Type of Expenditure to Qualify for Additional Tax Reduction Percentage Allowed Effective Tax Reduction Mining machinery and equipment 15% 7.5% Machinery and equipment for metallization 15 7.5 Social welfare projects 10 5.0 Mining roads 5 2.5 Construction and installations in general 5 2.5 Special Reduction for Copper and Gold Production To encourage the development of new copper and gold mines, the tax laws provide for a further 50 percent reduction of the FNP of the production tax on these metals when produced by Mexicanized companies. These reductions are calculated before the 50 percent and 25 percent reductions discussed above. Subject to negotiations with the government, additional tax reductions may be obtained by Mexicanized companies as a further incentive to develop new mines. That is, the government may grant special subsidies to companies that are able to prove that they require tax concessions because of the inaccessibility of the reserves or lack of infrastructure. These reductions may be as high as 100 percent of the federal net share of the production and export taxes. However, this favorable treatment probably would not apply to a large company because, to qualify, technical assistance including design, engineering, and metallurgical research - must be performed in Mexico by a Mexican company. Concession Tax All mining concessions are required to pay a surface area tax, which is usually less than 15 pesos (US$1.20) per hectare per year. Income Taxes Corporate income taxes are graduated on a sliding scale to a maximum of 42 percent of annual taxable income exceeding 500,000 pesos or US$40,000. An operating mine may request an income tax reduction of 10 percent for exploration and development expenses in excess of those required for a normal mining operation. A new mine may request a special tax agreement from the Ministry of Finance; under this agreement, it can obtain a 40 percent reduction in income taxes for a maximum period of five years. Commercial Receipts Tax All commercial transactions are subject to a commercial receipts tax of 3 percent. Of this tax, the federal government receives 1.8 percent and the state 1.2 percent. Depletion In Mexico, there is no percentage depletion in the sense that the term is used in the United States. Depletion as referred to under Mexican law covers amortization of 28