Until a few months ago, Mexico was one of the rare countries left in the world that didn’t charge taxes on mining production or profits. But a proposed 7.5% tax on resource companies, and as much as 8% for gold, silver and platinum miners, is scaring investors and small players away.
The country, which ranks fifth globally in terms of mining investment and fourth in exploration spending, currently taxes miners 30% of their revenue. And that regime had been working just fine, with mining investment expected to hit a new record of $8 billion by the end of the year. But that was before the bill came on the scene.
Earlier this year President Enrique Peña Nieto introduced a plan to bolster Mexico’s feeble tax haul that alarmed miners. The reform focuses on reaping more income tax from higher earners, closing corporate loopholes and widening the tax base. As part of the restructuring Mexico’s Congress voted in favour of passing a 5% tax to redistribute miners’ profits to the states and municipalities where they mine.
The bill, originally due for a Senate vote in coming months, was later to fold into the government’s fiscal reform, which increased the proposed fee to 7.5% of earnings before interest, taxes, depreciation and amortization (EBITDA).
While the planned tax may not be a major challenge for mid-tier miners with established operations, Haywood Securities analyst Stefan Ioannou told BNamericas it would definitively be “prohibitive” for many smaller players, which rely mostly on high-risk seed money.
The new ruling would have even more critical outcomes if combined with plans to force mining firms to actively work on their concessions, as it would increase per-hectare fees for concessions left inactive for two years or more. Analyst have pointed out the timing of the proposal is awkward, given the recent drop in metals prices and production.
The country’s national statistics agency (INEGI), recently reported that overall mining output fell by 2% in the first six months of 2013, compared with the same period the previous year.
Mining companies Industrias Peñoles SAB and Fresnillo Plc (FRES) would suffer the most should the legislation pass, while Grupo Mexico SAB would be less affected as it has activities outside of the sector, according to an e-mailed report by Citigroup Inc.’s Banamex unit.
Mexico’s mining industry employs about 334,000 directly, with 2 million people employed indirectly, making the sector the country’s fourth largest industry in dollar income, behind cars, oil and electronics. If approved by the senate, the new mining tax will be implemented as early as January 2014.