In the Economic Policy General Criteria for 2014, the Mexican government has proposed the establishment of a special mining right of 7.5% (5% in the original proposal) on the net positive income from extractive activities. As mentioned in our previous bulletin, the following are not considered as permissible deductions:
- Financial costs
- Inflationary effects
- Investments in fixed assets (through depreciation and amortization)
Additionally, the government has proposed the establishment of an extraordinary right on mining income equal to 0.5% of the income derived from the sale of gold, silver and platinum, considering the value of such minerals on the international markets and the considerable difference of these metals with respect to other non-precious metals.
These last two changes were not included in the proposal approved in April. The document approved in April is subject to approval by the Senate and more than likely these new proposals would be included in the approval process.
Income Tax, Flat Tax and Value Added Tax Laws and Federal Tax Code
Pending a more detailed analysis and the discussion and approval by the Mexican Congress, these are the main changes proposed in the 2014 Economic Package introduced on September 8, 2013 to Congress that could affect mining entities:
- Income tax rate –30– there is a tax reduction scheme under the current legislation that is being eliminated, (i.e. 29% scheduled for 2014 and 28% for 2015 and later years)
- An additional income tax of 10% is proposed when dividends are paid to individuals and non-resident entities – this tax would be paid by the Mexican entity (it is not a tax withholding)
- The option to take the deduction in the same year for exploration expenses is proposed to be eliminated
- The current tax consolidation regime would be repealed, with a five-year period for the payment of any deferred tax provided. In its place, a new tax consolidated regime for entity grouping would allow groups to defer income tax for up to three years (considering, for these purposes, only the profits and losses of the entities that comprise the group)
- A restriction is being proposed for the deduction of non-taxable salaries and benefits paid to employees; this could have an important effect on employee leasing companies that provide services to mining operational entities
- Payments made to related parties (residents either in Mexico or abroad) for which the income is not taxable or, if taxable, is subject to an effective tax rate of less than 75% of the tax that would have been paid in Mexico, would not be deductible
- The Value Added Tax exemption on temporary imports of goods is proposed to be cancelled
- The Value Added Tax rate proposed for transactions in the border zone would be 16% - currently it is 11%
- The IETU Law is proposed to be repealed
- The legislation would provide an anti-abuse clause, allowing the tax authorities to challenge the tax effects of transactions that are seen as having no business purpose or reasons
As always, the Tax & Legal Practice at KPMG in Mexico is at your service to analyze in detail the effects that this reform could have on your business operations.