Are Mexican miners obliged to rectify their tax returns?

Mexico's tax authority SAT has urged large taxpayers in mining and four other sectors to supplement their 2020 and 2021 tax contributions if the rates used were lower than the effective rates published this week.

The publication of those rates is part of the controls outlined in the SAT's 2023 master plan, and the tax agency added that the measure is aimed at "minimizing the possibility of initiating in-depth reviews aimed at corroborating correct compliance with tax obligations."

In the case of silver mining, the effective tax rate was put at 6.33% for 2020, while for 2021 it was 6.30%. For gold mining, it is 7.48% for 2020 and 9.12% for 2021, and for copper and nickel, it is 9.81% for 2020 and 10.54% for 2021.

BNamericas talks to Guillermo Mendieta, auditing and tax partner at law firm Mendieta & Cía. about how obligated mining companies really are to correct their tax situation if it falls below the published parameters and on the risks that they could face.

BNamericas: Is it normal practice in Mexico for large taxpayers such as mining companies to rectify their previous income tax (ISR) payments based on effective rates calculated by the SAT?

Mendieta: It wasn’t normal previously. In this administration, the issue of effective rates began to be brought up, not only in mining, but in various sectors. In fact, they published the first table [of rates]. 

It wasn't normal, but what the government is doing is carrying out analysis, using transfer pricing studies with the variables they have or the information they have from the declarations from some of the sectors, to determine the effective rate of tax on the income that each sector should pay, based on profits, operations, expenses, income ... because the SAT has that information through in the statements it has, whether they're provisional or annual SAT payments. It doesn't have much time – it will have two or three years.

BNamericas: Are companies whose payments are below the effective rates calculated by sector required to declare and pay the difference?

Mendieta: Not necessarily. There may be many variables or factors. At the end of the day, the rate they got is just that, an average weighting. However, the authorities are evidently aiming for the effective rate of tax via the ISR that would have to be collected at the sector level for each company that's in that sector. In the case of copper and silver mining companies, for example.

BNamericas: And what do those reference rates calculated by the SAT for each economic activity indicate?

Mendieta: Although it's true that they are for the mining sector, the price of silver isn't the same as that of gold, copper or nickel or steel. So, obviously there could be variations that the authorities consider, but they publish them so that all the corresponding or underlying sectors bear in mind that this is what they should be paying on average. 

If you're under that level, then you're undervaluing and that's something that the authorities could check in terms of expenses. If you're over, then obviously you're not charging enough in expenses. 

Let's say that it's a weighted average for a point of balance to determine how much each [company] should be paying in each particular sector and specifically mining companies.

BNamericas: Could adjusting to these effective rates with complementary declarations affect the profitability of the companies?

Mendieta: They could obviously affect the profitability of the companies, without a doubt, but it also means that the companies have to allow it because the authority has said that it's not an obligation to pay those effective rates.

It's just a point of reference. It's like a thermometer: 34-36 (degrees Celsius) is a normal temperature. If it's below 34 or above 37 it's a problematic issue. It's not mandated by law. They're only references, it's not compulsory to pay.

BNamericas: What are the risks for mining companies that decide not to make the adjustments to the corresponding effective rate and what should they do?

Mendieta: Obviously, if the authority has established that notion and an audit falls upon you and it determines that the rate you paid is below the average, they will want to create a tax credit and collect it. 

The question is whether or not the mining company allows that or not, and obviously [it will have to provide] the documentary support and evidence to say why it wouldn't have made that profit, that is, why it had greater expenses that reduced its income or its effective tax rate. 

There has to be a reason why. It has to have the evidence or documentary support to argue that in case the authority doesn't see it that way. And if not, then it would have to go to court and litigate on the matter.