A Legal Perspective on Mexico’s Tax Regime

Q: What are the main fiscal services that Baker & Mckenzie provides?

A: Baker & Mckenzie is a comprehensive law firm with an important presence all over the world. We work with a lot of clients entering Mexico for the first time and we help them with all the legal work that they require, as well as with legal, tax, and environmental due diligence. 90% of our clients are foreign companies. We help them to understand the Mexican business environment, which can be complicated, and we also offer advice on tax projections, capitalization rules, repatriation techniques, the structuring of agreements, among many other services.

Q: What is your general perspective on the Mexican legal system for the mining industry?

A: Given that there is not a specific tax regime for the mining industry in Mexico the general rules apply. There are three main federal taxes in Mexico: income tax, flat rate tax and value added tax. Those taxes apply to all industries, which is a good thing because they give foreign investors a clear overview of the country’s fiscal framework. The lack of specific regulations for the mining industry can also be an inconvenience. Mining companies invest a lot of money and resources over a long period of time and there is always a possibility that in the end the company will not be profitable. If Mexico really wants to become a more attractive investment destination, it needs to have a more beneficial tax regime for the mining industry.

Q: What solutions could be implemented in order to optimize taxing policies for the mining industry?

A: Mining activities require large investments within the first few years of a project, thus generating a tax loss. The income tax law has a 10-year carry forward period, but that period should be longer for mining companies – about 20 to 30 years. The law allows companies to deduct pre-operating expenses over a longer period, but when a mining company has several projects this becomes an issue because losses are being generated at different times. Given the importance of the industry, the law should be reviewed very thoroughly and amended in order to efficiently regulate and satisfy the mining industry, or there should be a separate set of laws for this industry.

Q: What is the importance of carry back in mining activities, after the depletion of the mine?

A: Mines have certain life cycles that tell us how long production will last and how the mines will operate. Once a mine is no longer profitable and must be closed, significant post-production expenses and environmental control activities sometimes generate losses for the company. Mexican law does not allow the deduction of taxes against those losses, which I believe is unfair. If we look at the project as a whole and not only by tax years, the company will suffer financial losses in the first and final years, but the losses of the final years do not count. In other countries it is possible to carry back those losses in order to mitigate them, by recovering taxes. This is an example of what could be done in Mexico and it is already included in the tax laws of other countries.

Q: What changes do you expect to see regarding fiscal policy for the mining industry in the near future?

A: It is very likely that in 2014 a new mining tax will be created that will have negative effects on Mexico’s attractiveness as a destination for investment. The problem is that when metal prices go down the taxes will remain in the law, and this will cause problems in the industry. The government needs to create incentives for companies to come to Mexico – the government should see the mining industry as an industry that needs to be supported. Despite the complications stemming from high taxes and regulations there is business to be done and investors are still attracted. Mexico is going to continue receiving investment to develop its mining industry, but if we had a more attractive fiscal framework for the industry, we would receive even more investment. There are no incentives at all for the mining industry; for instance, mining companies have to invest in very isolated areas and start from scratch, building houses for employees, as well as roads. Investment is not limited to mining facilities but to the entire infrastructure of a mining town, and the law should offer tax incentives for investments that help very poor communities boost their economies. The mining industry can be very useful in the development of local communities, since it creates more business opportunities and employment in remote areas where people do not have any other source of income.