TAXATION OF THE MINING INDUSTRY IN MEXICO (ENGLISH VERSION)
| Jurisdiction | Derecho Internacional |
(April 2003)
TAXATION OF THE MINING INDUSTRY IN MEXICO (ENGLISH VERSION)
Miranda, Estavillo, Staines y Pizarro-Suárez, S.C.
Mexico City, Mexico
[Page 7B-1]
INTRODUCTION
As you know, mining is one of Mexico's oldest industries, as the country has an important reserve of mineral resources including large silver reserves (the world's number one producer), as well as copper, lead, zinc, coke, coal and gold. Most mines regulated by the Mining Law are concentrated in the states of Sonora, Coahuila, Chihuahua, Zacatecas, San Luis Potosi, Baja California Sur, Durango, Michoacan, Hidalgo and Colima.
The Political Constitution of the United Mexican States, Mexico's Supreme Law 1 indicates that the State is responsible for guiding national development in order to guarantee that it is integral and sustainable, for which it may act per se or with the public and private sectors, by law, to boost and organize priority areas of development.
Under criteria of social equity and productivity, companies belonging to the public and private sectors of the economy will be aided and boosted, subject to the forms dictated by public interest and to the use of productive resources, in everyone's benefit, conserving natural resources and the environment.
Consequently, the Political Constitution of the United Mexican States establishes the property system of the land and water included within the limits of Mexican territory, which originally corresponds to the Nation, which will at all times have the right to impose the necessary form on private property, as well as to regulate the exploitation of natural elements capable of appropriation.
In accordance with the foregoing, such ordinance indicate that the Nation directly owns, among other elements, all minerals or substances in veins, stratum, mass or deposits whose nature is different to the components of the land, such as minerals from which metals and metalloids used in industry, precious stone deposits, etc.
The set of very extensive powers referred to above can be used to frame the legal parameters that govern mining, which is the specific question we are dealing with today; these powers are consolidated with an ad-hoc legislation, which states that the Nation's ownership is non- transferable and not subject to adverse possession, and the exploitation, use or utilization of the respective resources by individuals or companies incorporated pursuant to Mexican law is prohibited unless by concessions granted by the Federal Executive according to the rules and conditions established by Law.
The Mining Law 2 , derived from the aforementioned Constitution, implements Article 27 of the Constitution in the field of mining.
[Page 7B-2]
Pursuant to the Mining Law, the exploration, exploitation and benefit of the minerals or substances referred to by the Law are considered as public utilities and are priorities over any other use or exploitation of the land, indicating that taxes imposed on such activities may only be established by federal laws 3 .
The Mining Law also establishes the obligation of exploration and exploitation concession holders to pay the mining rights established by the applicable law, and the failure to pay such rights is grounds for cancellation of the concession 4 .
It is important to point out that pursuant to the provisions of the Mining Law 5 , only companies incorporated pursuant to Mexican Law may hold mining concessions. It should be clarified that pursuant to the Foreign Investment Law, foreign investment may represent up to 100% of such companies 6 .
The aforementioned rules represent the basis and foundations for taxing mining in Mexico, exclusively with federal taxes.
It should be pointed out that taxation in Mexico is one of the most complex and constantly-changing legal fields and, therefore, it requires the constant updating of anyone immersed in this area, and even more so if we consider that Mexico has made an important number of treaties and agreements to avoid double taxation and free trade agreements, which make taxation even more complicated 7 .
[Page 7B-3]
This subject is unquestionably very extensive, given that we cannot limit it to the tax provisionsthat are exclusively applicable to mining.
Any investor needs to have enough elements in order to make investments in foreign jurisdictions and such elements lead to an endless number of circumstances that have to be analyzed.
With the minimum background I have mentioned, I will now move on to develop the specific topic I have the honor and chance to present to you in this session:
I. Corporate environment
One of the most interesting factors for a foreign investor when doing business in Mexico is the corporate vehicle that allows them to be present in Mexico, within the legal framework, with the greatest possible administrative and fiscal efficiency, and, based on this, it is important to reconcile corporate aspects with tax-related ones.
As this is not the subject of this talk, we will not go under more depth and only point put that the most usual and efficient means for this purpose is through the incorporation of a business corporation 8 . The type of company most frequently used is the "sociedad anónima" (stock corporation), which is easy and cheap to incorporate, as well as allowing very flexible operation.
Notwithstanding, in the case of subsidiaries of US companies it is common to find the use of a "sociedad de responsabilidad limitada" (limited liability company), as long as they meet certain characteristics, and which enjoy tax advantages in the United States.
Another figure that can be used is that of a branch, which has its own advantages, in the understanding that a wide range of factors have to be assessed in order to decide on the best
[Page 7B-4]
vehicle in each specific case, and we should remember that only companies incorporated in Mexico may hold mining concessions 9 .
II. Fiscal environment
Federal taxes in Mexico are:
a. Income Tax 10 ;
b. Tax on Assets 11 ;
c. Value Added Tax 12 ;
d. Mining Rights. 13
Each of the aforementioned taxes is regulated by the specific law applicable to each case and its regulations, and it is important to point out that in March every year the Federal Executive, through the Mexican Ministry of the Treasury and Public Finance, issues the so-called Annual Temporary Tax Regulations and the Annual Temporary Foreign Trade Regulations. Both regulations undergo constant alterations during the year, and therefore it is important to keep current with such modifications, given that they generally contain procedural rules that should be observed for due compliance of tax provisions.
An ordinance that it of utmost importance is the Federal Tax Code 14 , which contains diverse rules whose application is importance in order to comply in due time and proper form with the different tax obligations that exist in Mexico.
It is necessary to state that no specific regulation exists in our tax system for the mining industry, and consequently our tax framework includes specific provisions for the mining field, which we will mention below, not before indicating the rules that apply to companies in general.
A. INCOME TAX
This tax is governed by the Income Tax Law and its Regulations 15
1. Taxpayers.
The following are subject to payment of this tax 16 :
[Page 7B-5]
a. Mexican residents, regarding all their income, whatever the source of wealth.
b. Foreign residents who have a permanent establishment in Mexico, regarding the income attributable to such permanent establishment.
c. Foreign residents, regarding income from sources of wealth in Mexico, when they do not have a permanent establishment in Mexico, or when, even in the case of having such establishment, such income is not attributable to it.
2. Permanent establishment.
The concept of permanent establishment contained in the Income Tax Law 17 , is basically the same as that contained in the OECD's Capital Income Agreement Model Agreement, and of most agreements to avoid double taxation made by Mexico.
It is important to highlight here that for the effects of the aforementioned concept, mines, quarries or any other place where natural resources are exploited, mined or utilized are considered as permanent establishments.
It is very common in Mexico for foreign companies to carry out work related to the exploration of mineral deposits that give rise to the existence of a permanent establishment in our country, a situation that on occasions is unforeseen and causes problems that may even put the project at risk.
This frequently happens in exploration agreements made by foreign companies with Mexican companies that hold mining concessions.
For this reason, it is very important to assess and analyze the circumstances under which mining activities are carried out in Mexico by a foreign company without the involvement of a subsidiary.
3. Corporate rate
The corporate rate is 34% on taxable profit1 18 .
4. Worker profit sharing.
The Political Constitution of the United Mexican States establishes that workers have the right to a share in company profits, indicating that in order to determine the amount of each company's profits, the taxable income pursuant to the Income Tax Law will be used as a base.
[Page 7B-6]
The worker profit sharing that should be paid is 10% of the company's taxable income 19 .
In-line with the aforementioned constitutional provisions, the Federal Labor Law 20 , which implements Article 123 of the Constitution, establishes that for the purpose of determining the worker profit sharing, the taxable income of each company will be considered as its revenue, pursuant to the rules of the Income Tax Law.
Notwithstanding the foregoing, the Income Tax Law contains two different provisions for the calculation of the tax base; the first is used as the base...
To continue reading
Request your trial