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Combatting the Mining Royalty

Laura Díaz - Díaz, Bouchot & Raya (DBR) Abogados
Partner

STORY INLINE POST

Wed, 10/19/2016 - 10:01

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Q: What are the most visible implications of the evolution of tax regulation in the mining sector and how would you describe the efficiency of the collection process?

A: Although the government has a strong motivation for collecting the mining royalties we in the industry are feeling the negative effects of the decision. We have advised our clients the royalties are unconstitutional, and we have already won one case to demonstrate this with another case currently subject to scrutiny by the Supreme Court of Justice of the Nation (SCJN). The government has been extremely efficient in its tax collection, and committees have already been established in many states in order to distribute funds generated to the local communities. This is a premature step as we are under the impression the SCJN will review the current case and will ultimately cancel the royalty structure as a result of our arguments. We represented two companies while filing their amparos, and Compania Mineria Pangea’s amparo is now at the SCJN. Another six amparos are also currently under review by the SCJN. As a result of the case being re-examined, I am not sure whether the government is continuing to distribute the money within the communities. I believe this process is extremely risky as they are already expecting funds that if the tax is rescinded will not be available.

Q: How would you describe your experience fighting cases with the SCJN?

A: It was reassuring that we had previously won one case and had reached a resolution. There are two types of royalties, Derecho Especial and Derecho Extraordinario. Derecho Especial corresponds with the 7.5 percent rate of tax imposed, whereas Derecho Extraordinario refers to the 0.5 percent surplus on all gold, silver, and platinum. The SCJN allowed us to file a new amparo against Derecho Especial, and this will be studied for a second time. In the case of Derecho Extraordinario, we are arguing that this levy does not fall under fiscal responsibilities but rather rights of way. Moreover, the extra 0.5 percent applies only to gold, silver, and platinum production when Mexico is one of the top 10 global producers of copper. The constitution contains a clause determining equality meaning the extra tax on these three products is discriminatory and therefore unconstitutional. We have been fighting this case since October 2015, and since the process normally takes between six and nine months we hope to have the matter resolved by the end of 2016. However, the new Ministry of Agrarian Development is extremely involved in the process and engaging in dialogues with the communities because everyone is anxious about the outcome of the case. The royalty also carries a double load for mining companies as they must oversee tfund allocation, and ensure they are spent in a way that benefits the community. Ultimately, the tax is hindering Mexico’s position as a global mining competitor.

Q: What aftermath do you expect from the limited funds?

A: The impact of these funds to the community remains to be seen as I believe this will either be extremely positive or extremely negative. On one hand, the money the communities are receiving is a result of taxes the mining companies pay, and the increase in benefits can be directly related to this. However, the negative aspect is the fact the money received directly correlates with production, which is continuously decreasing. One of my clients in particular believes that ending the year successfully will be limiting losses to US$30 million, which means there will be no profits to be taxed. This will directly affect communities that are being promised funds for a limited time. Even if the royalty is not rescinded the companies are not making a profit, which means the communities will not receive any money.

Q: What incentives are being offered by the government for exploration activities, and do you expect tax deductions to return?

A: The government must review all fiscal incentives but states also have to evaluate and harmonize benefits and taxes that are imposed on an individual level. Fiscal duties and benefits are largely incoherent, and differ from one state to the next. I believe that a more aligned and efficient structure across jurisdictions would create a plethora of benefits. Currently, a mining concession application can take three years since companies must first obtain an explosives permit and an environmental permit, among other regulatory requirements. Therefore, kicking off exploration projects is extremely complicated.

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