I. MINING FEES – SUMMARY

The amendment to the Federal Law on Government Fees that will come into effect in 2014, introduces new fees to be paid by the mining industry in addition to the existing fees set forth in the law.

The new fees are the following:

  • 7.5% applied to the resulting (positive) difference of diminishing from the income derived from the sale of mining activities the allowable deductions of the Income Tax Law. Such deductions do not include investments, interest and the annual inflationary adjustment. (*1)

This fee must be paid annually no later than the last business day of March of the following year to which the payment corresponds.

  • 50% of the maximum rate of the regular fees (Art. 263 of the Law – “Regular Fees”), for those companies that do not carry out exploration and exploitation work during two consecutive years and within the first eleven years of the mining permit. This fee will be increased in a 100% when inactivity occurs in the twelfth or later years. (*2)

This fee must be paid every January and July of the corresponding year.

  • 0.5% of the income derived from the exploitation of gold, silver and platinum. No deductions are applicable in this case. (*3)

This fee must be paid annually no later than the last business day of March of the following year to which the payment corresponds.

Therefore, as of 2014 the mining industry will have to consider additional fees to pay according to each specific situation. For a better understanding of the above mentioned fees, we explain them as follows:

F

irst scenario: A company that is exploiting a mine (but does not exploits gold, silver or platinum) will have to pay the regular mining fee as it was paid before 2014 and will have to pay an additional 7.5% applied to the resulting (positive) difference of diminishing from the income derived from the sale of mining activities the allowable deductions of the Income Tax Law.

That is:

Regular fee    (Art. 263)

+ 7.5%             (*1)           

Total: Mining fees to pay in 2014

S

econd scenario: If a company holds a permit but does not perform exploring or exploiting activities related to such permit will have to pay the regular mining fees plus an additional 50% of the maximum rate of the regular fees.

That is:

Regular fee                      (Art. 263)

+ 50% Max. rate of regular fee (*2)

Total: Mining fees to pay in 2014

T

hird scenario: Those companies that exploit gold, silver and platinum, will have to pay as of 2014, the regular mining fees plus the 7.5% applied to the resulting (positive) difference of diminishing from the income derived from the sale of mining activities the allowable deductions of the Income Tax Law and an additional .5% to the income derived from the sale of gold, silver and platinum.

That is:

Regular fee    (Art. 263)

+ 7.5%             (*1)

+ 0.5%             (*3)            

Total: Mining fees to pay in 2014

This same situation will apply for those companies that exploit gold, silver or platinum and any other mineral or subsurface substance.

II. WHAT ARE THE ARGUMENTS IN ORDER TO CONCLUDE THAT THE MINING FEES ARE UNCONSTITUTIONAL?

Contributions are those amounts to be paid in order to cover public expenditure. Among contributions, there are different categories, such as taxes, fees, social security contributions, and others. That is, fees, as well as taxes, are contributions.

Fees are different from taxes. Fees are defined as those contributions to be paid i) derived from a public service (i.e. the issuance of a birth certificate), or ii) derived from the use and enjoyment of public property (i.e. the concession of a public road). Fees must be determined based on the cost of the service to be provided (i.e. in the case were they are derived from a public service, the cost that the issuance of the birth certificate has for the government); fees cannot be a source of revenue in order to cover general public expenditure (the source of revenue in order to cover general public expenditure are taxes, as explained below).

On the other hand, taxes are defined as those contributions to be paid in order to cover public expenditure, in general. No specific destiny has to be given to taxes besides covering public expenditure (i.e. to pay bureaucracy salaries, build highways, etc.).

The mining fees in question were created as such, that is, as fees. Thus, they must either derive from i) the rendering of a public service, or ii) from the use and enjoyment of public property. However, in this case there is no rendering of a public service neither use and enjoyment of public property.

Fees must be determined based on the cost of the service to be provided and cannot be a source of revenue in order to cover general public expenditure. However, in this case the mining fees in question are not determined based on the cost of a service (since no service is being provided and given the fact that the fees are determined based on revenue) and are intended to be a source of revenue in order to cover general public expenditure (which, as explained, cannot be the case with regard to fees).

There are other circumstances that lead us to conclude that the new mining fees are unconstitutional, which we can discuss with you if required.

III. HOW AND WHEN SHOULD THE MINING FEES BE CHALLENGED?

The above mining fees must be challenged through an “amparo action”. The amparo action in Mexico is the legal remedy through which taxpayers may challenge any law, regulation or provision that is deemed unconstitutional.

In order to challenge the new mining fees, we suggest to file the amparo action within the 30 working days after the Law comes into effect as of January 1st, 2014. However, in the event that the Federal Courts decide that the Law should be challenged after the -first act of application-, which is the first payment of the fees, further actions could be necessary to challenge said Law.

The amparo action must be filed before the competent District Courts according to the place where the company pays the corresponding mining fees.

Please consider that each company has to file its own amparo action in order to obtain any relief. The company that does not file its own amparo action will not be able to benefit from other companies’ favorable amparo decisions.

IV. WILL YOU HAVE TO PAY THE MINING FEES DURING THE CORRESPONDING AMPARO PROCESS?

Yes, the company would have to pay the mining fees until a final resolution is issued by the federal courts.

V. WHAT WOULD THE EFFECTS OF A SUCCESFUL AMPARO ACTION BE?

If a favorable resolution is secured within the amparo action, the company will be entitled to recover all the amounts paid for the corresponding mining fees and other concepts.

VI. ARE THESE KIND OF ACTIONS, THROUGH WHICH A LAW IS CHALLENGED FROM A CONSTITUTIONAL PERSPECTIVE, COMMON IN MEXICO?

Yes, these actions are very common. As mentioned before, the amparo action is the effective legal action to follow in order to challenge any new law, regulation or provision deemed unconstitutional.

These kind of actions are very common in Mexico and for the past ten years, the number of companies that had filed amparo actions against taxes, laws or regulations that they consider violate constitutional principles has increased exponentially, securing either favorable or unfavorable resolutions.

On the other hand, the authorities knowledge that taxpayers have the right to file these kind of actions in order to try to secure constitutional relief, thus, consider such actions as a regular and common practice in Mexico.

VII. WHAT OTHER SOLUTIONS EXIST AGAINST THE MINING FEES

In some cases, restructuring could be a solution to avoid payment of the mining fees. A case-by-case analysis must be made, in order to determine if restructuring applies to the company in question as a possible solution to avoid the payment of the corresponding fees.