Mining companies respond to proposed tax increase in Mexico

October 29, 2013

Mexico's lower house of Congress approved a new 7.5 percent mining royalty on earnings before interest, taxes, depreciation and amortization in October as part of a plan to bolster the country's tax haul.

Mining companies have responded to the proposed taxes with everything from a letter to president Enrique Peña Nieto urging him to intervene on “draconian” tax reforms that they said threaten the industry to threats to pull out of the country all together.

Sixteen mining company chief executives signed the letter urging Peña Nieto to intervene. The letter, which appeared in four of the country’s major newspapers, pointed out that the total tax burden on mining companies will rise from 40 percent to more than 57 percent, “making Mexico one of the least competitive jurisdictions for mining investment in the world.”

In addition to the letter, Goldcorp and Grupo Mexico issued warnings that they may take the billions of dollars planned for projects in Mexico to other regions if the proposed taxes are approved.

Taxes that miners must pay under the Fiscal Reform Act, which passed the Mexican Congress and will be brought to the Senate on October 30, include: 30 percent corporate income tax, 10 percent employee profit share tax, 10 percent dividend tax, 7.5 percent EBITDA (earnings before interest, taxes, depreciated and amortised capital) tax and 0.5 percent gold and silver gross royalty tax.

“[This bill] did not consider that mining is a capital intensive industry, where hundreds of millions of pesos must be spent to explore for and discover a … new mineral deposit, and billions of pesos must be invested to develop a … large mine,” said the letter. It was signed by, among others, Endeavour Silver Corp CEO Bradford Cooke and Coeur Mining Inc. CEO Mitchell Krebs.

“Some existing mines will close and many proposed mines will not be built,” it warned, adding that, “economic activity will decline in poor rural areas where mines are typically located.”

The letter suggested that the proposed EBITDA tax be reduced to a 4 percent, and that the gold and silver royalty tax be eliminated.

Grupo Mexico, whose 80 percent owned Southern Copper is the country’s No. 1 biggest copper producer, warned investors that if the senate approves the new taxes, the company “would be forced to redirect” close to $5.4 billion of planned investment to other countries including Canada, the U.S., Chile and Peru.

And last week, Canadian Goldcorp also said that if Mexico approves its proposed royalties on mining companies, it will likely have to readdress investments in the country, especially if it can’t get the returns it wants.



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