Mario Hernández
Head of the Industrial Manufacturing, Tax Partner
KPMG México
Eduardo Salgado
Eduardo Salgado
Head of Mining Industry, Audit Partner
KPMG Mexico
View from the Top

Necessary Adjustment of Mining Tax Terms

Wed, 10/19/2016 - 11:33

Q: How have the Mexican royalty fees affected the industry’s competitiveness?

MH: An investor deciding between Peru and Mexico might decide that Peru’s ability to negotiate a tax certainty agreement with the government is extremely attractive. The contract allows the country to guarantee a fixed tax percentage for a period that can be as long as 20 years. Peru offers solid chances for investors because they know exactly what they will be paying for a substantial time, which gives them a more accurate perspective of potential return. Mexico loses competition in this aspect as administration changes can bring different levels of royalties. However, it can offer a tax certainty promise signed by the federal government that assures a quarter without increased taxes, reduced benefits, or new taxes. The drawback is that the agreement allows taxes to be adjusted in case of a worldwide economic phenomenon that can force Mexico to establish new ones, a worrisome detail considering the global instability caused by phenomena like Brexit.

ES: Clients often tell us they do not mind paying taxes as many other countries impose similar contributions. The key issue is its terms and conditions. Other regions offer certainty and smaller percentages, while Mexico enacted relatively high royalties. Its reform should have been similar to those already established in the world to improve competitiveness. KPMG believes that the new mining laws should be reviewed, and the implementation should be aimed toward benefitting companies and the communities. International and local investors are interested in certainty. Unfortunately, the country holds a package of instability with issues that involve land access, corruption, insecurity, land sale limits, and agreement uncertainty created by local communities. The laws do not need to be more restrictive to give assurance to investors.

Q: How successful has the government been in reinserting more of the proceeds from mining into community development?

MH: Returning some of the benefits mining companies receive is an obligation that many players have already incorporated into their structure. Most mining sites and operations provide schools, training, doctors, and other important services that result in a pseudo city for the employees and their families completely paid by the companies without any pressure from the government. The idea behind royalties is to provide additional support for these communities but its mechanism is exceedingly complex. Players now have to directly pay the government and collections have been relatively low thanks to the market. Before the reforms, mining companies were allocating funds directly to surrounding neighborhoods. Now, they have to go through an unnecessarily long bureaucratic process for an element of the industry that was previously working properly. Authorities divide royalties between the federation, the state, and the communities. Our clients that are already exploring and exploiting worry they have to pay double. Many continue to pay for benefits and services because authorities are not stepping up to the plate fast enough to take over the financing.

Q: What is the idea behind the creation of the royalties, and how can players struggling to pay taxes be supported?

MH: Ultimately, the implementation of royalties is a wise decision as Mexico was previously one out of two countries in the mining world that did not have taxes for the sector. The problem is that the reform was approved at an inconvenient time with unattractive terms. Its negotiation occurred when the precious metal market was at a peak, and its conditions no longer work for the industry. The government is not collecting as much money as expected in a landscape of suspended mining operations. In our mind, a sustained upsurge in the mineral prices would be the most effective way to help investors but it can only be controlled by the market. A more realistic solution would be to replace the conditions of the fixed royalty, currently set at a rate of 7.5 percent and a further 0.5 percent for gold, silver, and platinum production, for a percentage that gradually increases depending on the maturity of a company. It would be fairer for younger companies with lower incomes to pay smaller royalty fees than more established companies. The terms should be adjusted to the current reality.