Editorial: Serving up a little Tax-Mex

International mining companies happy to be invited to their usual seat of honour at the fiesta in Mexico are a little unnerved to find that this time, they’re going to be the piñata, and the Mexican government is winding up for a hard swing.

Apparently Mexico’s many years as a low income-tax jurisdiction for miners is coming to an end, as new Mexican President Enrique Peña Nieto moves to put his country’s income tax rates more in-line with the other 33 nations of the Organisation for Economic Co-operation and Development.

Lawmakers in Peña’s newly reinstalled Institutional Revolutionary Party (PRI) are proposing to introduce a new royalty on miners’ profits, and the proposal has just been approved by a public finance commission in the national Chamber of Deputies. The rate of the proposed new tax has been boosted to 5% from 4% at the last minute, and it would be imposed on miners’ earnings before interest, taxes, depreciation and amortization, or EBITDA.

We’re not talking huge sums here: Reuters reports that the new royalty could take in anywhere from US$250 million to US$500 million per year — though Australia’s experience with its new Minerals Resource Rent Tax shows it’s possible for government accountants to wildly overestimate future royalty revenue.

Currently Mexico’s tax system for miners is a little archaic compared to other mining countries, with the Mexican government mandating general corporate taxes, employee profit sharing and fees on mining concessions based on hectares, rather than the more straightforward taxes on production and profits that are common elsewhere.

That the new royalty would be on profits and not revenues is an acknowledgment by the government that mining is a cyclical industry that seeks a lightened tax burden during the down years.

Indeed, the architect of the bill, PRI congressman Adolfo Bonilla of mining-powerhouse Zacatecas state, was quoted by Reuters as saying: “We don’t want this to be seen like vengeance. These companies have been reaping the benefits for years. We’re not talking about an industry without revenues, without profits.”

Money raised from the new royalty would be split between state governments (50%), municipalities (30%) and the federally administered fund for states and municipalities (20%). Right now, the miners are broadly taxed at the federal level, with money unevenly and unpredictably doled out to the lower levels of government.

Miners have mixed feelings about the new royalty, as they are generally keen to see more taxes from their operations pumped back into the local community and region, as it’s such a great help in meeting corporate social responsibility obligations and creating positive local relationships, but they’d rather not see additional tax burdens, obviously.

Mexico’s chamber of mines Camimex has urged the national government to be cautious in reducing the country’s international competitiveness in mining, especially since competing nations Chile, Canada, the U.S., Argentina, Brazil and South Africa have tax incentives and fiscal stimulus measures that don’t exist in Mexico.

Camimex says miners pay around 40% of combined tax already, noting that Mexico is one of only two countries that grant profit sharing to workers, and it is the highest rate, at 10%. It emphasizes that the mining industry, with its long time frames, “needs long-term tax schemes that provide certainty to investors to carry out their projects, and above all, preserve sources of employment.”

Mexico ranks as the fourth favourite destination for mineral exploration dollars worldwide, and the country’s mining industry is behind only the automotive, electronics and oil sectors in generating export income, and ahead of tourism.

The new royalty bill could be put to a vote in Mexico’s lower house within days. If passed, it would then make its way for ratification in the senate. If it makes it through the senate, it could conceivably take effect as early as March 2014.

The conservative National Action Party opposes the bill, as do some members of the Democratic Revolutionary Party, so we may yet see amendments incorporated into the final law, perhaps with more generous deductions and less emphasis on taxing via a royalty on profits.

Workers are certainly anxious to guard against their sweet profit-sharing arrangement being sacrificed in a larger deal between government and industry.