New Zacatecas Ecological Tax Alienates Operators

Following the controversial fiscal reform for the mining sector in 2014, the state government of Zacatecas announced in December 2016 new Ecological Taxes for industries with highly contaminating activities. The industry’s reaction was swift

The proposal for the new Ecological Tax made by the Zacatecas government, which came into effect in January 2017, was put forward by state Governor Alejandro Tello and approved by the state Congress. Its conception was largely due to the state’s deficit of over MX$1.5 billion and it will apply a charge to extractive companies installed in the state, considering them highly polluting companies.

This, explained the state Minister of Finance Jorge Miranda, is the first tax of its kind in the country. The measure was designed to raise MX$1.2 billion by imposing charges related to contamination levels. Víctor Armas, Zacatecas’ Minister of Water and the Environment explained that the tax will be broken down into four sections.

The first tax will apply to minerals like gravel and stone quarry, for which companies will be charged per m3. Secondly, companies must pay MX$250/t of carbon and methane emitted to the atmosphere by their operations. Thirdly, companies will be charged per m2 of contaminated soil and per m3 of contaminated water found to be caused by their operations. Finally, companies will be charged for storage of waste with high compositions of chromium, lead and cyanide.

ZACATECAS’ MINING COMPETITIVENESS

Mexico is number one in the world for silver production and the infamous “Silver Belt” crosses straight through Zacatecas’ territory. In 2015, two mines in Zacatecas –Fresnillo and Saucito – both belonging to one of the world’s largest silver producers Fresnillo made it into third place and fifth place respectively in The Silver Institute’s list of the top producing mines in the world. These two mines alone brought in 37.6 million ounces and the state contributed 19 percent to mining production in 2015, according to figures from the Ministry of Economy. Carlos Pavón, Secretary General of mining union SNMM, notes that Fresnillo currently pays MX$100 million under the current mining tax regulations established in 2014. With the Ecological Tax, the company will be required to pay MX$250 million more.

Fernando Alanís, Director General of Fresnillo’s sister company Industrias Peñoles says he is “saddened” by the imposition of the taxes. “It suggests that the Zacatecas state government does not recognize the value that mining adds to the region. The industry represents 30 percent of the state GDP and accounts for 13,000 jobs, and many of the companies operating in Zacatecas – including Peñoles – are certified as clean enterprises by PROFEPA.”

INDUSTRY RESPONSE

Pan American Silver’s La Colorada underground mine is located in the state and, although Mexico Country Manager Christopher Warwick admits the tax will not affect the underground operation as much as it would an open-pit, he is concerned about the precedent it sets for other states. “With the latest introduction of the Ecological Tax by the state of Zacatecas in a traditional mining state within Mexico, at very short notice and without prior discussion and the unclear reasons for its imposition, it sends out a very mixed message to the investors in the Mexico mining industry,” he says.

The Mexican Mining Chamber (CAMIMEX) also condemned the new taxes. In a statement, the Chamber stated that “on behalf of its affiliated companies, CAMIMEX expresses its deep discontent and rejection of the tax measures.” It reminded the government that companies already manage social and environmental responsibility programs and have done so for some time, without government intervention.

The Chamber also points out that the government is already benefiting a great deal from mining company operations in Zacatecas. “In addition to ordinary taxes, the mining industry pays the special, extraordinary and additional duties established two years ago, 80 percent of which are allocated directly to the Fund for the Sustainable Regional Development of States and Mining Municipalities,” the statement says. “This represents more than MX$850 million for the State of Zacatecas: MX$414 million for the year 2014 and MX$444 million for the year 2015. This fund is twice the payroll tax collected by the entity per year.”

Even Julio César Nava, Zacatecas’ SEMARNAT delegate voiced his opposition to the taxes. “The whole point of issuing certifications is because (mining companies) fully comply with all federal regulations,” he says. “Mining companies must report everything to SEMARNAT in terms of permits, use of water, loss of plant cover and generation of toxic substances, and that is overseen by the annual operating certificate.” He also added that both CONAGUA and PROFEPA are authorized to carry out random inspections and that if any mining company is found in breach of regulations, it is liable for a fine or even mine closure.

MINERS FIGHTING BACK

The implications of the Ecological Tax could be extensive and a number of companies are considering legal action or even removal of activities from the Mexican market. Bradford Cooke, CEO of Endeavour Silver, which has the El Compas development project in Zacatecas, told Mexico Mining Forum in February 2017 that the company’s Board of Directors was displeased with the tax. “The board told me to find some projects outside of Mexico. So there is a reality here that we have to deal with,” he said.

Alanís and Octavio Alvídrez, CEO of Fresnillo describe the tax as “excessive” and are leading the charge to legally challenge its constitutionality. The tax came into force on Jan. 1, 2017 but by Feb. 8, Peñoles had already submitted an amparo against it. On Feb. 20, President Enrique Peña Nieto threw his support behind the mining industry by ordering the Legal Department of the Federal Executive Branch to file an order of constitutional conflict with the Supreme Court of Justice of the Nation (SCJN). Right now, the tax is on hold due to its constitutionality being considered by the SCJN. A decision is expected in September.

ACTING OUTSIDE JURISDICTION?

The federal government argues that the taxes implemented at state level by the Zacatecas authorities overstep state authority and fall under federal jurisdiction. According to the Minister of Economy, Ildefonso Guajardo Villarreal, “if the SCJN concludes that the legislator and the Governor of Zacatecas issued a general provision, exercising powers that are under the jurisdiction of the Federation, the contested provision could be declared invalid and without effect.” He argues that Mexico’s General Law of Ecological Equilibrium and Environmental Protection (LGEEPA) does not allow this kind of legislation to be implemented on a state level.

This is a sentiment echoed by industry insiders. CAMIMEX claims that the creation of the new taxes violates the Federal Pact and the rule of law due to the fact that, as a concessioned activity, mining is exclusively subject to the scrutiny of the federal government. It also states that mining companies adhere to standards and regulations, as they must comply with environmental law in order to obtain the relevant permission to operate.

Similarly, Warwick says that miners have always worked under this federal framework, and changing requirements retrospectively and on a state level would be counterproductive. “Our perception is that our work has the approval of the federal authorities to proceed and continue, because we have always worked within the regulations given by the government agencies appointed to approve such matters,” he says. “I have no problem with tightening up environmental laws in Mexico but it is so important that this is done correctly and then fairly administered.”

Alanís is confident that the SCJN will rule in favor of the miners. “The mining law is federal, so the measure is unconstitutional. We are delighted that the federal government has already sent the issue to the SCJN,” he says. “We are confident of a positive outcome from the hearing but because we have already been granted an amparo, we will not pay an extra peso as a result of this tax.”

CLEARING THE DEFICIT

Zacatecas places seventh in the country in terms of debt per capita at MX$5,160.8, according to the state's Ministry of Finance. Zacatecas Minister of Finance Jorge Miranda warned that if the taxes are not approved by the SCJN, there is a real risk that Zacatecas will be unable to pay its teachers, nurses and civil servants. The current state government inherited MX$7.3 billion in debt from its predecessor and Miranda says the conditions of these loans are “unsustainable” since interest and commissions ran to MX$2.6 billion up to March 2017. He says the MX$500 million budget given to Zacatecas by the federal government is not nearly enough to cover debt repayment. Miranda says there are three options for reducing the debt: raising the government’s income, reducing expenses or applying for a new line of credit. The third option, he says, is out of the question since the state’s debt increase has triggered the debt alert scheme, which means the state of Zacatecas is no longer eligible to apply for more credit.

Until March 2017, he says the tax had raised over MX$1.8 billion, with some notable mining companies having already contributed. He calls for “solidarity with the Zacatecan people” and blames the “shortsighted” financial approach of the previous state government for the implementation of “painful measures”. He stresses that the state government is in communication with the affected companies, to provide support for the new tax. “We are not enemies of mining or large corporations,” he says. “We simply recognize that in times of adverse economic crisis there are big winners and big losers. We respectfully request that (the big winners) share this benefit to give Zacatecas financial viability