Tax Restructuring Strategies for Improved Profit Margins

Q: How does PwC help boost its clients productivity and efficiency during downturns such as the one currently being experienced by the industry?

A: Companies throughout the mining sector are all collectively seeking to achieve meaningful cost reductions and so our work is focused on shedding light on how to boost our clients’ businesses. This includes cost reduction assistance while maintaining productivity through operational reviews of Enterprise Asset Management, readiness and risk assessment reviews for capital projects, warehousing and logistics optimization, strategic sourcing, and spending analysis. Moreover, we carry out supply and contract management reviews for Procurement and offer Supply Chain strategy governance services. If a client needs to improve its cash flow one option is to take out loans from banks or other sources like government agencies. A Canadian company recently took out a loan from Bancomext with favorable interest rates, which has proven to be a shrewd business decision.

Q: How can your tax-related services provide benefits for clients?

A: Many production companies have subsidiary exploration businesses, and often it can be beneficial to combine both businesses due to certain tax clauses available under Mexican law. We can advise and aid our clients through this process. In early 2016, a tax incentive was authorized, which supports mining companies in the purchase of diesel. Businesses will now be able to credit 100 percent of tax paid during the acquisition of diesel against income tax payable and withheld to third parties, which can reduce the diesel purchasing by up to 33 percent. Given the quantity of diesel used throughout the mining value chain this is a significant development, and we encourage mining companies to review the process they use for purchasing diesel in order to take advantage of this piece of regulation. Another area in which there is often significant room for improvement is mine site logistics, and our specialists make the effort to visit mines across the country to assess whether alterations to supply chain management can be made to further streamline mining operations. Moreover, we often help our clients with their human resources procedures using our extensive market knowledge and contacts to recruit the professionals best suited for the position.

Q: What are the main challenges Mexican mining companies face regarding tax regulations, and how does PwC help its clients overcome them?

A: The most important recent development was tax reform, which introduced taxation on all mining activities in the country. We help our clients deal with this added pressure by advising them on restructuring options, as well as the use of tax credits in certain situations. Another problem is related to favorable VAT balances. When mining companies make significant investments into the sector they pay Mexican VAT, which creates VAT favorable balances that should be refunded within 40 days. In the last two or three years the tax authorities have been slow to process these refunds, and I have witnessed companies waiting for more than one year for their VAT refund to be authorized and processed. This is far too long a wait, especially given the current market situation where available cash is so hard to find so the government must prioritize reducing waiting time for corporate tax refunds in order to support the industry’s recovery.

Q: What role does PwC Mining Center of Excellence in Toronto play in the organization’s participation in the mining industry?

A: This is an extremely important facility for PwC because it ensures that all of our clients have access to the skills, and abilities of our mining specialists around the world. The Mining Center of Excellence allows our Mexican mining clients to work alongside Canadian specialists, which is an effective way of combining industry knowledge between them, and create a synergy for our clients. Moreover, it has helped build our client base because many Canadian companies have Mexican subsidiaries and they appreciate the fact that we can act as a bridge between the two markets. In fact, PwC is currently in the process of integrating its Mexican operations with its business in the US, and from July 1, 2016 we will be operating as a combined, international firm.