Possible Inconsistencies Detected in the New Mexican Mining Fees

The Mining Royalties Bill approved by the Joint Commissions of the Ministry of Finance and Public Credit and the Ministry of Economy of the House of Representatives was included in the Tax Reform package for 2014. This bill establishes a payment for the use of the extraction of minerals for the benefit of the states and municipalities where mining activities are performed. Instead of being established in the Mining Law, this bill is now included in the Federal Fees Law (LFD for its Spanish initials) which will become effective as of January 1, 2014. The tax reform proposal was approved in general by the full Senate on October 31, 2013.   

"In this regard, we may note that several constitutional violations may be triggered, since the same assumptions for mining fees that were considered to be included in the Mining Law were merely integrated to the proposed tax reform, only now it will be through the LFD and by increasing the rate applicable to the Special Mining Fee, explained Jorge Ruiz, Partner for the Corporate Practice Group of Baker & McKenzie Mexico. In our opinion, they violate several constitutional tax principles such as the principles of legality, proportionality, equality, and public expenses allocation, as well as several of the taxpayers' human rights."

The reform intends to create three different fees applicable to the mining activity in Mexico:

Special Mining Fee

This will be calculated at a 7.5% rate over the positive differences resulting from subtracting the deductions allowed in the Mexican Income Tax (LISR for its Spanish initials) from the income resulting from the transfer or sale of the mining activity.

"The proposed fee rate was increased by 2.5% from the bill approved by the House of Representatives, which initially considered establishing a 5% rate for the payment of such fee, emphasized Luis Adrián Jiménez, Partner for the Tax Practice Group of Baker & McKenzie Mexico. It is important to consider the strong impact that the non-deductibility of net operating losses of previous fiscal years will have for the determination of this fee, given that there is no consideration of subtracting from such profits the losses of previous years.”

Additional Mining Fee

It is incurred based on the maximum rate of the mining fee set forth in Article 263 of the LFD per concession hectare, that is, based on the rate of $124.74 pesos. Fifty percent of this fee will be paid by mining concessionaires who prove they have not carried out prospecting and exploitation works or activities for two consecutive years in the first eleven-year term, from the date of issuance of the respective concession title. The total fee must be paid after the twelfth year of inactivity and subsequently. 

Extraordinary Mining Fee

The creation of an extraordinary fee is proposed, which will be calculated at 0.5% rate over the income resulting from the sale of gold, silver, and platinum, without any deduction. This fee will be paid annually by filing a tax return no later than the last business day of the month of March following the year when the payment must be made. This payment must be made in addition to any other applicable mining fees in accordance with the LFD. Likewise, taxpayers are imposed the obligation to keep separate accounting books, identifying the income from the sale of gold, silver, and platinum.

“According to the proposed bill, the resources obtained from the collection of the fees should be used in physical investment with a positive impact on social, environmental, and urban development, said Jorge Salazar, Associate with the Tax Practice Group of Baker & McKenzie Mexico. These resources will not be included in the federal "sharable taxes" (recaudación federal participable) in terms of the Tax Coordination Law.”

The Mexican Supreme Court of Justice states that, in order to comply with the proportionality tax principle, the collection of a fee for the use and exploitation of national goods must be consistent with the use of such good, but such collection can never be charged for not using or exploiting the same.

“The bill establishes different treatments for taxpayers under similar circumstances, which infringes the principle of tax equality, concluded Alfonso Cortez, Partner of the Dispute Resolution Practice Group of Baker & McKenzie Mexico. Besides, the proposed reform is unclear as to the cases when such fees should be paid, which is contrary to the principle of tax legality.”