43-101 2008 Technical Report On The La Fortuna Project, Durango ...

16.2.1.4 Mexican Taxation
16.2.1.4.1 Federal Corporate Tax
Corporate taxable income is subject to federal corporate tax at a rate of 28% for 2008 and subsequent
years. The income tax laws recognize the effects of inflation on the following items and transactions:
depreciation of fixed assets, costs of sales of fixed assets, sales of capital stock (shares), monetary gains
and losses, and tax loss carried forward. In addition, mandatory Profit Sharing (see below) is now
deductible when calculating taxable income.
Taxable income is computed in accordance with generally accepted accounting principles. Depreciation
of tangible fixed assets and amortization of intangible assets is made with the straight-line method.
Howe has assumed that all new capital has been depreciated over 10 years using the straight line method.
No opening tax pools have been assumed. Business losses may be carried forward for 10 years and as
noted above are subject to adjustment for inflation.
16.2.1.4.2 Net Assets Minimum Tax
The Net Assets Minimum Tax was eliminated in Mexico starting January 2008. The federal government
has replaced this tax with a new IETU flat minimum tax. The tax is calculated as 16.5% of the company's
monthly profits. The tax is not paid in additional to the federal corporate tax (ISR - see section 16.2.4.1).
At the end of each month the company calculates the taxes owing using both the ISR and IETU protocols.
The higher of the two calculated values is then paid for that month.
The main difference in the calculation procedures for the ISR and IETU taxes is that tax losses from
previous years cannot be carried forward for the calculation of the new IETU. The IETU can be deducted
or credited by the parent company in Canada.
16.2.1.4.3 Value Added Tax (IVA)
The 15% IVA is payable on any supply of goods and services including imports. The IVA payable can be
reduced by IVA collected by the taxpayer in the course of its annual business operations.
16.2.1.4.4 State Tax
State taxes are based on salaries paid in the state during the tax year. The tax rate for State of Durango is
1.375%.
16.2.1.4.5 Other Payroll Taxes
The company must pay a 15% Social Insurance Tax and a 5% Housing Contribution Tax based on annual
payroll.
16.2.1.4.6 Mining Tax
During the period of exploitation, the mining lands tax is approximately $10 per hectare in year 1, and
increases approximately 10% per year thereafter.
For the purposes of this financial evaluation, it has been assumed that payroll related tax costs are
included in the operating costs (i.e. State Tax, Social Insurance Tax and Housing Contribution Tax). It
has also been assumed that IVA payable on contract mining services is included in the contract mining
costs.
16.2.1.4.7 Profit Sharing
The company is required to pay a 10% profit sharing tax to its employees. Profit sharing is calculated in
the same manner as Corporate Tax but is calculated before Corporate Tax and is deductible when
calculating the Corporate tax. On the other hand, Corporate Tax is not be deducted when calculating
Profit Sharing. Castle Gold has advised Howe that it will not be required to pay Profit Sharing Tax as it
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