Understanding the Reasoning Behind Tax Reforms

October 29, 2013 may be remembered as one of the most impactful days for the Mexican mining industry in recent history. On this fateful day, the Senate approved a number of tax reforms, including the much debated 7.5% mining tax for all operators, as well as a 0.5% royalty on gross revenues generated from gold, silver, and platinum deposits. The subsequent shockwave of discontent continues to make waves among many private industry players in the sector as they try to adapt to the changes the Reform has wrought. However, one issue is that many companies are asking why these charges were implemented in the first place.

Few are more qualified to provide an answer than Hector García, Tax Partner at PricewaterhouseCoopers (PwC) and an expert on mining. “At the beginning of his presidential term, the administration of President Enrique Peña Nieto agreed to work on an initiative to enact the tax reforms with other political parties in Mexico,” he states. “The government’s main reason behind this was to stake a claim to some of the financial benefits that the mining industry has been generating across the country. There had been an increase in the numbers of concessions handed down by the government to companies for the right to exploit non-renewable, natural resources. This naturally triggered an increase in production over several years, which in turn directly led to the reforms. Simply put, the government felt it had played an important role in the growth that was being seen in the mining industry and so set out to claim its fair share.”

According to García, prior to the reforms being passed, PwC was invited to consult with the government during a series of economic discussions, along with other influential organizations such as the Business Coordinating Council. Although these discussions do not seem to have had an effect on changing the authorities’ stance as to the new 7.5% royalty, some concessions were made. “The government has now promised that no further changes will be made to Mexican tax laws until 2018. In fact, it has stated that no discussion on the matter will even take place,” he explains. Despite ongoing concern by the private mining sector, this pledge by the government not to make further alterations to the Fiscal Law for the three years to come has at least introduced a grace period with respect to taxes. This period will allow companies to plan ahead, re-evaluate their investment strategies for the Mexican mining sector, and get projects underway according to the new fiscal regime.

“Most companies would not have a problem paying taxes if the rate was lower, such as 4-5%. Another aspect that could be improved is the deductibility of investments,” describes García. “For example, it is no longer possible to deduct investments in exploration and mine development stages from taxes. There is an area of opportunity for the Mexican government to reduce the rate, or allow for the deduction of investments in the mining companies, in order for the country to be more competitive.” Media reports in early 2014 predicted a catastrophic effect on the mining industry as a result. While certain investments have been delayed and some mining projects deferred, the financial reports of many public companies paint a different picture a year on.

Community relations, in particular, have become a major point of contention since the reforms were announced. According to the new law, The Fund for the Regional Development of Mining Municipalities will be set up to ensure that a significant share of the revenue collected from the tax and royalty will go to improving infrastructure in local communities. While the small print clearly states that funds should be designated to community development, the industry is waiting patiently to see if the funds are actually distributed as they are meant to be. “The only way to be certain that the government follows through on its promise to support communities is through pressure from mining companies, state governors, municipal presidents, and the communities themselves,” explains García. “We will need to wait until some months into 2015 to see if the funds are used wisely or not. Some communities are already asking the government for advance payments on the funds that should come in March 2015, but the government has nothing to give at the moment. Mining companies will continue to pay for community development initiatives if the funds do not reach the communities around the mine, but this could potentially double their costs. Even so, regardless of what happens in 2015, repealing the law is not a plausible outcome.”