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With the external factors faced by miners in terms of price volatility and cycles, they at least need protection against the local factors that impact their operations, says Eduardo Salgado, Head of the Mining Industry at KPMG in Mexico. “Legal certainty is vital to foster investment. Companies must be certain that they will be able to exploit and operate the concessions they are granted,” he says, highlighting that Mexico’s tax structure is not necessarily conducive to a friendly business environment.
Legal certainty often equals tax certainty. Salgado says the federal royalty taxes, which impose 7.5 percent on all metals profits and 0.5 percent on precious metals, sent ripples through the industry. He says that, even though other jurisdictions have similar taxes, the issue is the punitive percentages charged and the risk that states will follow suit and implement other fees. “Government representatives claim that they will try to help and support the mining industry,” he points out. “It would be contradictory for states to impose more taxes, as that would go against their stated intentions.”
Zacatecas recently pushed forward efforts to collect an additional Ecological Tax, which was designed to protect the environment and benefit local communities. “The possibility has the industry worried as the greatest risk of having any new tax approved in a mining state is that it may lead to other states levying the same duty,” agrees Mario Hernández, Head of the Tax Mining Practice at KPMG in Mexico. “Under the current economic conditions, it could be catastrophic for the industry to impose new taxes. I think the government should aim to help mining companies, instead of seeking to collect more money from them.”
Hernandez proposes the implementation of Tax Certainty Contracts in Mexico. Already successful in Peru, these are used to guarantee miners that the government will maintain a stable tax regime during the time a company is investing in and operating a mine. “I think these could be very beneficial to foster investment in the country,” he says.
New duties are not the only concern regarding the country’s fiscal policies. Salgado also points to the fact that exploration expenses are deductible over 10 years, while other industries can deduct their expenses as long as they comply with the lawful requirements. Hernandez proposes the mining sector should be provided incentives similar to those for Special Economic Zones (ZEEs), given the similarities in creating social development in isolated, often impoverished communities. “If a mine is established in an undeveloped community and the company is committed to creating a certain number of jobs and generating a certain standard of development through education and infrastructure, the government should give special incentives,” says Salgado. “It is a clear win-win situation.”
Hernandez is convinced that as mine operators are obliged to restore the land to its previous condition, the social and environmental cost of mining is covered by the law. But the investment that companies make for environmental recovery is made after the mine has closed and is no longer yielding returns. “This does not make any accounting or economic sense, as this expense is not deductible during the mine operation because it has not been paid and when it finally is, the company is no longer receiving income from the mine,” he says. “I believe this payment should follow the model of a pension fund,” he says. “Companies would pay a certain amount to a trust fund for the closing of the mine, which could be tax-deductible.”