Genco Makes Gains In Mexican VAT Dispute

by Mike Godfrey, Tax-News.com, Washington

09 September 2010

Genco Resources Ltd, a publicly traded mining company which primarily owns La Guitarra silver-gold property in Mexico, has made some good progress in four lawsuits in Mexico aimed at obtaining VAT refunds.

In 2006, after more than 10 years without problems recovering VAT, the Mexican tax authorities, Servicio de Administracion Tributaria (SAT) began arbitrarily rejecting claims for VAT refunds, claiming Genco's subsidiary, La Guitarra, produced mineral concentrates, not the gold and silver contained therein, and for that reason did not qualify for the 0% tax rate. Under Mexican tax law, the producers of gold qualify for a 0% tax rate on most inputs, meaning any VAT paid on inputs used in production can be claimed back.

The Mexican tax courts have ruled in La Guitarra's favour in all four lawsuits and all four rulings were appealed by SAT. Genco learned that the Mexican tax courts have now heard two of the appeals and, in both cases, the final rulings have upheld the original court decisions in La Guitarra's favour. SAT has now refunded the previously withheld VAT refund to La Guitarra in both these cases.

In addition to the VAT claims, SAT has notified La Guitarra that it has conducted a tax reassessment for tax year 2003 and concluded there is an amount owing from the period. The taxes allegedly owing from 2003 are substantially made up of VAT which SAT claims La Guitarra should have paid because La Guitarra did not qualify for a 0% tax rate on production.

In taking this position, Genco believes that SAT is relying on the same argument it used to reject La Guitarra's VAT claims. The balance of the tax reassessment is for approximately USD170,000 in income taxes plus penalties and interest.

La Guitarra has said it planned to appeal the 2003 tax reassessment and vigorously defend its position that it does not have any VAT, income tax or other amounts owing. Genco stated it did not intend to pay the taxes or other amounts allegedly owing or post a bond, and therefore anticipated SAT could encumber La Guitarra's assets by imposing what is known as an Embargo en la Via Administrativa.

Under this procedure, La Guitarra would retain title and full use of its assets but, in the event of a ruling in SAT's favour, La Guitarra would be required to pay any taxes, penalties or interest deemed owing.

Genco has been informed by La Guitarra's tax advisers that until a final decision is reached, La Guitarra can substitute collateral or pay any amounts deemed owing and any encumbrance of assets will be removed. Genco feels that an Embargo en la Via Administrativa will be the lowest cost option with limited risk.

It is expected that final rulings will be received on the remaining two VAT lawsuits within the next 6-12 months. Genco does not expect a final ruling to be given on the 2003 reassessment for 12-24 months or longer.

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