Q: Your firm specializes in taxation for extractive industries, particularly mining. Why did you decide to focus on this sector, and how has your relationship with clients evolved since you started?

GR: We began serving the mining industry in 2017. Our first engagement was a tax litigation matter involving water rights duties against a group of mining companies. We won that case, and from that foundation in tax litigation, we progressively specialized in tax matters for the mining industry. Today we are ultra-specialized in the sector, not only in litigation, but also in tax audit defense, statutory financial statement opinions, federal tax refunds such as VAT, and specialized mining-sector accounting.

Our main client base is in Canada. Carolina Franco leads our prospecting efforts there and maintains close, in-person communication with our clients, with a constant presence at international industry forums. Our headquarters are in Guadalajara, with offices in Mexico City and Aguascalientes, and we represent clients throughout Mexico.

CF: Beyond the fact that mining taxation is a fascinating field in itself, our role goes further: we help close the communication gap between our clients' head offices abroad and their Mexican operations, giving them clarity and confidence about what is happening in-country. 

Q: How does that compare with legal teams that cover many areas of mining law and treat tax as an add-on service?

GR: First, it is worth noting that both Carolina and I have public sector experience. In my case, since before 2009, I worked on tax matters and assessments issued by IMSS, SAT, and INFONAVIT. The firm actually started as a general tax practice, and we later specialized in the mining industry. So what we offer is really a sub-specialty: we are sub-specialists in mining taxation, backed by broad experience in tax law in general.

Many professionals think that covering as much ground as possible brings in a more active client base. Our approach has always been the opposite: sub-specialization,  hyper-specialization, because that is what makes you more competitive. As the Mexican saying goes, el que mucho abarca, poco aprieta, he who grasps at too much holds on to little. We prefer a client base that is very well attended, with real, verifiable solutions and highly qualified advice.

Our public sector background has also allowed us to bring people from the tax administration itself into the team, always within the legal framework, which gives us a very high level of tax specialization. There are very few firms specialized in mining, and far fewer in mining taxation. To this day we have not seen another reference firm in taxation for extractive industries, which is exactly where we focus.

CF: Additionally, certain federal taxes apply exclusively to the extractive industry, which makes having a specialized team vital. We have seen it many times: clients who previously worked with generalist firms come to us, and when we review their tax status, we find they overpaid the special mining duty or missed benefits such as the value-added tax (VAT) refunds available to exploration companies. This is where specialization translates directly into cash flow for mining companies. 

Q: What are the most dangerous or most common audit scenarios mining companies face today with the SAT,  from presumed non-existent operations to electronic reviews?

GR: Previously, the tax authority was quite lax in reviewing mining duties. That has changed. Rather than creating new taxes, although the mining duty rates did increase, the authority's strategy has been to become far more efficient at collecting what is already on the books. 

Many companies carry outstanding debts with the tax authority related to these duties, and SAT is now conducting a considerable number of audits on their payment, and in some cases restricting companies' digital seals (CSDs), which in practice paralyzes their ability to invoice and operate. The stakes go beyond collection: failure to pay these duties for two years can trigger cancellation proceedings against the mining concession itself. For a mining company, that means the risk is not just a tax liability but losing the asset that underpins the entire project. 

The authority is also heavily reviewing simulated operations in the mining industry. One recurring challenge: companies lease land from an ejido, and the ejido is often not fiscally regularized. These are real operations, but without demonstrable materiality, and they put mining companies at risk of an audit or verification.

Anti-money laundering is another red flag in the industry, particularly for companies that produce and sell precious metals, gold, silver, and platinum. Under Mexican law, this activity is classified as a 'vulnerable activity,' which means these companies are required to comply with anti-money laundering (AML) prevention mechanics: filing the corresponding notices with the authorities and implementing the internal measures the law imposes. We have noticed the industry has been quite lax on this front, in many cases not out of negligence, but simply because companies did not know they were subject to these obligations. 

Deduction of operations is also a recurring issue, with quite considerable tax credits at stake. Companies must keep their accounting up to date at all times, maintain contracts with suppliers, and keep signed proposals with a certified date. Finally, there is REPSE: suppliers who should be registered with the Ministry of Labor and Social Welfare but are not, which creates significant contingencies for the industry.

CF: In the past, companies that did not pay the ordinary mining duties would simply wait for the debt to expire. Today we face a government that is even cancelling mining concessions when these duties go unpaid. That deserves close attention.

More broadly, since SAT can open audits to review transactions at any time, materiality documentation must be in order. For large taxpayers with revenues above MX$2 billion, we issue the statutory audit report on their financial statements. For those outside that regime, we audit internally anyway; it allows us to self-correct before SAT comes knocking. We know SAT's collection trends, so our clients can face audits without fear and with open doors.

Q: You mentioned VAT refund recovery earlier. How does that practice work, how long does it take, and where do the bottlenecks usually appear where miners need your help?

CF: VAT cuts across many industries, but in extractives it has specific technical features; understanding these is what unlocks the refund benefit.

It starts in the pre-operating period: junior explorers searching for economically viable minerals to sell a project or build a mine. At that stage, everything is an expense: geologists, drilling, laboratories, administration, while revenue is zero. All of those expenses carry VAT, and the company has the right to request its refund. In practice, a company with no income can still generate cash flow equal to 16% of its spending.

Guillermo and I keep running into the false belief that you cannot obtain a VAT refund until the company has revenue. Nothing could be further from the truth. But the mechanics of pre-operating refunds are very specific, and that period can last one, three, five, 10, or 20 years before mineral is found. To SAT, that looks strange: why is this company spending so much with no income? This is why a mining company needs us from the very beginning. 

In development, all mine construction expenses are equally eligible. In production, many of our clients export their concentrate to Asia, and exports are zero-rated, so all the VAT incurred in production can be recovered: three stages, three mechanisms, one tax, and a genuine path to a refund at each one. 

The obstacles come down to details: certain suppliers must hold REPSE registration; contracts must be clear and, in some cases, signed before a notary public to establish a certified date; and when an invoice is issued as a single-payment (PUE) invoice, payment must be made within that same month, among other basic requirements. Neglect those and the refund becomes an uphill battle. Handle them properly, and the refunds are granted.

Q: How real is the threat of digital seal certificate (CSD) cancellations for mining companies, and what is the best way for your clients to protect themselves?

GR: There is an active campaign by the authority around temporary and definitive seal restrictions. One of the main triggers is having unpaid or unregularized debts with the authority. 

The authority is currently pressuring the industry through three channels. First, the Art. 69-B list of simulated operations: you must watch closely whether any of your suppliers appears on it, because if a supplier is listed and you do not self-correct, you can be subject to a temporary or definitive restriction. 

Second, seal restrictions for debts or for any of the conducts foreseen in the Federal Tax Code. Without getting too technical, Art. 17-H and onward set out the grounds for restricting and cancelling digital seals. Third, large debts for mining duties.

Seals are often restricted over something quite manageable: a discrepancy appears, an invitation letter goes unanswered, then a collection requirement is set aside too. Then the restriction lands, and the company does not know how to handle the procedure. Most of these cases can be easily addressed: with the right advice, you can reactivate your seals. The contingency usually starts as a small detail or a simple clarification that should have been fixed. A definitive restriction is far worse, you may have to pay twice for something you perhaps did not owe, then go back to the authority to recover the improper payment. Handled on time, a simple matter stays simple.

My advice to the industry is to stay on top of invitation letters, requirements, and clarifications  and to self-audit. 

CF: Our advice is straightforward: attend to your tax obligations properly, understand exactly what is required of you as an extractive company in Mexico, address everything in a timely manner, and never ignore an SAT invitation letter, even over a minor discrepancy, because that is often where seal restrictions begin. Have a team that audits your financial statements regularly. We even go further for many of our clients: we monitor their tax mailboxes directly, so no notification ever goes unanswered.

Q: When a situation escalates, when does it make sense to seek a resolution through administrative channels, and when should a company escalate to full federal litigation?

CF: It depends on the stage. If the exercise of verification powers has just begun, we are still in a purely administrative stage. Our response there is to address and correct whatever irregularities SAT presumes, within the audit itself. If the audit concludes with an assessed tax liability, we move to the litigation arena: first, a revocation appeal before SAT itself, or directly an annulment lawsuit before the Federal Court of Administrative Justice to have the assessment declared void. 

We always try to resolve matters administratively, but we are dealing with a collection agency; SAT's ultimate purpose is to collect. Sometimes we reach a good outcome administratively, and sometimes we go to trial, with certainty that we have every element to keep SAT from overreaching. 

GR: Two examples, without naming names. In the first, a company in the Bajio underwent a desk audit in which SAT intended to assess around MX$97 million. Our full understanding of the company's tax position, including significant accumulated tax losses, gave us decisive leverage: your observations are not valid, and here is why, but even if you insist on assessing, the company will offset the liability against its losses, so you will collect nothing. The assessment became unattractive to pursue. SAT validated the vast majority of the questioned operations and closed the matter with a very small fine, itself improper, which we will now claim back as a refund. The lesson: you have to be strategic and know when to litigate and when not to. 

In the second case, also in the Bajio, the authority treated various loans as taxable income because the contracts lacked a certified date, they had not been executed before a fedatario público, which under Mexican case law is who gives a private contract evidentiary value against the authority. Yet the materiality was complete: bank statements, transfers, and every document inherent to the operation. You may be missing document one, but you have documents two through five. This happens constantly, since in Mexico we do not have the habit of notarizing everything. Our baseline recommendation is that contracts always carry a certified date, but if they do not and you hold the supporting elements, go to court and convince the judge that a contract cannot be voided in a way that turns a received loan into income. Otherwise a small formality creates a gigantic contingency: here, MX$53 million. In that one: litigation, definitely.

Q: Looking at the coming months, what are your main growth objectives in the Mexican market? 

CF: Our biggest opportunity lies in tax refund procedures, every time we review a mining company's financial statements, we find that line item sitting there, pending recovery. We will keep deepening our specialization in the extractive industry, growing our presence, and earning the trust of clients who need reliable solutions to run their operations in Mexico.

We also aim to expand our large-taxpayer portfolio  and scale the full suite of services around it: statutory audits of financial statements, anti-money laundering compliance,  federal tax refunds, audit accompaniment, and tax defense whenever a liability is assessed.

GR: Our objective is growth in the large-taxpayer segment, without neglecting any other. A client once told us: 'One of the Big Four is making me a proposal, and honestly, I am torn.' Their people are excellent, but faced with a global giant, he chose a boutique firm highly specialized in his industry: us, because he felt confident we could actually solve his problems. That is the goal: to compete head-to-head with any firm in the market, with the people and the experience to back it up.

FRIMA (Franco, Ríos Muñoz y Asociados, S.C.) specializes in providing consulting and legal defense for mining companies, particularly excelling in VAT recovery and refunds.