in Slide 3, to compute Damages at the level of SMCV.
Would you compute Damages at the level of Freeport, then, it will be, more or less, 54 percent. But that's a different--I'm not sure how that relates to the Claim here. It's beyond my expertise.
Now, if you ask us, you tell us: "Okay. Experts, compute Damages for this or that," we can always do that.
PRESIDENT HANEFELD: Then we stop for the moment with our questions to give the Parties enough time to do their questioning.
MS. CARLSON: Thank you, Madam President.
BY MS. CARLSON:
Q. Good afternoon, Dr. Spiller, Ms. Chavich. You're experienced as Experts and experienced in this sequence in particular, so I will just very quickly spin through a couple of logistical parameters. One is you already know the importance of focusing on a short answer. We are on an
[Page 2783]
ever-shrinking clock in this case.
And because you are appearing together in this proceeding, as you know, we've agreed that the rules are that one of you will decide who answers the question, only one of you will answer the question, unless you specifically ask the Tribunal for permission to chime in, or to add on to the first answer.
And, for convenience, I'm going to direct most of my questions to Dr. Spiller, and, of course, Dr. Spiller, you can say if you'd prefer for Ms. Chavich to answer the questions instead.
Also, I assume that you've had the chance to review the Transcript from our exchange in February when we last met in the other related arbitration; correct?
A. (Mr. Spiller) Yeah, I reviewed it. Yes.
Q. Okay. So, I will caution that part of this may feel like something you've seen before, because we'll be covering some of the same territory, but, of course, the most important people in this room are the ones who weren't with us in February. And so, we will
[Page 2784]
be covering--
(Overlapping speakers.)
A. (Mr. Spiller) I won't answer déjà vu, no.
Q. Exactly. Assume déjà vu, and we'll go from there?
A. (Mr. Spiller) We go from there.
Q. Right.
Okay. So, just one question on that sort of allocation of responsibilities. Dr. Spiller, could you explain why you asked Ms. Chavich to coauthor the Report with you? Are there particular areas in the Report, or subjects on which you didn't feel comfortable opining and wanted her expertise? Or what was the reason for the Joint Report?
A. (Mr. Spiller) We work together very well, and we normally write Reports together. It's our normal practice within our practice to coauthor with colleagues. So, it is not different here.
Q. Is there a division of responsibilities in the subject matter, or in who gets into which level of detail, for example?
A. (Mr. Spiller) Not really. No. We work as a
[Page 2785]
team. We are responsible for everything.
Q. So--just so, I can anticipate, then, how do you plan to decide whether you'll answer a question or whether you'll pass it over?
A. (Mr. Spiller) That we'll see how it goes, and it depends on, you know, divide more or less the time. And we'll come, we'll decide.
Q. Okay. All right. Just a couple of questions on background, and then also on the parameters because I do think on one of the questions that even the President posed there, they suggest that there may be some confusion.
But first, on your respective backgrounds, in the interest of time, when we met in February, Dr. Spiller, I went--we discussed your background in investment treaty arbitrations, which is extensive. I think your Annex suggests--I counted somewhere in the neighborhood of 50 cases in which you've appeared as an Expert in investment treaty arbitrations; is that correct?
A. (Mr. Spiller) I don't know how many cases.
Q. Okay.
[Page 2786]
A. (Mr. Spiller) Maybe more. I don't know.
Q. We established in February that three of those cases are cases in which you've been retained to appear as an Expert testifying for the Respondent, the State; is that correct?
A. (Mr. Spiller) That was correct. I failed to mention that I also had an engagement with Poland in--on the Serbia v. Poland pharmaceutical Case. I forgot about that. I'm sorry about that.
Q. Okay. So, four then?
A. (Mr. Spiller) Yeah, although one, I believe were two cases. But yes, more or less like that.
Q. And in February I read out--and I will not take the time here--the names of some 32 cases that I had been able to identify in the public record where you had appeared as an Expert engaged by Claimant.
And then, since then, with better research, I've identified seven more. So, that would bring our total up to 39 that I found, and four that we've discussed for Respondent. So, 39 for Claimants and four for Respondents; is that right?
A. (Mr. Spiller) Well, I don't know about that.
[Page 2787]
Q. Okay. Well, that's fair. I should tell you--
A. (Mr. Spiller) When you mentioned the cases last time, they were all appropriate, so I imagine the additional seven will also be. I don't have a problem with that.
Q. But, your--but to be fair, I shouldn't force you to assume something that's not in front of you.
So, just quickly, those cases are HydroEnergy v. Spain, BSG v. Guinea, Windstream Energy v. Canada, Global Telecom v. Canada, Crompton v. Canada, Odyssey Marine Exploration v. México, and Sanum Investments v. Laos.
Do those all sound like cases in which you are engaged as an Expert?
A. I don't think Worldcom v. Canada. I don't recall that case.
Q. Not Worldcom, Global Telecom v. Canada?
A. (Mr. Spiller) Global Telecom. Yeah, it could be. Yeah.
Q. And then, Ms. Chavich, again, sort of based on what I could find in the public record, I think
[Page 2788]
we--and I think in February we identified six cases in which you had appeared as a testifying Expert in investment treaty arbitration, all of which were for Claimant. That was Alicia Grace v. México, Lopez-Goyne v. Nicaragua, Gabriel Resources v. Romania, Glencore v. Bolivia, Total v. Argentina, and Eco Oro v. Colombia.
Are those correct?
A. (Ms. Chavich) No, they are--I was not a testifying Expert in Eco Oro or Total--and Gabriel either. I think. So, those, I...
Q. I see. So, those were not cases in which you tested--you were a testifying Expert. Okay.
And I was not able to identify any Respondent's side testifying engagements; is that correct?
A. (Ms. Chavich) In treaties, is correct.
Q. Okay. Thank you. All right. So, then moving to instructions and sort of how you proceeded with the calculations that you did. So, we've got the Main Claim and then the Alternative Claim. The Main Claim is assuming that each and every Royalty
[Page 2789]
Assessment, each and every Tax Assessment, and the Penalties and Interests associated with those Assessments are a breach of the Stabilization Agreement and a breach of the Investment Treaty; correct?
A. (Mr. Spiller) I believe so, that these are--you know, we were instructed to--all those Assessments were breaches, and I believe that Claimant explains that they are breaches of the Stabilization Agreement and/or the Treaty.
Q. Right. And if we were to focus exclusively on treaty claims, and here I'm going to speak exclusively of claims under Article 10.5 of the Treaty, your calculations still include all Tax Assessments and Penalties and Interest in the Main Claim; correct? Even if we are speaking only of Treaty breach.
A. (Mr. Spiller) Yes, but with the caveat that we were not asked to perform that assessment. We were not given a list, exactly of what this Treaty, what this statutory--sorry, Stability Agreement in detail. So, it's not part of our instructions.
[Page 2790]
Okay. So, our instructions is to--these are the breaches of the Treaty and/or--of the Stability Agreement and/or the Treaty, and these are--compute Damages based on that. So, we were not instructed to look in detail of--that's jurisdictional issue, whether SMT or a Stability Agreement.
Q. Okay. So, again, focusing still on the Main Claim, if the Tribunal were to decide that taxes--and let's be comprehensive--taxes and the Penalties and Interest on the taxes were outside of their jurisdiction for purposes of a treaty Claim, they could not look to your Report to find the correct number for what should be claimed in the Main Claim; correct?
A. (Mr. Spiller) Our Report will not provide that. Our model could provide, because our model has each and every Assessment in it.
So, if the Tribunal makes a determination concerning that, and we get the list--an appropriate list of each--which each Assessment corresponds to which breach, then we can exclude certain--whatever Assessments corresponded, and whatever Penalty and
[Page 2791]
Interest, if so, the Tribunal determines.
So, our model on which Ms. Kunsman's model is also based is extremely detailed, extremely detailed. It goes through incredible detail. So, you can view--you, the Tribunal can order--more or less, whatever you want, we can do with the existent model.
Q. Okay. But on the face of your Report, that number is not available to them?
A. (Mr. Spiller) No.
Q. Okay. And on the Alternative Claim, which is only for the Penalties and Interest, both on Taxes and on Royalties, again, you do not--you continue to include tax Penalties and Interest in that Claim, regardless of the jurisdictional question that's been in front of Tribunal; correct?
A. (Mr. Spiller) Correct.
Q. Okay. So, that jurisdictional question affects both the Main Claim and the Alternative Claim calculations; correct?
A. (Mr. Spiller) It may. It may affect. It depends, really, on how the Tribunal interprets that jurisdictional issue.
[Page 2792]
My understanding on the Penalties and statutory--and that is something that Claimant explained relates more to the Penalties and Statutory Interest and should not have implemented or imposed for reasons of uncertainty. But the--that's a different thing. And it's an area that I don't want to go beyond that, because that's the extent of my understanding. So...
Q. All right. We can leave that jurisdictional question to the lawyers for now.
All right. And then the other thing that I just want to establish is that, again, if the Tribunal were to find liability for, maybe, say--let's put ourselves in the Alternative Claim.
If the Tribunal were to find liability for some, but not all, of the Penalties and Interest--for example, if it upheld Penalties and Interest where SMCV had an untimely waiver request--your Report won't help them segregate different categories of the Penalties and Interest. You say your model would do that, if asked, but that your Report will not; is that correct?
[Page 2793]
A. (Mr. Spiller) That's correct.
Q. Okay. And did you do any calculation to try to attach a Damages figure or liability specifically to Claimant's Claims about procedural issues in the Tax Tribunal?
A. (Mr. Spiller) No.
Q. Okay. And if the Tribunal were to find that SMCV could and should have mitigated to avoid some of the Penalties and Interest, but on a different date than, for example, Ms. Kunsman used, they would not be able to use your model to adjust for that; correct?
A. (Mr. Spiller) Oh, yes, they could.
Q. They could use your model. Could they use your Report?
A. (Mr. Spiller) Well, the same way they cannot use Ms. Kunsman's Report. You know, if they found different dates, it had to be tinkered.
So, the model can be used for--really, for almost anything that the Tribunal wants to do concerning taxes, Penalties, Royalties, et cetera.
Q. Okay. And then just a question about the overall approach.
[Page 2794]
I have seen in multiple places in your Report references to the--taking the approach that--sorry. Hold on. Switching to another page in my notes.
So, the framework you're applying is to answer the question--what we call the but-for question: That is, to put SMCV in the position that it would have been in but for the Alleged Breaches of the Treaty or the Stabilization Agreement; correct?
A. (Mr. Spiller) Yes. Correct.
Q. Okay. And that is just, for reference--I don't think we need to go look at it, but we would find that in your first Expert Report at Paragraph 96. We would find that, then, echoed in Claimant's Briefs.
Well, let's very quickly confirm. Let's go ahead to Tab 1--your First Expert Report is at Tab 1 if you need to look at it.
We'll also throw it up on the screen, and Paragraph 96, which is Page 56 of the PDF, where you explain that your objective is restore SMCV to the position it would have been in but for Perú's breaches; correct?
[Page 2795]
A. (Mr. Spiller) That's correct.
Q. And that's the sort of fundamental question that we should ask ourselves with each of these steps, with each of these categories of Damages; right?
A. (Mr. Spiller) For each of what?
Q. For each of the elements of the Damages that you've calculated; correct?
A. (Mr. Spiller) "The elements" being exactly what?
Q. Well, it is the overall question that you're asked to answer in your calculations. What would the situation--you have to assess, what would be the situation have been but for the Damages, compare that to the Actual Situation, and then calculate the Damages from the difference; correct?
A. (Mr. Spiller) Yeah, but for the payments. That's what you're saying; right?
Q. Right. Okay.
So, let's move--I'd like to spend just a few minutes talking about this question about dividend distribution.
A. (Mr. Spiller) Okay.
[Page 2796]
Q. And here, as you've explained in your direct examination, there is the question of when we should assume the dividends would have been distributed, and then, if necessary, at what interest rate; what interest rate should be applied to bring those dividend distributions forward in time.
Correct?
A. (Mr. Spiller) Okay.
Q. Okay. Now, and this is--as you identified in your Direct Presentation, this is an issue with a substantial impact. There's about $114 million at stake in the Main Claim and $83 million at stake in the Alternative Claim.
Now, you're not here as a lawyer, but I assume you're familiar with the rule that it's Claimant's burden to prove its Damages?
A. (Mr. Spiller) Sorry, I couldn't hear the last words.
Q. Sorry. I assume that you are familiar with the rule that it is the Claimant's burden to prove its Damages?
A. (Mr. Spiller) Yeah.
[Page 2797]
1 Q. So, it's Claimant's burden, we submit, to
2 put on the table the information that would prove what
3 would have happened, and, in the case of this
4 particular question, what dividends would have been
5 distributed and when they would have been distributed
6 in the but-for world.
7 A. (Mr. Spiller) Okay.
8 Q. Okay.
9 A. (Mr. Spiller) I will let Ms. Chavich to
10 handle this line of questioning.
11 Q. Okay. All right. And you have assumed for
12 the purposes of this modeling that SMCV would have
13 distributed 100 percent of the cash flows that it
14 would have received, had it not had to pay the
15 Assessments and Penalties and Interest, that it would
16 have distributed 100 percent of those funds as
17 dividends; correct?
18 A. (Ms. Chavich) Like the additional payment
19 net of all the mitigation explained, that additional
20 cash, that excess cash that the Company would have
21 had, yes, would have been distributed as dividends the
22 same days when the Company actually paid dividends,
[Page 2798]
1 despite these disputed payments; correct.
2 Q. So, you're summing that, if SMCV had this
3 additional money in hand, it would not have retained
4 any of it for additional capital projects, for
5 additional Reserves; if it had had that extra money,
6 it would have gone directly to the Shareholders on the
7 next available dividend distribution date?
8 A. (Ms. Chavich) Correct, because this is extra
9 money, extra to the money that they already saved when
10 they decided to pay dividends.11 PRESIDENT HANEFELD: May I ask one question
12 in this regard?
13 Is this a categoric "yes," or is it "it
14 depends"? Because I could assume if they operated
15 under a reinvestment of profits Stabilized Regime,
16 they would have a greater incentive, maybe, to keep it
17 rather than distribute it.
18 So, can you qualify your...?19 THE WITNESS: (Ms. Chavich) Yes. And that's
20 why we follow the dates on which they actually
21 distributed dividends despite making the payments.
22 So, that means that at that point they
[Page 2799]
1 already set aside the cash that they will need, for
2 example, to pay debt, or if they have a CapEx in a
3 plan, they already set that cash and additional to
4 that they distributed dividends.
5 So, this is just extra new cash, in a sense,
6 and that is why we follow the actual dividend dates,
7 to avoid having the problem of saying, "Look, maybe
8 they have the cash available before, but they could
9 have--make another use? No. Let's focus just on the
10 actual dividend dates that we know that, at that
11 point, the cash needs to fork over and they paid
12 dividends." So, they would have used this additional
13 cash as additional dividends.14 THE WITNESS: (Mr. Spiller) Madam President,
15 if I may elaborate, if you wish.
16 There is no evidence of a significant
17 capital project in the books. At least at the time
18 that these dividends were actually paid in 2018 to
19 '22, there is no evidence that the Company had or was
20 planning to do an additional Concentrator or anything
21 like that. There is just not evidence about that.
22 So, the money would have stayed in the
[Page 2800]
1 Company with no particular real use.
2 PRESIDENT HANEFELD: Thank you.
3 Sorry for the interruption.
4 BY MS. CARLSON:
5 Q. Well, if I may follow up on Dr. Spiller's
6 add-on, because that's interesting: You didn't
7 mention any such analysis of the Company's operating
8 plans or any investigations that you performed to
9 determine whether the Company had been considering
10 additional capital activities in the 2018-and-onwards
11 period. And I don't see any mention of that in your
12 Expert Report.
13 Could you tell us, please, how you
14 investigated the Company's operating plans before you
15 prepared your Report?
16 A. (Ms. Chavich) We have an understanding by
17 the financial of what is the payments that are coming,
18 for example, for that.
19 If there is a plan of expansion--as, for
20 example, when you have the expansion that we show here
21 between 2011 and 2016, it was explained in the
22 Financial Statements that the Company was undertaking
[Page 2801]
1 first the Feasibility Study and then the plans. So,
2 that is explained in the Financial Statements of the
3 Company.
4 But the main--the main point here is that
5 dividends were distributed in any case, so the cash
6 hold was sufficient to cover the operational and
7 capital needs that they have, with the exception of
8 2020, that the Company, if I am not mistaken--we cite
9 to the release--dividends were not paid due to
10 uncertainty during that year, not because there was an
11 Investment Plan, but, given the uncertainty of that
12 year, dividends were not paid.
13 But in the others--in all the other years,
14 dividends were paid, despite the payments.
15 Q. I'd like to look at how you actually
16 explained your reasoning in your Report. So, let's
17 look at your Second Expert Report at Paragraph 37.
18 So, that's Tab 2 in the binder and Page 28 of the PDF.
19 And here you've explained and you've given
20 two reasons why you are assuming that the dividend
21 distribution will happen--would have happened, excuse
22 me--would have happened on the dividend distribution
[Page 2802]
1 dates and that it would have been a complete
2 pass-through.
3 I don't see any discussion here of your
4 extensive analysis of the Company's operating plans.
5 I see here two reasons given: One that you talk about
6 the history of their dividend distribution practice,
7 and then you also talk about their dividend
8 distribution policies.
9 Is that correct? Because I'd like to ask
10 first about the dividend distribution practice that
11 you're citing.
12 A. (Ms. Chavich) Yes. So, the first reason
13 that you see here is the practice, and the fact that
14 when we assumed the dividends would have been
15 distributed is when dividends were distributed, so in
16 2018-2022, exception 2020, and those dividends were
17 distributed even after the disputed payment.
18 So, even after not having this cash, the
19 Company was able to set aside the cash need that they
20 have and pay dividends.
21 Q. Right.
22 A. (Ms. Chavich) And what we explained is that
[Page 2803]
1 there is no reason to--and what we follow is, in
2 reality, there is no reason to assume that more cash
3 will increase your limitations to distribute
4 dividends. And then we go to the policies.
5 Q. Right. But you describe--you say here in
6 the language that we're looking at that there is a
7 well-established practice of distributing available
8 cash as dividends, except in the years when the
9 Company was accumulating cash for capital investments.
10 And you mentioned that also in your slide
11 presentation, which I think is a--it's Slide--
12 A. (Ms. Chavich) 18.
13 Q. --18, which is a copy of Figure 1 from
14 your--let's see--First or Second Expert Report. One
15 of the two. It's from your Second Expert Report. So,
16 if we could take a look at that figure.
17 So, I'm curious about the word "except"
18 because, if I count correctly here, we have 18 years
19 on this chart, and in nine of them, half of them, no
20 dividends are distributed. So, that doesn't sound
21 like an exception. That sounds like just as much as a
22 rule as the dividend distribution practice.
[Page 2804]
1 A. (Ms. Chavich) The Company, when they have
2 excess cash that it doesn't have any use to, it
3 distributed it. So, that is what you see between 2007
4 and 2010.
5 Between 2011 and 2016, there was an
6 expansion taking place. The Concentrator was
7 expanded; a new Concentrator was expanded.
8 Those years, what you are doing is you are
9 saving money and not distributing dividends to your
10 Shareholders, because they are expecting to have a
11 higher return due to this investment in the future.
12 So, it's a savings that you are doing now to then
13 further have additional dividends in the future. You
14 know that the revenues of the Company and the profit
15 increase after an expansion that triplicates their
16 capacity.
17 So, the logic is that when you have money
18 available and when you are a single-project company,
19 when you have money available and you don't have a
20 plan on expansion, that money, if it doesn't have any
21 use, should be distributed to your Shareholders,
22 because you have to give a return to your
[Page 2805]
1 Shareholders.
2 So, the practice of this Company is, when we
3 have a project, like an expansion, that money could be
4 reinvested, because we are going to get a return that
5 is at least the cost of equity. Otherwise, we are
6 distributing dividends. And that is what we show
7 here.
8 And we see here also, and that, I think, is
9 the most relevant period, the period in which payments
10 were made. And in any case, the Company had available
11 cash to distribute dividends.
12 Q. Right. In fact, the Company had more cash
13 than it distributed; correct?
14 So, it did not distribute all of its
15 available cash during that time period?
16 A. (Ms. Chavich) Correct. They distributed
17 what is excess cash, correct.
18 Q. Right. But if we look at, for example,
19 Ms. Kunsman's Second Report at Table 9, which is
20 Page 23 of the PDF--that's also at Tab 5 of the binder
21 in front of you--and we look at those same years she's
22 put on this chart in Table 9, then in Table 9 she's
[Page 2806]
1 shown the cash balance. So she's shown that, in fact,
2 they have more cash than they distributed. So,
3 they're obviously not distributing everything they
4 have got available.
5 Likewise, if we look at Table 11, we see the
6 difference between retained earnings and dividends,
7 and they've got retained earnings in excess of their
8 dividends as well. So, they're not distributing
9 everything they have available to them?
10 A. (Ms. Chavich) There are two different things
11 here, and--sorry--I will have to respond to them
12 separately.
13 Retained earnings is an accounting concept.
14 So, retained earnings are the amount of earning that a
15 company has generated during the past. It doesn't
16 consider the investment at all.
17 So, for example, here you see that it says
18 that the Company has, like, 4 billion of retained
19 earnings. That is the blue line. When you see the
20 cash available under--in 2014, if you go to the
21 previous chart that you were showing me, the available
22 cash was almost zero, or very low.
[Page 2807]
1 Q. Sorry. Just so we will--we'll show you that
2 chart.
3 A. (Ms. Chavich) Yeah. If you see, 2014, you
4 almost don't have cash, because you were investing all
5 the cash in the expansion.
6 So, retained earnings really is not
7 something that can be used to measure availability of
8 any fund. It's just an accounting concept that
9 accumulates accounting earnings without taking into
10 consideration investments and other cash outflows.
11 But just to be clear, I think that we shouldn't
12 consider it.
13 Now, regarding cash, as you see here, you
14 have your accumulated cash for the first expansion;
15 then you don't have it for the expansion of 2011-2016.
16 You don't have cash those years because you're using
17 it for the expansion. And then, yes, you accumulate
18 additional cash. And not all the cash is distributed.
19 You have to set aside cash for issues like, I have a
20 payment coming for operative reasons; prices are
21 volatile, so I need to have cash. So, the management
22 decides that there is cash that they need to hold.
[Page 2808]
1 The cash that they distributed is excess
2 cash. They already had that excess cash despite the
3 payment. That is the yellow bar there. What we are
4 saying is that when you have the net additional
5 payments, that additional cash will go on top of that
6 excess. It is more excess cash available and should
7 have been distributed at that point.
8 Q. Right. And so, you just mentioned the
9 management decision-making. Management decides how
10 much cash they need to save. Management decides how
11 much cash that they can send out the door.
12 Management, I assume, decides whether they should
13 pursue the capital expansion programs that we saw in
14 the 2012-2017 period; right?
15 Those are free choices by the management at
16 every point in time; right?
17 A. (Ms. Chavich) No--they are free choices
18 within reasonable business; right? You cannot do an
19 expansion plan that is not going to--it's not expected
20 to generate a return, because otherwise the Board and
21 the Shareholders are not going to approve--
22 (Interruption.)
[Page 2809]
1 (Stenographer clarification.)
2 A. (Ms. Chavich) Otherwise the Shareholders
3 will not accept that. Sorry.
4 Q. Okay. And you did not cite--or find, I
5 assume, because I assume if you'd found it you would
6 have said so--any policy that either directs the
7 Company to distribute all available cash or any rule
8 of thumb or policy that creates a default that they
9 will distribute a certain percentage of cash
10 available; the only policies that you cited were
11 policies that simply permitted management to make
12 dividend distributions. Is that right?
13 A. (Ms. Chavich) We cite to--and we can see
14 exactly the term of the policy--when they explained
15 that dividends should be paid, that dividends are
16 going to pay once liabilities--and, yes, you can show
17 it, probably, better than me trying to--
18 Q. Yeah. So, this is Exhibit CE-934. This is
19 the dividend distribution policy of SMCV.
20 And specifically, if we can highlight the
21 paragraph, the sentence that says "according to this
22 policy," about halfway through. But, of course, it's
[Page 2810]
1 just a paragraph. You can read the whole paragraph.
2 A. (Ms. Chavich) Yes. Yes.
3 And then this is the line; right? The
4 Company is going to use their profit as much as if
5 they have any continued growth of opportunities, face
6 any financial obligation, and then dividend
7 distribution will take place.
8 We know that all those befores had been
9 covered because dividends were distributed, so we are
10 in the point where we are already distributing
11 dividends in 2018, '19, '21, and '22.
12 Q. And in the periods where the management was
13 making the major capital investments in the
14 Concentrator expansion from 2012 to 2018, we know that
15 there were large financial obligations that were not
16 paid, nevertheless; right? That was when all the Tax
17 Assessments were pending?
18 A. (Ms. Chavich) That there were financial
19 obligations? There was an outstanding debt that was
20 also used to finance the Project, and it was paid as
21 payments come. It was not a default, in a sense. I
22 don't know what--
[Page 2811]
1 Q. I'm actually referring to the tax
2 obligations-
3 A. (Ms. Chavich) Okay.
4 Q. --which--this policy would suggest
5 that one should first pay your tax
6 obligations and then pay out your dividends.
7 But we don't--that didn't happen, did it?
8 They didn't follow that policy?
9 A. (Ms. Chavich) Well, they followed the policy
10 of paying what they considered were obligation that
11 otherwise you will be in default.
12 Same with "financial obligation." It
13 doesn't mean that you have to cancel all your debt
14 before paying dividends. You have to be on good terms
15 with your debt before paying dividends.
16 Q. Okay. Let's switch gears and talk about the
17 mitigation, which is one of the disagreements that
18 you've identified between the Experts.
19 SMCV did pay some of its taxes when
20 assessed, and that stopped the running of Penalties
21 and Interest. And, when that happened, you took
22 account of that in the Damages calculations; correct?
[Page 2812]
1 A. (Mr. Spiller) Yes.
2 Q. So, we know that they knew how to do that?
3 A. (Mr. Spiller) Sorry. Can you repeat that?
4 Q. Never mind.
5 Sorry. I'm just trying to accelerate
6 through a few points here. All right. But obviously,
7 because we have large accumulated Penalties and
8 Interest, we know that they did not pay all of their
9 Assessments when assessed. They chose to let some of
10 those obligations hang while they contested them in
11 the administrative and court proceedings, and that's
12 how they accrued Penalties and Interest; right?
13 A. (Mr. Spiller) I believe that they followed
14 the tax proceedings and--yeah, these amounts were not
15 enforceable yet in Perú. My understanding is that
16 once there is a Decision of the Tax Tribunal, I think
17 it becomes enforceable and payable. But, yeah, I
18 think that they took whatever management strategy or
19 decision they took is what they did.
20 Q. Right. And, I mean, that decision to choose
21 between paying your taxes under protest and stopping
22 the Penalties and Interest, or not paying the
[Page 2813]
1 Assessments, contesting them and waiting to see what
2 happens at the end, that's what causes more than half
3 of the Damages--more than half of the Assessments
4 claimed here; right? You broke this down in your
5 first slide?
6 A. (Mr. Spiller) Well, I think that it is
7 Claimant's Claim that the reason why they're--that
8 amount is because of the inappropriate Tax and Royalty
9 Assessments. I think that's the reason, and whatever
10 they were doing was they were following the
11 administrative process in contesting the tax
12 obligations, with expectations of recovery from SUNAT
13 that--at the reimbursement rate, which is reasonably
14 high, very close to the Cost of Capital of the
15 Company. So...
16 Q. But it's your understanding that they had
17 the option to pay the Assessments, when received--
18 A. And also to--
19 (Overlapping speakers.)
20 Q. --and they would not have accrued the
21 penalty and interest; correct?
22 A. (Mr. Spiller) Yeah. And also to ask SUNAT
[Page 2814]
1 to reverse its--to review its policy, and pay back
2 with interest at the reimbursement rate. So, it
3 is--yeah.
4 Q. And that's common--
5 A. (Mr. Spiller) That's the options. You know,
6 whether it's one or the other, it seems that both are
7 legal, to me.
8 Q. Right. So--and this is common in taxation
9 in many, if not most countries in the world, that you
10 have the option to pay under protest, avoid the
11 Penalties and Interest, contest the issue, and if it
12 turns out you're right in the end, you get your
13 payment back, with Interest. This is the statutory
14 rate that you're referring to.
15 So, that option is known to the Company,
16 because we know they did it, and they simply chose not
17 to do that here.
18 If we look at your Slide 3 from your
19 presentation; right?
20 A. (Mr. Spiller) Okay.
21 Q. Which is just the instruction Slide.
22 A. (Mr. Spiller) Yeah.
[Page 2815]
1 Q. Just for reference. If they had done that,
2 on both Claims, the dark green bar would be gone;
3 right?
4 A. (Mr. Spiller) Yes.
5 Q. And that dark green bar is more than half of
6 the amounts in the Main Claim; right?
7 A. (Mr. Spiller) Yes. And what's the question?
8 Q. Yes. I was confirming that it's more than
9 half of the amount-
10 A. (Mr. Spiller) Yeah.
11 Q. --claimed here was the Company's choice to
12 incur?
13 A. (Mr. Spiller) Yeah. Right. But, you know,
14 paying doesn't exempt the Penalties, you know.
15 Normally, you get an assessment and that assessment
16 incorporates a penalty. You don't get a free
17 assessment.
18 Q. But it stops the running of future
19 Penalties; correct?
20 A. (Mr. Spiller) Well, it depends because you
21 pay the Assessment, and then SUNAT comes with a
22 different Assessment and a different Penalty. So,
[Page 2816]
1 it's not necessarily true. You know, if I pay one
2 Assessment of SUNAT, I don't know what--you save the
3 Statutory Interest on that particular Assessment, but
4 that doesn't save you anything else after tomorrow.
5 They come with a different assessment, for a different
6 reason. As it happened.
7 Q. In this same time period that they chose to
8 accrue $616 million in Penalties and Interest, that
9 was the same time period in which they were making a
10 $5.3 billion capital investment; correct?
11 A. (Mr. Spiller) I find they choose to accrue
12 Penalties and Statutory Interest. I don't think
13 that's a proper representation of anything because
14 Penalties are not chosen. You don't choose to pay--to
15 get assessed a Penalty. You receive a Penalty. You
16 may select to delay and absorb the Interest, and then
17 you'll get that money back, but the Penalty and the
18 Penalty too, but the Penalty is what you get assessed.
19 So, it's not clear that paying the
20 Assessment saves you that particular Penalty.
21 At least, that remains to be explained
22 better, you know, because it's not proper,
[Page 2817]
1 your characterization.
2 Q. We can agree, I assume, that you would avoid
3 paying further Interest; correct?
4 A. (Mr. Spiller) For avoid what?
5 Q. Paying further Interest?
6 A. (Mr. Spiller) You may save on Interest,
7 yeah.
8 Q. Yeah. And if the--if you change your tax
9 behavior, you will also avoid further Assessments,
10 and, therefore, avoid the Penalties in those
11 Assessments;--
12 A. (Mr. Spiller) Well...
13 Q. right?
14 A. (Mr. Spiller) Well, yeah, but why would you
15 change your tax--your tax stories? You know, your tax
16 reporting. You know, that assumes a lot.
17 Q. Okay. One moment, please.
18 Just a quick note about the interest rate
19 that you used--switching back to the dividends, the
20 interest rate that you used to bring forward the
21 dividend distributions, if we want to look at your
22 slides just for reference, let's use Slide 7, please.
[Page 2818]
1 A. (Mr. Spiller) Yes.
2 Q. So, you took the--you explained that you
3 took the green bar, which is all the Assessments, you
4 adjusted that for tax savings associated with having
5 paid Royalties and the like, and then the--I want to
6 talk about the transition from the orange bar to the
7 light blue bar.
8 As I understand it, for this period of time,
9 you're adjusting for time, and you applied interest at
10 a short-term deposit rate?
11 A. (Mr. Spiller) From the 813 to the 819,
12 yes, that the assumption is that the Company keeps the
13 cash at hand until it has--as you recall, you saw that
14 declining cash balance is in one of the charts of
15 Mrs. Kunsman's, declining cash balance, during that
16 period of time, the Company would not have distributed
17 dividends, and then in 2018, you started distributing
18 dividends. So, until that day, then, they will have
19 kept the cash at hand and collecting some short-term
20 deposit rate.--
21 Q. Right.
22 A. (Mr. Spiller)--And then
[Page 2819]
1 Q. And I just want to ask you about that rate.
2 It's the rate specifically I'm interested in.
3 A. (Mr. Spiller) Okay.
4 Q. So, that rate, I looked at the Excel
5 spreadsheet to get here, but it seems to range from
6 like .5 percent to about 2 percent over this time
7 period?
8 A. (Mr. Spiller) Yeah. It's a low--it's a
9 low--it comes from the--it's the deposit rate,
10 short-term deposit rate at the time in Perú was
11 between .5 and 2, I think.12 Q. Yeah, somewhere in that 1 to 2 range.
13 (Overlapping speakers.)14 A. (Mr. Spiller) With that average, I think it
15 was 1.25 or something.
16 Q. Right. So, when we go, though, when we do
17 the next adjustment for time, for time value, when we
18 take the light blue bar to the dark blue bar, now
19 there's a different rate being applied here, and
20 that's the Cost of Equity.
21 A. (Mr. Spiller) Correct.
22 Q. Which, numerically, I think ranges between
[Page 2820]
1 about 5 and 8 percent, over the 2018 to 2022 period?
2 A. (Mr. Spiller) I believe you're right. Yes.
3 Q. Okay. So, that's 2018 to 2022. That's a
4 period in which the U.S. Government can only borrow at
5 a 1 to 2 percent rate; right?
6 A. (Mr. Spiller) I think so.
7 Q. Right. And if you take something
8 like--well, Ms. Kunsman suggests--
9 A. (Mr. Spiller) Well, sorry. The short-term
10 rates is the borrow. Long-terms rates was--
11 (Overlapping speakers.)
12 Q. The U.S. T-bill rates?
13 A. (Mr. Spiller) Yeah, that's a very short
14 term.
15 Q. Right.
16 A. 10-years rates were higher than that, but,
17 10-years rates were around 2 percent, 2-3 percent.
18 Q. Right. And if we said, okay, well, this
19 isn't the U.S. Government, certainly, but this is a
20 commercial player. So, if we add a couple of
21 percentage points to that, we get rates between, let's
22 say, 2.4 and 4.4 percent. That's Ms. Kunsman T-bill
[Page 2821]
1 plus 2.
2 A. (Mr. Spiller) Well, not really because the
3 T-bill was much lower, but the--but this is not--this
4 is not what a shareholder demands from--
5 Q. But it is the rate--
6 A. Hold on. From postponing dividends. If I
7 am a shareholder in a company, and Claimants control
8 the Board, and they will demand an appropriate return,
9 and an appropriate return is at least the Cost of
10 Equity. So, if I--if for some good reason they would
11 like to postpone dividends when the cash is available
12 for distribution, they will demand, at least, to
13 obtain that return.
14 Now, here what we have is an involuntary--
15 involuntary postponement. The dividend will come
16 whenever the Tribunal makes a determination, say, in
17 2024. So, if I have to accept a delay until 2024 of
18 my dividend, then it should be at least the Cost of
19 Equity. And that's a cost for SMCV. If SMCV
20 voluntarily postpones dividends, then it will have to
21 distribute that amount that we provide here, 942.4, as
22 of 2022, and some more until 2024.
[Page 2822]
1 Q. Dr. Spiller, I will ask that you focus on
2 the question that I asked.
3 The T-bill plus 2 rate is close to the--is
4 something that we might refer to as a prime rate,
5 something that's available in the commercial
6 marketplace; right?
7 A. (Mr. Spiller) No. The T-bill is not.
8 Q. I'm sorry?
9 A. (Mr. Spiller) The T-bill is not.
10 Q. T-bill plus 2?
11 A. (Mr. Spiller) It could be plus 2, plus 3.
12 Q. Okay. All right.
13 And what evidence do you have that anyone in
14 the marketplace would have offered 5.5 to 8.6 percent-
15 A. (Mr. Spiller) Well.
16 Q. --in the 2018 to 2022 period?
17 A. (Mr. Spiller) Well, simply the Cost of
18 Equity in--in mining. For mining--
19 (Overlapping speakers.)
20 Q. I said in the marketplace. If somebody
21 wants to borrow--
22 (Overlapping speakers.)
[Page 2823]
1 A. (Mr. Spiller) Sorry. This is not borrowing.
2 Nobody is borrowing here. I'm postponing a
3 particular--I'm postponing receiving a particular
4 dividend.
5 Q. But what is your evidence--
6 A. (Mr. Spiller) So, the...
7 Q. that this rate was available as a commercial
8 rate? Do you have any evidence that this, these rates
9 were available as a commercial rate?
10 A. (Mr. Spiller) What is a commercial rate for
11 you?
12 Q. Have you seen the--
13 (Overlapping speakers.)
14 A. Because a commercial rate is--commercial
15 rates are things are being priced based on that rate.
16 So, for example, I can price a loan based on a rate
17 that's associated with that loan. I can price a share
18 based on the Cost of Equity, the Cost of Capital
19 associated with that particular company. So, shares
20 are being transacted every day, and the shares
21 have--when you discount the cash flows of a particular
22 company, that's how you value a share, and that is the
[Page 2824]
1 Cost of Equity.
2 So, all shares are being transacted at Cost
3 of Equity, different Cost of Equity for different
4 industries, and Cost of Equities, as commercial as any
5 other rate.
6 Q. Did you investigate whether rates of
7 5.5 percent to 8.6 percent were commercially available
8 to third parties in the marketplace, or did you only
9 calculate the Cost of Equity of the specific company?
10 A. (Mr. Spiller) Well, the Cost is a
11 commercially reasonable rate in that sense too.
12 Q. Did you have any proof that there is a
13 commercially available rate of 5.5 to 8.6 percent in
14 the 2018 to 2022 time period?
15 A. (Mr. Spiller) Well, shares were
16 being--shares were being transacted. You're asking
17 me, do you have proof of a loan at that rate.
18 Q. Right.
19 A. (Mr. Spiller) Well, this is equity. This is
20 not debt. This is equity. So, if you are looking at
21 equity, you don't apply the Cost of Debt. It's
22 like--if I--if you--if you buy--if you're going to buy
[Page 2825]
1 a loan portfolio, you're going to use the Cost of Debt
2 of that particular portfolio, but if you're going to
3 buy a company, rather than give you debt is going to
4 give you equity, you discount at the Cost of Equity.
5 So, each Cost of Capital applies to whatever
6 the asset you are valuing. So if I'm valuing debt, I
7 use the Cost of Debt. If I'm valuing equity, I use
8 the Cost of Equity. So, when we do the cash flows to
9 the firm, we don't use the Cost of Equity. We use the
10 Cost of Capital of SMCV, which is the balance of
11 equity and debt, because the Company, as I show in
12 Slide 3, is a balance of--it has equity and has debt.
13 So, you compute the average cost.
14 But when you only focus on the equity, then
15 you use the cost of capital of equity. So, it is an
16 applicable asset, applicable rate of--it's true--an
17 applicable rate to the appropriate instrument.18 MR. UKABIALA: I'm really sorry to
19 interrupt. Just pursuant to the Agreement between the
20 Parties, each Party had a hundred and-I'm sorry, hour
21 and 10 minutes, which would be 40 minutes for cross,
22 which I believe we've gone over.
[Page 2826]
1 So, we just wanted to see if the plan is for
2 Kunsman to have a shorter direct, or we'll have the
3 equal amount of time for cross as well.4 MS. CARLSON: We can discuss that in just a
5 second. I have one question left. Thank you.
6 BY MS. CARLSON:
7 Q. Dr. Spiller, you are aware that the
8 requirement of the Treaty that is applicable in this
9 case is that--to use a "commercially reasonable rate"?
10 You're aware of that Treaty provision;
11 correct?
12 A. (Mr. Spiller) I think that--
13 Q. This is just a question.
14 A. (Mr. Spiller) There are two issues on this.
15 Q. No, I don't need an explanation.
16 A. (Mr. Spiller) I--no, no--
17 (Overlapping speakers.)
18 Q. Are you aware that that is the applicable
19 Treaty provision?
20 A. (Mr. Spiller) Well, I think this is--
21 Q. That's a yes or no.
22 A. (Mr. Spiller) Hold on. It cannot be. Hold
[Page 2827]
1 on.
2 Q. Yes, it is.
3 A. (Mr. Spiller) No. If I look at the chapter
4 in which this interest at commercially reasonable rate
5 appears, it's--go up a little bit on this, go up a bit
6 more--it's Article 10.7, which talks about
7 expropriation and compensation. I'm not a lawyer. I
8 don't know if that applies or not. But, to me, it
9 means that for an expropriation claim, the
10 compensation that you're going to apply is that. And
11 even the Article 3 doesn't apply here. We are not
12 looking at the Fair Market Value of a company. We are
13 looking at historical damages, damages that happen in
14 the past.
15 So, this is not--this is the--to me, as an
16 economist, this is not necessarily the article that
17 you want to look.
18 Q. Okay.
19 A. (Mr. Spiller) Maybe you refer me to
20 a different article, but that's up to you.
21 Q. So, you're operating under a legal
22 instruction, that this is not the right--the
[Page 2828]
1 applicable provision?
2 A. (Mr. Spiller) I'm not under a particular
3 instruction. I understand--normally, we talk about
4 commercial rates in international arbitration, and I
5 think that the Cost of Equity is the applicable rate
6 for this particular methodology. For a different
7 methodology, there is a different rate.
8 Q. Okay. Thank you.
9 MS. CARLSON: That concludes my questions,
10 Madam President.11 PRESIDENT HANEFELD: Any questions in
12 redirect?13 MR. UKABIALA: No redirect for Claimant.
14 Thank you, Madam President.15 PRESIDENT HANEFELD: Thank you.
16 No further questions.17 MS. HAWORTH MCCANDLESS: Can I get a sense
18 of where I am on time?19 PRESIDENT HANEFELD: Yes.
20 MS. HAWORTH MCCANDLESS: Just so, that I can
21 answer Counsel's question.22 PRESIDENT HANEFELD: Yes. And now, first of
[Page 2829]
1 all, thank you very much for your testimony. We have
2 no additional questions. So, you are released as
3 Experts in these proceedings.4 THE WITNESS: (Mr. Spiller) Thank you.
5 (Witnesses step down.)
6 PRESIDENT HANEFELD: And, Marisa, could you
7 please share with us where we stand in terms of time?8 MS. CARLSON: And I guess I need to know
9 what--just what was on this examination.10 SECRETARY PLANELLS VALERO: Yeah. This
11 examination you used 48 minutes.12 MS. CARLSON: Okay.
13 Counsel, I am prepared to proceed on either
14 basis; Ms. Kunsman can shorten her presentation, or
15 you can have an extra eight minutes, whichever you
16 prefer.17 MR. UKABIALA: Yeah, the extra time for
18 cross-examination would be preferred. Thank you.19 MS. CARLSON: Thank you.
20 PRESIDENT HANEFELD: That we will proceed on
21 this basis, and use this moment for a 10-minute break.22 (Brief recess.)
[Page 2830]
1 PRESIDENT HANEFELD: So, let us continue now
2 with the Respondent's Quantum Expert, Ms. Kunsman.3 ISABEL SANTOS KUNSMAN, RESPONDENT'S WITNESS, CALLED
4 PRESIDENT HANEFELD: Welcome. And let us go
5 right away into the Declaration.
6 Could you please read it out?7 THE WITNESS: Great. Yes. I am Isabel
8 Kunsman, and I solemnly declare, upon my honor and
9 conscience, that my statement will be in accordance
10 with my sincere belief.11 PRESIDENT HANEFELD: Thank you. Do you have
12 your Expert Reports--that's RER-5 and 10--in front of
13 you?14 THE WITNESS: Yes, I do.
15 PRESIDENT HANEFELD: And I understand you
16 will also give a presentation?17 THE WITNESS: I will.
18 PRESIDENT HANEFELD: So, we are looking
19 forward to your presentation now.20 THE WITNESS: Great. Thank you.
21 DIRECT PRESENTATION
22 THE WITNESS: For the benefit of the
[Page 2831]
1 Tribunal, I provide a summary of my qualifications in
2 this slide which you can reference later.
3 So, as Compass Lexecon mentioned, their
4 Damages calculation contains two scenarios: One, the
5 Main Claim, under which they assume that the Tribunal
6 will find that all Assessments, Penalties, and
7 Interest constitute a breach of the Treaty and/or the
8 Stability Agreement; and an Alternative Claim, whereby
9 the Tribunal will find that not waiving all the
10 Penalties and Interest, incorrectly calculating some
11 of the Assessments, and not fully reimbursing SMCV for
12 the GEM payments constitute a breach of the Treaty
13 and/or the Stability Agreement.
14 Now, both Claims have two components in the
15 calculation: Historical losses, and future losses or
16 offsets. Because the offsets are higher, those become
17 negative.
18 In total, Damages under the Main Claim,
19 which I will show in red throughout the presentation,
20 are USD 942.4 million, and the Alternative Claim,
21 which I will show in blue, USD 719.9 million as of
22 September 13, 2022.
[Page 2832]
1 Now, there are two items of note on Damages.
2 One, Claimant is calculating--is presenting
3 Damages on behalf of SMCV, and Compass Lexecon, as I
4 have said, have only calculated Damages on behalf of
5 SMCV for both breaches. So, if the Tribunal decides
6 that Damages should only be calculated for Freeport,
7 you would need to reduce Damages by the dividend taxes
8 and also by their shareholding of SMCV.
9 The second item of note that was brought up
10 is that the second-largest Shareholder of SMCV, SMM
11 Cerro Verde, has initiated an arbitration against
12 Perú, and if the Tribunal in both cases award Damages,
13 SMM Cerro Verde would double-recover.
14 I make seven adjustments to Compass
15 Lexecon's Damages calculations. Five of them deal
16 with historical losses and two of them with the future
17 losses offset.
18 All but one relate to both the Main and the
19 Alternative Claims. The sales-based tax correction
20 only deals with the Alternative Claim. Now, before I
21 go into the details of my adjustments, I want to
22 highlight where the areas of disagreement are with
[Page 2833]
1 respect to each step of Compass Lexecon's Damages
2 calculation.
3 So, in this schematic, I'm just showing the
4 historical losses which Compass Lexecon calculates in
5 three steps: First, the net losses, which represent
6 the amount that SMCV paid for the assessment,
7 Penalties, and Interest, net of the GEM
8 reimbursements, depreciation offsets and Income Tax
9 savings.
10 They then calculate net dividends lost by
11 adding to the net losses interest at a short-term
12 U.S.-denominated deposit rate, which is approximately
13 1 percent annually. And, because they are claiming
14 Damages on behalf of SMCV, they don't deduct the
15 dividend tax. The assessment payment--the interests
16 run from the various assessment payment dates to the
17 various dividend payment dates.
18 Now, in the third step they calculate
19 Claimant's historical Damages by adding pre-Award
20 interest to the net dividends lost at SMCV's Cost of
21 Equity.
22 So, of the areas of disagreement in the
[Page 2834]
1 historical calculations, three of them deal with the
2 net losses, which is the avoidable Penalties and
3 Interest, the Tax Measures not allowed for Damages
4 under the Treaty, and the sales-based tax correction;
5 then the second one deals with the timing of the
6 but-for cash flows to be paid out as dividends; and
7 the last disagreement is with the pre-award interest
8 rate that Compass Lexecon uses.
9 So, my first adjustment deals with the
10 mitigation of Penalties and Interest. I calculated
11 Damages based on the legal assumption that SMCV could
12 have avoided a significant portion of the Penalties
13 and Interest associated with the Assessments if SMCV
14 had followed SUNAT's methodology and paid the
15 Assessment Interest and Penalties under protest after
16 receiving the first Assessment.
17 This adjustment reduces the Main Claim by
18 62.1 percent and the Alternative Claim by
19 72.4 percent.
20 The calculation of this adjustment hinges on
21 what I call the cutoff dates, and the cutoff dates
22 represent the date SMCV received the first Assessment
[Page 2835]
1 for Royalties and for each type of tax. So, in total,
2 there are seven cutoff dates.
3 So, for Royalties and taxes that were due
4 before the cutoff date, SMCV could have paid the
5 Assessment, Interest, and Penalties up to the cutoff
6 date under protest to keep additional interest from
7 accruing on those Penalties and Assessments. But, for
8 the ones due after the cutoff date, the entire
9 Penalties and Interest could have been avoided by
10 filing taxes under protest using SUNAT's methodology.
11 So, in this schematic, I provide an example
12 of the methodology I used for the Royalties. On the
13 left side of the table, it shows that, for Royalties,
14 SMCV received seven Assessments. The first one, they
15 received on August 17, 2009 for the Royalty period
16 between December 2006 to December 2007. The gray bar
17 represents that period where they paid the Royalties,
18 and the white bar surrounded by the red dotted line
19 represents the interest and penalties accrued on the
20 Assessments.
21 So, for the first two Assessments they
22 received, because they had already paid those
[Page 2836]
1 Royalties by the time they received the Assess--the
2 first Assessment, which means the cutoff date is
3 August 17, 2009, they could have only avoided the
4 interest from accruing after the cutoff date.
5 Now, for the third Assessment, because the
6 cutoff date is in between the Royalty Assessment
7 period, they could have only avoided the Penalties and
8 Interest for those payments that would occur after the
9 cutoff date.
10 Then, for the last four Assessments, they
11 could have avoided the Assessments altogether,
12 including the Penalties and the Royalties, if they had
13 paid the Royalties using SUNAT's methodology that they
14 already knew as of August 17, 2009, and doing so under
15 protest.
16 My adjustments are conservative in two
17 respects: First, as the Tax Experts mentioned, I
18 understand that after receiving the first Assessment,
19 SMCV could have understood that it should have applied
20 nonstabilized taxes and Royalties to the Concentrator
21 going forward in order to avoid additional
22 Assessments, Penalties, and interest.
[Page 2837]
And, second, I did not include a mitigation adjustment for the interest associated with the payment plans because I didn't have enough information to do so.
Now, my second adjustment deals with the Tax Measures not allowed for Damages under the Treaty.
Compass Lexecon's Damages calculation does not distinguish between the two legal Claims, which I referred to under the breach of the Stability Agreement and the breach of Article 10.5 of the Treaty.
I calculate Damages under Article 10.5 of the Treaty based on the legal assumption that the Royalty Assessments and not fully reimbursing SMCV for the GEM payments are the only Measures Claimants can claim for Damages. So, they can only claim the Royalty Assessments and the Interest and Penalties associated with the Royalty Assessments, and then the GEM payments, but nothing else.
This adjustment reduces the Main Claim by 39.6 percent and the Alternative Claim by 36 percent.
And these are stand-alone adjustments. The impact is
[Page 2838]
a stand-alone impact.
Now, the sales-based tax correction, which is my third adjustment, is a difference of opinion between the Tax Experts. All I did is just completely remove the tax corrections from Compass Lexecon's calculation of the Alternative Claim, and it reduces the Alternative Claim by 3.3 percent.
Now, for the fourth adjustment, which deals with the distribution of the but-for cash flows, Compass Lexecon assumes that the but-for cash flows would be distributed based on the dates that SMCV distributed dividends. But there is no evidence to support this assumption that they would have distributed all those but-for cash flows. And without any evidence of the dividend policy or a circled pattern of practice, I assume that the but-for cash flows would be distributed as a one-time settlement payment at the Valuation Date.
This reduces Damages by 12.1 percent in the Main Claim and 11.6 percent on the Alternative Claim.
So, what do I mean by "no dividend policy or pattern"? All companies have a dividend policy,
[Page 2839]
explicitly or implicitly. Some companies will distribute a percentage of their earnings or their Free Cash Flows to Equity or some other Measure every year. Other companies will distribute a fixed amount, a fixed amount per share. Others will have, before they make the investment, project companies, an expected pattern of distribution of dividends, and other companies may choose to not distribute dividends at all for a period of time.
So, there is a policy, and I asked for this policy, and I didn't receive it. So, as an alternative, I looked at, well, what did SMCV do historically? And there isn't any disagreement between the Experts that there weren't any dividend payments between 2012 and 2017, and also no dividend payments in 2020 because of COVID.
However, when--the years they did distribute dividends, SMCV didn't distribute all of the available cash that they had. For example, in 2018, as the yellow block shows, they distributed a very round amount of 200 million in dividends, and they could have distributed up to 501 million. And you've heard
[Page 2840]
today from Claimant's side that, well, they decided what was the cash amount they needed, and then what was left over they could distribute as dividends. That assumes that a company will first decide the cash amount they need, and then they will decide what's left over to pay as dividends.
That's not right. That's not always the case. Sometimes companies will say: "We will distribute a certain amount as dividends, and whatever is left over, we'll keep it as a cushion," or--there are many reasons. Or we'll keep--"We don't want to distribute it for tax reasons," or because of debt issues, other commitments that they have may have. There are a lot of reasons. Unfortunately, I don't know what were the reasons specific to SMCV, because I didn't have their dividend distribution policy.
Now, the fifth adjustment deals with the pre-award interest rate. In their First Report, Compass Lexecon states: "To restore SMCV to the position it would have been in but for Perú's breaches, it is necessary to add interest to the nominal cash flows--lost cash flows. SMCV's Cost of
[Page 2841]
Equity represents such rate, as it is the minimum Rate of Return that SMCV's equity holders require to voluntarily invest or retain cash flows in SMCV. Therefore, it reflects the Cost SMCV bears by delaying its equity distributions due to Perú's breaches."
However, Compass Lexecon ignores relevant provisions of the TPA, which provides for an interest at a "commercially reasonable" rate.
So, what Claimants and/or SMCV would have done is not relevant, given the TPA's instruction to calculate interest using a commercially reasonable interest rate.
Now, even if one were to ignore the TPA's instruction, Compass Lexecon, as I mention here, is comparing the But-For and the Actual Scenario--right?--when it comes to Damages.
So, in order to show that, in the But-For Scenario, SMCV would have earned that Cost of Equity, they have to present evidence that Claimant had the opportunity to invest in a project that earned SMCV's Cost of Equity during the relevant period; and, even if such project existed, they would have to
[Page 2842]
demonstrate that the Measures prevented Claimant from raising capital to invest in said project.
Now, the issue of the Cost of Equity that was discussed earlier relating to whether it's a commercially available rate or not, the Cost of Equity represents the average return investors expect from investments in the common shares of companies over a multi-decade period. It is a very long-term rate, and it's an expectation.
So, using SMCV's Cost of Equity as a pre-award interest rate assumes that very long-term Rates of Return can be earned over very short periods of time. Over a short period of time, companies may or may not earn their Cost of Equity, and in general, companies hope to earn their Cost of Equity, but they may or may not.
Finally, there is no evidence that Claimant had reinvested or was reinvesting any capital back into SMCV, and Compass Lexecon's assumption that SMCV would hold the but-for cash flows in short-term deposits before distributing them as dividends implicitly assumes that SMCV would not have reinvested
[Page 2843]
the but-for cash flows into the Project or started additional projects.
I also wanted to note that Compass Lexecon's Damages calculation assumes that the amounts that would be paid in dividend taxes would be accruing interest at the Cost of Equity.
We didn't make an adjustment for this because all of our other adjustments negate this adjustment, but it is also something that the Tribunal should consider.
Based on the "relevant interest rate" language on the Treaty, I consider the one-year U.S. Treasury Bill plus 2 percent compounded annually a commercially reasonable rate to calculate pre-award interest. Using this rate reduces the Main Claim Damages by 7.5 percent and the Alternative Claim Damages by 7.2 percent.
Now, Compass Lexecon provides alternative pre-award interest such as the Weighted Average Cost of Capital and Perú's Cost of Debt. I won't repeat the reasons again, but the same reasons apply to those rates as the ones that apply to the Cost of Equity.
[Page 2844]
Now, with SUNAT's reimbursement rates for excess payments, Compass Lexecon is assuming that that rate would apply to all of the Assessments, Interest, and Penalties, but my understanding is that that rate would only apply to payments--would not apply to payments of avoidable Assessments because it assumes that those avoidable assessment Penalties and Interest are not excess payments.
Also, for both avoidable and unavoidable Assessments, the reimbursement rate doesn't apply to interest. My understanding is that.
Now, for future losses, I provide a similar schematic as I did for historical losses. In total, Compass Lexecon calculates expected net offsets of USD 12.23 million--negative million--which are made up of outstanding liabilities and depreciation of offsets.
Compass Lexecon assumes that the Outstanding Liabilities will be paid as of the Valuation Date, and that depreciation of offsets will happen between 2023 and 2027.
Like they did for the historical losses, they bring forward those offsets using a short-term
[Page 2845]
interest rate. And then on the third step, they discount them back to the Valuation Date using SMCV's Cost of Equity. Now, the areas of disagreement here are with the outstanding liabilities and the Discount Rate used.
These are small adjustments, with the outstanding liabilities. On their First Report, they assumed--Compass Lexecon assumed that they would have been paid as of the Valuation Date, but what we found is that, when they submitted the Second Report, there were still 33.2 million of outstanding liabilities unpaid.
So, in our view, because it is unclear whether those liabilities will be paid or not, they should be excluded since they have not materialized, and excluded in those liabilities reduces the Main Claim by 2.7 percent and the Alternative Claim by .2 percent.
The last adjustment just deals with the Discount Rate Compass Lexecon uses for the depreciation offset, and it has less than 1 percent impact.
[Page 2846]
Now, as I have mentioned, the effect on Damages of all of my adjustments are stand-alone, and there are a couple of adjustments that are mutually exclusive. In this slide, I provide the impact of several adjustments in combinations. So, the adjustments combined for the Treaty Claim excluding Adjustments 3 and 5 reduce Damages by 87.4 for the Main Claim and 90.4 for the Alternative Claim.
And then for the Stability Agreement Claim in combination, if you exclude Adjustments 2 and 5, the decrease is 69.4 percent and 77.3 percent for the Main Claim and Alternative Claim respectively.
Now for the Tribunal's reference, similar to what Compass Lexecon did, I provide a cheat sheet of what are all the adjustments, what are the assumptions under Compass Lexecon's calculation, and then what are the assumptions for my adjustments.
And, with that, I conclude my presentation.
PRESIDENT HANEFELD: Thank you very much.
We have no immediate questions from the Tribunal's side, so we hand over to the Claimant's Counsel for cross.
[Page 2847]
MR. UKABIALA: Thank you, Madam President.
CROSS-EXAMINATION
BY MR. UKABIALA:
Q. Hello, Ms. Kunsman. Nice to see you again.
A. Great to see you again, Mr. Ukabiala.
Q. Ukabiala, yes.
A. Okay.
Q. I apologize for cutting personally into your time, and we are very short on time. So, you remember the drill from last time; I'll try to ask my questions as concisely as possible and would be very grateful if you could give as concise answers as you can.
And what I think would be really helpful is to help the Tribunal to identify where we actually have differences between the Damages Experts, because I think there are actually a lot of agreements. And so, I think it would be helpful to isolate the economic issues for the Tribunal.
So, I would like to just go through Table 3 of your Report. And if we can put that up on the screen, that would be great.
This is Table 3 of your Second Report.
[Page 2848]
A. Thank you.
Q. Okay. So first we have Adjustment A, the mitigation adjustment, and this is by far your biggest adjustment with a 62 percent impact. I understand from the SMM Hearing that this adjustment is based on a legal assumption and is not based on any independent economic assumption by you?
A. Correct.
Q. Thank you. Next, we have Adjustment B, which you call "Taxes Not Allowed for Damages Under the Treaty," and I understand that this is also an instruction from Counsel?
A. Correct.
Q. And you are aware that this instruction is based on Respondent's Article 22.3.1 objection to Article 10.5 claims based on Penalties and Interest on Tax Assessments; correct?
A. How I understand this instruction is that--and I'm going to refer to the language.
Q. And I think you might have mentioned it in your presentation.
A. Yes. That under Article 10.5 of the Treaty,
[Page 2849]
Claimant cannot claim for taxes or--Tax Assessments or the Penalties and Interest associated with those Tax Assessments. So, they can claim for Royalties and the Penalties and Interest associated with the Royalties.
Q. Exactly. Thank you, Ms. Kunsman.
A. Okay.
Q. And so you weren't asked to perform any adjustment based on the application of Article 22.3.1 to Article 10.5 Claims for Royalties or Penalties and Interest on Royalties?
A. No.
Q. Okay. Thank you.
And I wanted to just make sure--I know you appreciate this, but under the Main Claim as Claimant has articulated it, the breaches of Article 10.5 and the stability are described as "and/or" breaches of Article 10.5 or the Stability Agreement; right?
A. Can you repeat that question?
Q. Right. So, in the articulation of Claimant's Main Claim, Claimant alleges that the final and enforceable assessments breached the Stability Agreement and/or--
[Page 2850]
A. Yes, "and/or." Yes.
Q. --the Article 10.5; right?
So, the Tribunal need not necessarily reach the Article 22.3.1 objection if the Tribunal finds a breach of the--breaches of the Stability Agreement?
A. Your questions are starting to sound very legal to me. I'm not sure. All I know is what the Damages correspond which--to what and how I present it in my presentation. I'm not sure what the Tribunal needs to conclude from a legal perspective or not.
Q. Yeah. No, I'm sorry, Ms. Kunsman.
Let's just go to just one more question on this. Let's just go to your Second Report, Paragraph 7. It says: "This exclusion Article 22.3.1 does not extend to the breach of the Stability Agreement"; correct?
A. Right. And that's what we call--what I called the "Stability Agreement Claim."
Q. Right.
A. Versus the Article 10.--Article 10.5 Treaty Claim.
Q. Right. So you weren't intending to present
[Page 2851]
any adjustments based on 22.3.1 to those claims?
A. Correct. No.
Q. Thank you, Ms. Kunsman.
Next we have the dividend distribution date. This is Adjustment C, and this is, in fact, an economic dispute between the Damages Experts; right?
A. Correct. Could you--yes. Thank you.
Q. And this is based on your view that, but for Perú's breaches, Cerro Verde would have only paid the lost cash flows to its Shareholders on the Valuation Date?
A. It is an assumption I make, not because I am certain that that's what they would have done. But because I don't have enough evidence to decide what they would have done, I picked a middle-of-the-road assumption. I could have assumed that they wouldn't distribute them until the end of the Concession, which some concessions do, or that they would have distributed them over time, as a percentage, but since I didn't have enough information, I assumed the Valuation Date.
Q. I understand that. And right now I'm just--I
[Page 2852]
just want to establish what the legal and economic disputes are.
A. Yeah.
Q. And so then we have the outstanding liabilities. That is also based on an economic dispute between the Parties; right?
A. Yes.
Q. And the sales-based tax correction is an instruction?
A. Yes.
Q. And the depreciation mitigation Discount Rate reflects an economic dispute between the Parties?
A. Yes.
Q. And the pre-award interest rate reflects an economic dispute between the Parties?
A. It reflects an economic dispute between the Parties, but also it has the legal implication that the reasonable rate--I mean, the commercially reasonable rate mentioned in the treaties is what applies.
Q. Right. I just want to establish that you didn't receive an instruction.
[Page 2853]
Did you receive an instruction for that?
A. No. When I--when I calculate Damages, when I represent Claimants, I look at the Treaty first to see if there's a specific rate to use, and in this case there was.
Q. Okay. So we have four adjustments based on economic disputes between the Damages Experts, and those are outstanding liabilities, depreciation, mitigation, the dividend payment date and the pre-award interest rate?
A. Correct.
Q. And, again, the adjustments for the dividend payment date and the pre-award interest rate are in the alternative?
A. Yes.
Q. So, if the Tribunal agrees with Dr. Spiller and Ms. Chavich on the dividend payment dates, the difference between the Damages Experts on actual economic issues is around 7.5 percent?
A. Yeah.
Q. Okay. Great.
So, now I'd like to continue discussing
[Page 2854]
things that I think we mostly agree about, and I'm sure we'll reach a point where we may not agree, and I'll let you know. But let's talk about the dividend distribution assumptions. I think a lot of this--there's agreement. I think it's undisputed that Cerro Verde paid dividends in each year between 2018 and 2022, except 2020; right?
A. Right.
Q. And in the real world, that reflects a decision by Cerro Verde's Board about how much Cerro Verde needed to retain as cash in the real world?
A. No. I asked for the Board minutes to determine what was the decision-making of the Board. I don't know if the Board decided: "This is how much cash we need and we are going to pay these dividends because of that." No. They could have said: "We are only going to pay up to this amount of dividends because we have--it is more advantageous for whatever reason to just do that amount" or "because we have a pre-established dividend distribution policy or plan that, when we first bid for the Concession was what we were going to do."
[Page 2855]
So, I don't know if that's right, no. I don't know what they did in the Actual Scenario.
Q. Right. So you referred to whatever reason that would be, and whatever that reason--whatever reason that would be, wouldn't that be--wouldn't that be a decision about how much cash Cerro Verde needed? For whatever reason it would be, it would still be a decision about how much cash Cerro Verde needed?
A. No. Like I said, you don't distribute dividends just based on how much cash you need because you can raise cash many other ways. You can hold paint suppliers. You can raise more debt. There are many ways, and dividends--how you--when and how many dividends you distribute are based on specific policies to each company.
Q. Right. But--and we'll get to the dividend policies in a moment. But once the Board distributes dividends, it's made a decision about how much cash it wants to retain.
Is it your testimony that that does not reflect the decision by the Board about how much cash it wants to retain?
[Page 2856]
A. It reflects a decision by how many dividends the Board wants to distribute. It is a very rounded figure. So, for example, in 2018, they distributed 200 million. If they had had an extra, let's say, 7 million, I'm not sure they would have distributed 207.
It's always a very round figure that they distribute. So, I'm not sure if the thought process at the Board level or at the--within the Company was: "Okay. How much cash do we need? Great. Then what's left over? Okay. Let's distribute that as dividend." No, it could have been the other way around.
Q. Okay. So I just want to confirm, first, that it is your testimony that a decision by Cerro Verde's Board to distribute dividends does not reflect a decision by Cerro Verde's Board about how much cash it wanted to retain on those dates?
A. It may or it may not. I don't know. That's why I asked for those Board minutes.
Q. Okay. And just really briefly on the point you raised about the round figures, it would--you're not testifying, are you, that Cerro Verde's Board
[Page 2857]
would decide not to distribute, for example, $252 million in dividends because the number is not 250 million?
Wouldn't they just round it down or round up?
A. I don't know. Like I said, I asked for the information. I didn't get it.
Q. Okay. So Ms. Kunsman, you keep saying that you asked for the information, but you have, in fact, reviewed Cerro Verde's dividend policy; right?
That's the document titled "Dividend Policy" that is Claimant's Exhibit CE-934.
A. Yes. And while the document is titled "Dividend Policy" it does not contain the actual dividend policy of SMM Cerro Verde. It just contains what Cerro Verde can do, not what they were doing or what their policy was.
Q. And just--the document is called "Dividend Policy"; right?
A. Yes. Like I said, that's the title. Yeah.
Q. And you also reviewed--and I'm sorry, first, that policy doesn't place any limitation on Cerro
[Page 2858]
Verde's ability to distribute dividends that would have been applicable in the but-for, does it?
A. I heard that there was some dispute on that, on whether the Tax Assessments constituted obligations or not.
Q. So, did you identify any economic reason?
A. No. They could have distributed the dividends.
Q. And you also--
A. Well, let me clarify that. They could have distributed dividends, but, like I said, I have not reviewed the policy. And there is some financial obligations that may preclude them to distribute more dividends than what they distributed.
Q. We're just talking about the dividend policy right now, Ms. Kunsman.
Did you identify anything in that dividend policy that would have prevented Cerro Verde from distributing the but-for cash flows as dividends in the But-For Scenario?
A. I did not, but this document would not be sufficient to make that determination.
[Page 2859]
Q. Okay. And you also reviewed Cerro Verde's bylaws; right?
A. Uhm--Yes. Yes, I did. Yeah.
Q. Okay. And, for the record, that is Tab 9, Claimant's Exhibit 480.
And the bylaws also don't contain any restriction on Cerro Verde's ability to have distributed the but-for cash flows on the dividend distribution dates in the but-for, do they?
A. No.
Q. Okay.
A. But there are--like I said, but there are other documents that could restrict.
Q. Right. Yeah. You keep saying that.
It seems that you are basing your assumption on some rule, whether formal or informal, that you haven't seen but that you think might exist somewhere that might have required Cerro Verde to retain a certain percentage of the but-for cash flows.
A. It is not might. They actually retained some of their cash flows when they could have distributed more in the years in which they
[Page 2860]
distributed dividends.
Q. Right. So, just to be clear, my question is, you're basing that assumption on some kind of rule or informal, you know, practice that you haven't actually seen; right?
A. I'm basing my assumption on looking at the times that Cerro Verde distributed dividends and finding that they had available cash to distribute more dividends than they actually did. And that tells me, like all companies have, there is a dividend policy, and that dividend policy for some reason is precluding them from distributing more cash than I would expect a project company would distribute.
I agree with the testimony from Compass Lexecon. It's unusual for project companies to retain cash unless they have a very specific reason.
PRESIDENT HANEFELD: Ms. Kunsman, just to follow, now, is this Tab Number 10 in Paragraph 66 of your Second Expert Report, and the numbers contained therein which you base your conclusion?
THE WITNESS: Well, yes, it--Well, let me see. Second Expert Report.
[Page 2861]
PRESIDENT HANEFELD: It's Paragraph 66. And then on the Page 24 of the English version, Table 10. And it's an overview of profit dividends, cash, and retained earnings. I think it is based on the balance sheets and Income Statements?
THE WITNESS: Correct.
PRESIDENT HANEFELD: This is the financials we looked at; right?
THE WITNESS: Yes. And also Table 9 and Table 11. Yeah.
BY MR. UKABIALA:
Q. Thanks.
So I think you've said that all companies have--there is a dividend policy, and that dividend policy for some reason is precluding them from distributing more cash.
And you've agreed that you saw the document in the record titled "Dividend Policy," and I believe that you also testified that--didn't you testify at the SMM Hearing that you couldn't find a pattern of a specific percentage of cash that they were distributing or of retained earnings or of net income
[Page 2862]
for that year; right?
So, you didn't see any kind of pattern, did you?
A. Right. If I had found a pattern or if they had paid nearly all of their available cash as dividends, then I would have modeled that. But I couldn't find a pattern.
Q. Yeah. And you think that the secret dividend policy would have had the explanation of that, that would have brought, you know, some kind of understanding to that non-pattern?
A. I don't know what you mean by "secret."
Q. Well, we have established that you reviewed the document titled "Dividend Policy" in the record, and you are referring to a secret dividend policy that you're saying has been withheld from you; right?
A. Again, I don't know what you mean by "secret," but I asked for dividend policy, which means what is the policy that the Company follows to decide whether to distribute dividends or not, and I did not receive it.
Q. But you received a document titled "Dividend
[Page 2863]
Policy"; correct?
A. I did receive a document that is titled "Dividend Policy," but it did not contain the dividend policy.
Q. Did it not contain a policy limiting Cerro Verde's ability to distribute dividends?
A. If that was their policy on 2018, 2019, and 2021, they would have distributed more dividends than they did, but they did not.
Q. Well, doesn't that policy leave the Board with discretion about whether to distribute more dividends or less dividends?
A. Absolutely, and that's exactly what I'm trying to find out: What does the Board take into account to make that decision, that it is absolutely at their discretion.
Q. But why do we have to guess about what's in a secret dividend policy? Why can't we just look at the dates on which the Board actually had determined that it had as much cash as it wanted to retain?
A. Because you are trying to project dividends in a But-For Scenario, not in the Actual Scenario.
[Page 2864]
You do have the data for the Actual Scenario but not for the But-For Scenario. So, that's why I'm asking for it, to figure out what assumptions I need to make to project those dividend distributions of the but-for cash flows in the But-For Scenario. Typically you can rely on the Actual Scenario to find a pattern or to--or in specific documents. In this case, I couldn't.
Q. But, Ms. Kunsman, companies don't have but-for dividend policies, do they?
A. Companies have dividend policies that they rely on to determine dividends each year.
Q. And you have reviewed the dividend policy in the record that is Claimant's Exhibit CE-934?
A. I have reviewed a document in the record titled "dividend policy," which does not contain the dividend policy.
Q. Because you insist that there's a secret dividend policy?
A. No, that is what you say. That wasn't my answer. We can review it again, if you'd like.
Q. Okay. I think we can move on, and I'd like
[Page 2865]
to discuss very briefly the outstanding liabilities.
So you don't dispute that Cerro Verde has paid over 97 percent of the outstand being liabilities; right?
A. Correct.
Q. And as of September 13, 2022, the only outstanding liabilities were PTU; right?
A. Yes.
Q. Now, you--so we went through this last time, and we know that Cerro Verde is a publicly traded company; right?
A. Yes.
Q. And so, publicly traded companies have to report their liabilities; right?
A. Right.
Q. And Cerro Verde reported the outstanding PTU liabilities in the 2021 Financial Statements; correct?
A. Yes, as current liabilities.
Q. Okay. So, this is where we, I think--we agree with everything up to there, and I want to see if we can find--so you say Damages are not incurred until the amounts are paid. And, as you know, we say
[Page 2866]
Damages are incurred once there's an enforceable payment obligation.
So, it seems that we, at least, agree that Cerro Verde couldn't have incurred Damages before there was an enforceable payment obligation; right?
A. What's--Let's take that step by step. Repeat the first part of your question please.
Q. Well, I guess really the question is, do we agree that Cerro Verde couldn't have incurred Damages before there was an enforceable payment obligation?
A. You can incur Damages in the future, but you have to show that you are actually going incur those Damages with certain--with certain certainty; right? And if you're going to incur those Damages in the future, you need to discount them.
Compass Lexecon didn't do that. They assumed that all of the liabilities would be paid as of the Valuation Date when we know for a fact today already that didn't happen. So, just based on that assumption, you would at least need to model that those liabilities would be paid in the future.
Q. But these are the PTU liabilities that Cerro
[Page 2867]
Verde owes to Perú; right?
A. No. They owe them to the workers. The "Participación de Trabajadores en Utilidades," so they go to the employees.
Q. Could we--could we go to Claimant's Exhibit 1033 Page 41.
PRESIDENT HANEFELD: These were not translated; right?
MR. UKABIALA: No, I don't think we have the translation, but I can read it into the record.
PRESIDENT HANEFELD: Exactly. What you want to bring to my attention, you can read into the record.
MR. UKABIALA: Yes, of course Madam President. "Represents the excess of salaries limit in the shared participation of workers to be transferred to the regional government."
THE WITNESS: Yeah. You are correct. That it goes to the regional government--Yes, you are correct. It goes to the regional government and it is for what I mentioned, the utility-sharing mechanism for employees.
[Page 2868]
BY MR. UKABIALA:
Q. Right. So, you do understand that Cerro Verde pays some amounts directly to employees, and they pay some of the amounts directly to the Government?
A. Right.
Q. Right. And you do understand that Cerro Verde incurs interest on those amounts that they owe to the Government; right?
A. I haven't been shown that. Compass Lexecon does not mention that or provide a document--
Q. Okay.
A. --of that.
Q. Well, assuming that those amounts incur interest and Compass Lexecon would be arguably very reasonable by assuming that they are being paid on the Valuation Date because, if they don't make that assumption, then Cerro Verde is being compensated for interest that will be accruing in the future. They will have to project the interest that will accrue in the future?
A. It would depend on the interest rate that is
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accruing, that I haven't seen and Compass Lexecon has not shown, and the interest rate that they are using for pre-award interest.
So, it may or may not.
Q. But by assuming that it is paid on the Valuation Date, no interest accrues in the future; right? In Dr. Spiller's and Ms. Chavich's model.
A. They will if the Tribunal decides to just apply--to apply interest from their Calculation Date to the date of payment of the Award, if those haven't been paid yet.
So, yeah, they would accrue interest.
I'm not sure if the Tribunal is going to ask Compass Lexecon to update their Valuation Model to the date of payment of the Award and if at that point those outstanding liabilities will be paid or not.
But, for it to not accrue--to not accrue interest, they would need to do that. Otherwise, it will.
Q. Yeah. But assuming that the payments are assumed to have been made on the date of the Award, by assuming that those payments are made on the date of the Award, Compass Lexecon does not model future
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Damages for the interest that Cerro Verde would have to pay?
A. They do in that--they do implicitly in that they are asking the Tribunal to use the Cost of Equity as a pre-award interest rate, and that--those pre-award interest will run from the date that Compass Lexicon models Damages to the date that the payment is made.
Q. Okay. Well, I think we do, at least, agree that those amounts are owed to Perú, and it seems to be your main concern is that, if Cerro Verde is awarded Damages for these outstanding liabilities, that there is some risk of double recovery.
Is that your--is that your concern?
A. Yes. Exactly.
Q. But if the amounts are owed to Perú, isn't it difficult to imagine a scenario in which Perú would pay those amounts in this proceeding and not enforce those amounts against Cerro Verde in Perú?
A. I don't know legally what they would need to do. I don't know.
Q. Well, wouldn't you--if it was you and you
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were asked to pay amounts that you could then be reimbursed for elsewhere, wouldn't you get reimbursed for them?
A. I would get the advice of a lawyer. I wouldn't make that decision myself.
Q. Okay. Just one more line of questioning.
So I'd like to ask you a little bit about the mitigation calculations, and I'm--so, you already explain how you calculate Penalties, the mitigation of Penalties and Interest, in your presentation and your Report. So, I don't think we need to go through that.
And we established in the last Hearing that you do understand that your model is assuming that the Respondent will retain the Damages that the Claimant suffered as a result of the Respondent's breaches?
A. It is not up to me to determine if those represent Damages are not. That is for the Tribunal to decide.
Q. Right. But have you--are you aware of whose burden it is to carry the burden on mitigation?
A. My assumption is that it is Claimant's.
Q. Would it surprise you to know that it is the
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Respondent's burden to carry?
A. No. Look, this is--it was an instruction. I'm not sure what the legal implications are. So, I don't know if I would be surprised or not because it is not something that I have gone into detail with. It's not my scope.
Q. Okay. Well, in your adjustment you assume that Cerro Verde's only entitled to recover Statutory Interest that accrued before your cutoff dates?
A. Correct.
Q. The dates after which you were instructed that Cerro Verde had a legal obligation to avoid incurring Penalties and Interest?
A. Right.
Q. And you calculate the Statutory Interest that you think Cerro Verde is entitled to recover, the Statutory Interest that accrued before the cutoff dates, by assuming a daily Statutory Interest rate, which is the average of the Statutory Interest rate during the relevant time periods; right?
A. Yeah.
Q. So, you don't actually compute the Statutory
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Interest that you were--that would have applied to Cerro Verde, that Cerro Verde is entitled to recover, using the actual Statutory Interest rates at that time?
A. I had to make certain assumptions because of the way the model was. I presented the calculations in my First Report, and Compass Lexecon made some comments, but they didn't alter the calculations. So, yeah.
Q. So Compass Lexecon identified the error in your calculations, and you wanted them to correct it?
Is that what you're saying?
A. They made--they made some comments, and in order for me to implement those comments, I needed more information. Their model needed a lot more detail, which I didn't have. So I didn't implement it.
Q. But we're just talking about the Statutory Interest rates that were applicable during the relevant time.
Isn't that information publicly available?
A. It is public information, but what I don't
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have is how much--the period in which those interests are accruing, so what part of the interest is accruing to which assessment.
Q. But don't you have the dates on which each of the Assessments were, you know, accruing interest, that began accruing interest?
A. Not to the detail that I would require, no.
Q. Ms. Kunsman, doesn't Compass Lexecon's model have the dates on which every single assessment started accruing interest?
A. Yes, but not--the assessment contains an assessment for a broad tax period, so they are for different tax payments that occurred on different days. So, yes, we do have the assessment date, but I didn't have enough detail to calculate, based on royalty payment or each tax payment that they did incorrectly, how the interest were calculated, allocated to those specific payments. So, I have the assessment as a whole, but not the individual calculations, and the interest run from each period in which the taxes should have been paid correctly. And that change--there are many of those for each
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assessment.
Q. Well, Ms. Kunsman, I'm very familiar with Compass Lexecon's model. It is incredibly detailed, and it is built from the ground up. And you didn't make any disputes about when--the dates of Assessments in Compass Lexecon's model, which, at least, you know, would suggest that the dates were sufficient for it to allow you to accurately compute Statutory Interest, don't you think?
A. I made a specific comment on my Report that I needed to use an allocation for that reason. So, I did mention it. But it--I mean, go ahead, show me-since, well, nothing.
Q. And you called that a simplifying assumption in your Report; right?
A. Yes.
Q. And at the SMM Cerro Verde Hearing, didn't you describe that as a calculation that is not exact?
A. Right. It's a simplifying assumption.
Q. And your adjustment also uses exchanges rates from the actual payment dates--right?--rather than earlier dates that you claim that those payments
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should have been made. Isn't that right?
A. Yep.
Q. And that would also be a calculation that is not exact; right?
A. Correct.
Q. And actually at the SMM Hearing, I think you admitted that the calculation for the mitigation assumption you were instructed to make is really not as precise as it could have been; right?
A. It could have been more precise had I had better information, and it would have been higher as well if I had more information because I completely dismissed the interest associated with the payment plans.
Q. But since the Respondent is--we can't test that because you didn't do the calculation, and since the Respondent has the burden of proving mitigation, don't you think the Respondent should calculate that as precisely as it can?
A. If the information is available, yes, but I didn't have the information available, so I couldn't do it.
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Q. Okay. Ms. Kunsman, so just one last question. You do realize that, if Cerro Verde had prevailed in the administrative process in Perú, it would have been refunded any overpayment including the penalties and interest that Cerro Verde allegedly could have mitigated in this proceeding. And those amounts would have been updated at SUNAT's reimbursement rate, which we saw in Dr. Spiller and Ms. Chavich's calculations would have resulted in higher Damages than what Freeport is asking for in this proceeding?
A. No. Because my understanding is that the reimbursement rate of interest would not have applied to the interest payments.
Q. What's that understanding based on?
A. From the legal--sorry. From the Tax Experts that have testified.
Q. Okay. That's just based on an instruction from the Tax Experts. You can't independently verify that; correct?
A. No.
ARBITRATOR TAWIL: Excuse me. So, what
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you're saying is that reimbursement of interest are not subjects to interest?
THE WITNESS: Correct.
ARBITRATOR TAWIL: But that's different from applying interest to interest, which is probably a legal provision. That's a different thing.
THE WITNESS: My understanding is that you would be reimbursed the interest, but you wouldn't be reimbursed interest on interest.
ARBITRATOR TAWIL: That means--that means that it's related to the provision to apply interest to interest, but that is different of reimbursement. If not, it would not have any reason to pay in advance--
THE WITNESS: Right.
ARBITRATOR TAWIL: --if you would not be able to update the amounts. Say you pay interest and you recover 10 years afterwards. That's a lot.
THE WITNESS: No. So you would--well, again, I'm not the right person to testify on this.
ARBITRATOR TAWIL: No. No, but I'm just wondering on your assumption.
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THE WITNESS: My understanding is that the reimbursement interest would apply to the assessed amount and to the Penalties, but not to the Interest paid on those Penalties and Assessment. But they would get the interest they paid back.
ARBITRATOR TAWIL: Yeah, but say you paid interest in the year 2010, and you recover that 10 years afterwards--
THE WITNESS: Well
ARBITRATOR TAWIL: --Let's say you have an inflation rate of--I don't know what the inflation rate is of Perú, but that's a lot.
THE WITNESS: But when you're getting reimbursed, you're assuming that you are making excess payments. So, you wouldn't be accruing all those interests on the unpaid amounts because you would have already paid it.
ARBITRATOR TAWIL: The problem is from the point of view of the debtor, payment of interest it's capital; it's not interest. It's capital.
THE WITNESS: Right. Right. And you would need to run the numbers. I don't know what those
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numbers are. I didn't run them, but I know I've been involved in other cases in Perú where the issue of prepayment came up and they did prepay some of their Assessments in the Duke Energy-Perú Case. So, there must be some incentive to do that.
(Comments off microphone.)
MR. UKABIALA: I promised that would be my last question, so nothing further from Claimant.
PRESIDENT HANEFELD: Any questions in redirect?
MS. CARLSON: Give me just a second to consult my notes.
(Pause.)
MS. CARLSON: Just one very quick question.
BY MS. CARLSON:
Q. When you're back on talking with Counsel about the dividend policy and about the fact that the dividend policy leaves discretion to the Board. And I think at Transcript reference 17:30 you responded and you said: "That's exactly what I'm trying to find out. What does the Board take into account to make
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that decision?"
What sort of information would you wanted to see? What would you have expected to see? What would have been helpful?
A. Board minutes and also an actual written policy. Some companies will have written policies. I would have wanted to look at, for example, their original models for project companies. You have models that model out right from the beginning when interest--when dividends will be paid and how much. So, those would have been documents they could have sent to me.
Q. What would you--what sort of discussion would you have expected to see in the Board minutes, for example?
A. The reason why they chose to pay 200 million instead of all of the cash they had available. It could have been as simple as, this is what our investors are expecting, or because of some tax reasons or reinvestment reasons, this is what we should distribute and no more.
Q. Okay.
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MS. CARLSON: Thank you.
PRESIDENT HANEFELD: Thank you very much. No further questions from the Tribunal.
You are released as an Expert in this proceedings. So thanks. Thank you very much, Ms. Kunsman.
THE WITNESS: Thank you.
(Witness steps down.)
PRESIDENT HANEFELD: Which leads us to more or less 5:30 sharp, and now to conclude this Hearing day, which is only possible thanks to the great efforts and cooperation on both sides. Thank you very much.
Is there anything you wish to address before we conclude for today?
MR. PRAGER: Nothing on Claimant's side. Thank you.
PRESIDENT HANEFELD: Thank you.
MS. CARLSON: Nothing from Respondent. Thank you.
PRESIDENT HANEFELD: Then we wish you a productive evening and looking forward to hearing your
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Closing Statement tomorrow. Tomorrow will be 9:00 a.m. start.
(Whereupon, at 5:27 p.m., the Hearing was adjourned until 9:00 a.m. the following day.)
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I, Dawn K. Larson, RDR-CRR, Court Reporter, do hereby certify that the foregoing English-speaking proceedings were stenographically recorded by me and thereafter reduced to typewritten form by computer-assisted transcription under my direction and supervision; and that the foregoing transcript is a true and accurate record of the English-speaking proceedings.
I further certify that I am neither counsel for, related to, nor employed by any of the parties to this action in this proceeding, nor financially or otherwise interested in the outcome of this litigation.
Signature
Dawn K. Larson