Mexico: Mexico's tax reform bill includes introduction of mining royalty
11 September 2013
Posted by: Author: EY
As part of the tax reform bill presented by Mexico’s President Peña Nieto to Congress on 8 September 2013, a proposal is included to introduce a mining royalty regime along with other changes that will have an effect on mining operations in Mexico.
The proposed royalty regime is in line with a draft that was approved by a special commission of Congress earlier this year; however, the applicable royalty rates are significantly increased in the proposed bill.
The bill proposes to introduce a "special mining right” to holders of mining concessions, at a rate of 7.5%. The rate will be applied to the difference between the income from the sale of extracted minerals and certain deductions allowed by the new regime.
For this purpose, the income will include taxable income of the concession holder under Mexican income tax law, excluding interest income, inflationary gains and certain amounts received in cash.
The taxpayer will be allowed to take deductions permitted by the income tax law, with the exception of depreciation, interest and inflationary losses.
The mining royalty would be applied independently from other rights payable by mining companies (for instance the general mining right payable by concession holders based on the size of the property in terms of the concession).
The bill also provides for an additional annual mining royalty of 0.5% applicable to income from the sale of gold, silver and platinum. The rate is applicable to the sales income from these metals, without any deductions.
Taxpayers need to have bookkeeping in place that allows for the identification of the sale of these metals.
The proposed bill also includes increased penalty payments for the general rights that are currently assessed on concession holders based on the size of the property. These penalties are imposed when a concession is not being developed.
If the concession holder has not carried out exploratory or exploitation activities in a mine during a two-year period, within the last 11 years, the concession holder would have to pay an additional 50% of the (current) right payable per hectare in terms of the concession. Further, if this situation remains unchanged after year 12, the amount payable by the concession holder per hectare would double.
The bill provides for mechanisms related to the sharing of the revenue collected from these new mining royalties between the federal government, states and municipalities, including the allocation to specific social, environmental and urban development of mining states and municipalities.
Mining companies will be significantly affected by the proposed bill, not only as a result of the proposed mining royalty regime, but also as a result of the increased income tax and VAT burden.
The proposed income tax reform, for example, introduces an additional 10% income tax on the distribution of profits to foreign shareholders or individuals. In addition, the income tax bill proposes to broaden the tax base by, among others: (1) eliminating elections for the immediate deduction for certain fixed assets and the immediate deduction - in the year incurred - of pre-operating expenses for mining companies (now to be amortized in 10 years); (2) the introducing additional requirements for the deductibility of payments made abroad; and (3) eliminating the tax consolidation regime. These income tax changes may also affect the calculation of the mining royalty, as the mining royalty basis depends on income tax deductions.
The VAT rate of 11% for the border zone would be eliminated (so the general 16% rate would apply in the whole country), and most temporary importations would be subject to VAT upon import into Mexico.
Mining companies should, therefore, carefully monitor the proposed tax reforms and their tax position in Mexico.