Mexican mining royalty plan passes committee in Congress

MEXICO CITY, April 18 Thu Apr 18, 2013 10:46pm BST

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MEXICO CITY, April 18 (Reuters) - A proposal to levy a new 5 percent royalty tax on mining profits in Mexico, the world's largest producer of silver, passed a congressional committee on Thursday as the country attempts to boost its paltry tax take.

The plan put forward by lawmakers in President Enrique Pena Nieto's Institutional Revolutionary Party (PRI) aims to boost revenues from an industry where companies enjoy a more generous tax regime than in other Latin American countries.

The proposal, which was approved by the economics committee of the lower house of Congress, aims to redistribute profits to the states where foreign and domestic companies mine.

The plan is part of a broader drive by Pena Nieto to improve Mexico's tax take, which is the lowest in the 34-nation Organization for Economic Co-operation and Development.

Under the proposal, mining firms would pay a 5 percent charge on net profits before tax. Mines not yet producing would pay a low, almost symbolic per-hectare fee on their concession.

Seventy percent of the revenues would go to the states and municipalities where mining occurs, for infrastructure and development, with the rest going to a federal development fund.

If it becomes law, the plan could generate between $250 million and $500 million in extra revenues per year, experts say.

"We don't want this to be seen like vengeance," said PRI congressman Adolfo Bonilla, the architect of the bill. "These companies have been reaping the benefits for years. We're not talking about an industry without revenues, without profits."

Unlike regional competitors like Brazil and Peru, which have already imposed mining royalty schemes in addition to charging mining companies an aggregate tax levy on profits of more than 34 percent, Mexico only charges miners income tax of 30 percent.

Introducing a royalty scheme in Mexico, which has yielded precious metals to foreigners and locals since the Spanish conquest nearly 500 years ago, is overdue, supporters say.

If the law passes another committee vote early next week, the bill could be put to the floor of the lower house later that week, Bonilla said. If approved, it would move to the Senate.

While the PRI and its allies should be able to muster a majority in the lower house, it is short of votes in the Senate.

Mining in Mexico accounts for nearly 5 percent of gross domestic product and is the fourth-largest industry behind carmaking, electronics and the oil sector.

OPPOSITION

Reforming the mining sector was part of a pact Pena Nieto unveiled in December between the country's main political parties to work together on economic reforms. But Bonilla's bill was drawn up outside the pact, and has come under fire.

The conservative National Action Party (PAN) and senior figures in the Party of Democratic Revolution (PRD) have withheld their support for the initiative, and officials say a more comprehensive law should be presented.

"It's a poor initiative," said PRD Senator Armando Rios Piter, calling the bill "incomplete" and too focused on just royalties. He did not think the bill could pass as it is now.

If it is approved, it would likely take effect by March 2014, when companies file tax returns, the PRI's Bonilla said,

The planned measures also face opposition from the country's mining industry, which fears they will hurt business.

"It will, without doubt, affect investment, the creation of jobs and finally competitiveness, and that's why we're opposing it," said Sergio Almazan, director of mining chambers Camimex.

A recent drop in gold prices means additional costs should be avoided, Almazan added.

Nonetheless, most foreign miners said they did not oppose the royalty regime as long as it remains stable.

"I think Mexico has always been a pretty decent country for mining investment," said John Gravelle, PricewaterhouseCooper's mining industry leader for Canada and the Americas. "And I think Mexico will still be a good investment."

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