D-1.1 6-62 Mexico taxes INTER-OFFICE CORRESPONDENCE Date: January 5, 1972 To: FILE From: Weston Bourret Sub: ARTHUR ANDERSON - MEXICO CITY Ref: On November 25 and 26, 1971, I met with representatives of Arthur Anderson in reference to the Mining Tax Laws as applicable to a large copper mining operation. The following Mexican partners represented Arthur Anderson in the conference: 1. Nicolas Urquiza 2. Eduardo Gonzales G. General The tax applicable to mining activities is governed by the law of taxes on development of the mining industry as promulgated December 30, 1955. This law has been amended from time to time to clarify or change specific points. Under the mining laws governing mexicanization, there is an automatic reduction of 50 percent of the federal portion of both the production and export tax. Generally, the federal portion of the tax is allowed 90-92 percent of the total. In the instance of a new mine, there is a further reduction of 25 percent of both production and export taxes. But this is not automatic and must be negotiated and discussed with two government departments: 1. Patrimonial Nacional 2. Treasury Department Memo to File Arthur Anderson - Mexico City 1/5/72 page two Mine Incentives For a producing mine, there is a further reduction of up to 25% of production and export taxes as an incentive for money re-invested in Mexico for such items as mining and metallurgical equip-ment, mill expansion, roads, housing, social benefits, etc. This 25% tax reduction is granted ona year by year basis on application to the Treasury Department. Special Agreement There is a possibility of a further tax reduction over and above Mexican incentives, which in effect nearly eliminates all federal taxes. The primary basis for such special relief assumes that: 1. Mining Company is investing more dollars for expansion and facilities than the taxes generated in the current year. 2. That the Mexican Company obtain prior approval from the Treasury Department. 3. All technical and design work on the expansion program must be provided in Mexico by Mexican nationals. The above special treatment may be canceled at any time by the Treasury Department for failure to comply. Income Tax In the case of a copper mine, a Mexicanized company can apply for up Memo to File Arthur Anderson - Mexico City 1/5/72 page three to 40 percent reduction of income tax by agreeing to install: 1. A new mine. 2. Initiating and conducting an approved investment program designed to provide long-term employment. Assuming that the mining company does not apply for this 40 percent reduction in income tax, it is possible to obtain a 10 percent reduction of income tax for outside exploration in conformance with a proposal submitted to the Treasury Department. To some extent, success in obtaining tax reductions depends on expertise in dealing with the government and reputation of Mexican partners in maintaining confidence of Treasury Department officials. Pre-mine and Exploration Expenditures In reference to exploration, there is a five-year loss-carry forward on all non-productive or uneconomic exploration projects. In the instance of pre-mine development, expenses are capitalized in a fixed asset account, later to ve written off against proven ore reserves. Technical Services and Consulting For income tax purposes, all fees paid to foreign companies for engineering, design and consulting are subject to the 42 percent Mexican tax on the gross dollar amount paid for such fees and services. In addition, there is a 3 percent federal and state tax. This obvious Memo to file Arthur Anderson - Mexico City 1/5/72 page four gross in equity in the tax laws causes great concern. While there is a possibility this tax will be removed, in the opinion of Arthur Anderson it may require some years. I was told that the main stumbling block in getting Asarco's La Caridad project off the ground is the 42% percent on engineering, design and construction fees. Until some compromise is made, La Caridad may never get started. Weston Bourret WB/nam