Mexican Jan. 1, 2014, tax reforms - significant changesInvestment in Mexico’s once promising mining sector will likely decrease dramatically and many new projects will likely not be pushed forward.
The Mexican government’s tax reforms will come into effect Jan. 1, 2014, and include four significant changes:
1) increase in the corporate income tax rate to 30%;
2) 10% withholding tax on dividends paid to non-resident shareholders
3) 7.5% mining royalty on EBITDA
4) 0.5% precious metals only environmental erosion fee based on gross revenues
The fact that the special tax is on EBITDA rather than EBIT is of particular concern as the mining industry is characterized by high initial capital investment and none of this is deductible against the special tax.
The approved proposal also disallows immediate deductions for exploration expenses in the period in which they occurred. Instead, miners will get an allowable 10% amortization of exploration expenses per year.
The changes will impact valuations for miners with operations in Mexico and limits any future upside in their shares.