Mexico mulls tax on miners as part of fiscal reform

MEXICO CITY, Sept 30 Wed Sep 30, 2009 6:15pm EDT

MEXICO CITY, Sept 30 (Reuters) - Mexico's Congress is considering a 4 percent tax on mining output as part of a fiscal reform package meant to boost government revenues during a steep recession.

But all the major mining companies in Mexico say the measure will stifle new investment and burden existing projects at a time when metals prices have slumped from record highs.

Mexico has one of the lowest tax takes in Latin America and President Felipe Calderon is trying to pass a controversial overhaul of the tax system to reduce the country's dependence on waning oil revenues.

Miners now pay taxes on land concessions that range from 50 centavos ($0.03) to 101 pesos ($7.50) per hectare (2.5 acres), said Senator Francisco Arroyo, an opposition lawmaker behind the bill whose proposal could win support from Calderon's party.

Mexico has long been a top destination for mining investment with its rich mineral resources and its business-friendly laws.

The country's major miners including copper giant Grupo Mexico (GMEXICOB.MX) and Fresnillo, the world's largest silver producer (FRES.L) owned by Penoles (PENOLES.MX), say they feel threatened by the proposal for the new law.

"This definitely will halt mining development. Mining is a global business, investors will go to other countries," said Grupo Mexico executive Xavier Garcia de Quevedo.

While Mexico will remain attractive, the decision to levy a tax on production and not sales is counterproductive, said Rodrigo Heredia, a metals analyst at Ixe brokerage.

"It would seem more appropriate to levy the charges on sales volume and not on production, since otherwise, the tax would be levied on the inventory levels that are indispensable in this cyclical industry," Heredia wrote.

He also said calculating the charge based on the average publicly-quoted price on the New York Mercantile Exchange, multiplied by the production volume each month, does not reflect the reality of the metals market.

Companies "often contract sales for future delivery at the price of the day the sale is closed, which could be different from the price on the day in which the goods are actually physically delivered," he said.

MONEY TO MINING TOWNS

Arroyo said he is open to debate with miners on the technical issues, but his priority is to ensure more money goes to mining towns, which are often in poor, isolated areas.

Arroyo, a senator from the Institutional Revolutionary Party, or PRI, said the bill's aim is not to dramatically raise the rates miners pay but rather to redistribute funds so local governments where mines are located.

He said the increase in payments will be partially offset by tax write-offs on profits.

"We have beautiful mining towns that are falling to pieces because of neglect," said Arroyo, who is from the state of Guanajuato where rich mineral deposits have been exploited since the time of the Spanish conquest.

"I come from a municipality where in my lifetime, I have seen a lot of wealthy miners and a lot of poor people. That's how we grew up, my father was a doctor for the miners," he said.

The PRI became the largest party in the lower house of Congress, displacing Calderon's conservative National Action Party, or PAN, after mid-term elections in July.

The party is now key to passing the package of fiscal reforms being considered by lawmakers as Mexico tries to avoid a possible debt downgrade by credit ratings agencies worried about its paltry tax collection.

Most PRI senators are against Calderon's proposal for a 2 percent tax on all sales, including food and medicine.

Arroyo said the mining initiative is separate from the overall fiscal package, although it will be considered in conjunction with the other proposed reforms.

He claims to have the support of at least 30 senators, three of them from Calderon's PAN, seen as more pro-business.

A key PAN senator Juan Bueno, who has played pivotal roles in the past negotiating government-backed legislative reforms, said Calderon's party was seriously studying the bill. ($1=13.50 pesos) (Additional reporting by Miguel Angel Gutierrez; Editing by Marguerita Choy)

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