Mining on the Edge: Will Mexico’s Tax Hikes Break the Industry?
Hold onto your hard hats, folks—Mexico’s finance ministry is cranking up the heat! In a bold move set to shake up the mining sector, they’ve proposed hiking two special mining taxes in the 2025 federal budget. Why, you ask? The government argues that soaring metals prices have fattened the coffers of mining companies, and they believe it’s high time these enterprises give back a fair slice of their profits.
The proposed changes aim to boost the special and extraordinary taxes on mining from 7.5% to 8.5%, and from 0.5% to 1%, respectively. This adjustment is framed as a necessary step to ensure that Mexico’s non-renewable public assets are treated justly in the eyes of the state.
But here’s the kicker: the mining chamber, Camimex, has raised the alarm, warning that if this budget is approved, it could jeopardize around $7 billion in investments earmarked for new projects over the next two years. This kind of uncertainty could have serious ripple effects in the industry.
To dig deeper, we turned to Mario Hernández, the lead tax partner of KPMG’s mining practice. He offers valuable insights into how these tax hikes might impact mining companies and the flow of foreign direct investment.
BNamericas: Can mining companies handle the proposed tax increases?
Hernández: The inclusion of tax increases in the economic package came as a shock. There was no prior discussion about raising them, and these taxes have been unchanged since their inception in 2014. While some mining companies operate with healthy profit margins, others are struggling with higher operational costs. Tax hikes could significantly affect their sustainability. Some might absorb the changes easily, while others might be pushed to the brink financially. This isn’t a field where you can simply shut down operations overnight; these are long-term ventures.
BNamericas: How much of their income do mining companies currently pay in taxes?
Hernández: The tax burden is substantial. Mining companies in Mexico face a hefty tax load that includes a 30% income tax, 10% profit-sharing with employees, and the current 7.5% tax on net positive income—which may soon rise to 8.5%. They also pay a 0.5% sales tax on precious metals, which could increase to 1%. When you tally it all up, around 50% of their profits could be funneled into taxes, royalties, and labor obligations.
This growing tax burden has compounded, especially after the 2021 labor reform that eliminated outsourcing, leading to a stricter profit-sharing regime. The mining sector is split between local firms and international players, particularly those from Canada, which collectively dominate about 60% of the market. These foreign companies are obliged to report their financials to shareholders, so any tax changes in Mexico directly impact their bottom line.
BNamericas: What other challenges do mining operations in Mexico face?
Hernández: The landscape is shifting in several ways. Last year, the duration of mining concessions was reduced from 50 years to 30, and securing a new concession has become increasingly difficult due to stricter regulations on water usage and community impact. Also on the table is a potential ban on open-pit mining, which could leave existing operations in limbo. This uncertainty looms over new projects as well as current operations.
BNamericas: How has the 2023 mining reform affected companies?
Hernández: New mining concessions are essentially on hold. Companies aiming to invest must now purchase existing concessions or buy out operating mines. Water use permits are also more difficult to obtain, compounding existing challenges in an already resource-strapped environment.
BNamericas: What if metal prices like gold and silver fall?
Hernández: Metal prices are notoriously volatile. A shifting stock market can drive precious metal prices up or down, and predicting where they’ll land is anyone’s guess. If market prices tumble while taxes climb, mining companies might find their profitability under siege. They could earn less revenue, pay fewer taxes, but still be hit with higher rates.
There’s a common misconception that mining is wildly profitable. Sure, some companies do rake in significant earnings, but the reality is that mining requires massive investments—think machinery, labor, and infrastructure. When the pendulum swings low on metal prices, many find themselves operating on razor-thin margins.
BNamericas: How do these tax increases affect Mexico as an investment destination?
Hernández: We’re at a crucial juncture. Six years ago, the arrival of the current administration caused jitters among investors regarding Mexico’s future direction—would it protect its markets or become more isolationist? While foreign direct investment has continued to trickle in, it hasn’t returned to previous highs. With a new presidential administration looming, investors are closely watching to see if policies will shift. The current rhetoric surrounding US-Mexico relations adds another layer of uncertainty, especially concerning foreign investments and trade agreements.
Tax hikes are rarely welcomed, and they’re coming on the heels of other significant reforms that have put the spotlight on the mining industry. However, the industry has evolved dramatically, leveraging automation and technology to modernize operations. Moving forward, companies must strategize how these changes will reshape their future, recalibrating their investment expectations and assessing the potential impacts on their operations.
