14 September 2016
Global Tax Alert
News from Americas Tax Center
Mexico’s proposed
2017 tax reform
package includes
provisions that may
affect the oil and
gas industry
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On 8 September 2016, Mexico’s President, Enrique Peña Nieto, presented
the 2017 tax reform package (the Proposed Reform) to the Mexican Congress
for approval. The Proposed Reform includes amendments to the Income Tax
Law, Value Added Tax Law, Federal Fiscal Code, Hydrocarbons Revenue Law
(HRL), and Federal Duties Law. The reform package must now be debated and
approved by the two chambers of Congress. If passed and enacted, the reform
will be effective as of 1 January 2017.
The President also proposed the 2017 Federal Revenue Act, which would replace
the 2016 Federal Revenue Act.
This Tax Alert discusses the most significant items included in the Proposed
Reform for the oil and gas industry.
Income Tax Law
Taxable income realization for Exploration & Production (E&P)
companies
Under current legislation, the HRL establishes that contractors receive extracted
hydrocarbons as in-kind consideration under license contracts (License) and a
percentage of the produced hydrocarbons under production sharing contracts
(PSCs). Although this in-kind consideration might be considered as taxable
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Global Tax Alert Americas Tax Center
income, the Federal Government argues that only income
obtained from the sale of hydrocarbons should be considered
in the contractor’s taxable base. Accordingly, the President
proposed to establish in the Mexican Income Tax Law (MITL)
that in-kind consideration obtained by a contractor in a
License or PSC should not be considered as taxable income,
to the extent that such consideration is not deducted as cost
of goods sold when transferred or sold.
Hydrocarbon infrastructure depreciation
Under current legislation, the HRL includes specific
depreciation rates that E&P companies may use on
investments made in hydrocarbon extraction and exploration
activities. To provide clarity to the oil and gas industry,
the Federal Government proposed amending the MITL to
include a specific depreciation rate of 10% that would apply
to: (1) fixed assets used for hydrocarbon transportation,
storage and processing; (2) platforms, rigs and drill ships;
and (3) processing and storage vessels, like floating
production, storage and offloading (FPSO). The proposal
does not specify depreciation rates applicable to assets used
in the transportation and distribution of refined products,
natural gas and petrochemicals, which might be important
to include in the provision.
Transfer pricing reports for E&P companies
The MITL establishes that taxpayers with annual income
lower than MXN$13 million are not required to maintain
documentation to comply with transfer pricing requirements
(i.e., obtaining transfer pricing reports). Because of the large
expected investment volumes in the E&P sector, however, the
Federal Government proposed eliminating the documentation
exception for E&P companies as they are already required by
contract to produce those reports.
Electric vehicle power feeders tax incentive
Considering that the electric vehicle market in Mexico is
just emerging and that almost a third of greenhouse gas
emissions in Mexico come from fossil fuel burning, the Federal
Government proposed a tax incentive to assist in reducing
CO2 emissions and their environmental impact. The electric
vehicle market has stalled in past years because there is no
consumer demand and consumers have limited access to
electric charging stations. To encourage gasoline providers to
include power feeders in their stations and to accelerate the
adoption of electric vehicles in Mexico, the Proposed Reform
would provide a 30% credit on investments made in such
assets creditable against income tax payable in the year the
investment is made. The Proposed Reform would require the
feeders to be physically fixed to publicly accessible service
points. If the credit exceeds the taxpayer’s payable income
tax for the fiscal year, the Proposed Reform would allow the
taxpayer to apply the credit balance against income tax for
the following 10 fiscal years.
Technology research & development (R&D) tax
incentive
To promote investment in technology R&D companies, the
Federal Government is proposing a tax incentive that would
provide a 30% credit on expenses and investments made in
technology R&D activities. Taxpayers would claim the 30%
credit against income tax payable in the year the investment
is made or expense is incurred. Taxpayers would determine
the amount to which the 30% credit applies by subtracting
the three preceding years’ average investment/expense
on technology R&D activities from the current fiscal year
investment in the same activities. That amount would be
the creditable balance that taxpayers could use against their
payable income tax. The Federal Government would issue
regulations that would establish the activities, sectors and
products to which the incentive would apply. It is anticipated
that the credit would not apply against salary expenses for
the development of these projects.
Hydrocarbons Revenue Law
PEMEX tax regime
The international decline of hydrocarbon prices has
affected the deduction calculation for costs, expenses
and investments in exploration and extraction activities
because the calculation relies on the value of the extracted
hydrocarbons. The deduction may be higher or lower
depending on the hydrocarbon prices, which also affects
the determination of the profit-sharing fee.
To protect Petroleos Mexicanos (PEMEX) from economic
exposure, the Ministry of Finance published, on 18 April
2016, a Decree that included a tax incentive for PEMEX
regarding profit-sharing fees for exploration and extraction
contracts. According to the Decree, PEMEX may choose
to apply one of the following alternatives, for purposes of
determining the deductibility limit for costs, expenses and
investments in onshore or offshore areas with water depths
lower than 500 meters if provisional payments are made:
Global Tax Alert Americas Tax Center
•Onshore: The higher amount between US$8.30/BOE
(barrel of oil equivalent) or the amount resulting from
applying 12.5% to the annual value of the hydrocarbons
that are not natural gas or condensates
•Offshore: The higher amount between US$6.10/BOE or
the amount resulting from applying 12.5% to the annual
value of the hydrocarbons that are not natural gas and
condensates, under Section II of Article 41 or Section I(b)
of Article 42
The Federal Government proposed including the Decree in
the HRL and making it applicable not only to PEMEX but to
all assignees.
Adjustment mechanism
Currently, the HRL requires the adjustment mechanism
included in contracts, established under the HRL, to be
derived from a formula that depends on the contractor’s
profitability. The Proposed Reform states that measuring
profitability imposes a significant burden. As a result,
the Federal Government would eliminate the profitability
element and broaden formula alternatives for the adjustment
mechanism without losing its current progressive nature.
Consortiums
Companies that have been awarded E&P contracts and have
opted to operate under consortiums must enter into a joint
operating agreement that establishes their participation
percentages. Additionally, the HRL establishes that the
operator shall issue the invoices to consortium members for
the expenses incurred as a consequence of executing the
contract. Each consortium member’s deductible expense
is the amount that corresponds to the percentage of
participation set forth in the joint operating agreement. The
Federal Government explained that this may cause distortions
in the way members’ funding responsibilities are recognized
because costs are not always distributed proportionally to
the participation (i.e., carry). For this reason, the Proposed
Reform would allow each of the consortium members to
deduct the costs they have effectively incurred in, but not
only in, proportion to their participation.
Value Added Tax (VAT)
VAT credit during preoperative periods
The Proposed Reform would eliminate the ability of taxpayers
to estimate the VAT triggered through preoperative expenses
and investments and obtain reimbursement for that amount.
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Instead, the Proposed Reform would allow preoperative VAT
to be creditable against income tax until the first month in
which the taxpayer starts carrying out activities that are
subject to VAT or to the 0% tax rate. The Proposed Reform
includes a list of activities that would be considered as
preoperative expenses or investments (i.e., R&D related to
the design, manufacturing and improvement of a product),
to the extent that such activities are carried out before the
performance of activities subject to VAT.
This proposal may significantly affect infrastructure projects,
as developers may have to finance VAT during the whole
construction period. Taxpayers should recalculate the
VAT creditable against income tax based on inflation, but
taxpayers would have to absorb the difference between
inflation and the cost of capital.
However, the Proposed Reform establishes that oil well
exploration activities, infrastructure development and other
necessary activities prior to commercial extraction of natural
resources would not be considered as preoperative activities
and companies would be able to credit the VAT charged
during the development of such activities, notwithstanding
that as a consequence of facts and circumstances that are
not attributable to the taxpayer, the extraction of natural
resources turns infeasible. If the preoperative extraction
activities are ceased due to facts and circumstances
attributable to the companies, then taxpayers would have to
recognize the reimbursed VAT in the next month following
the month in which such activities were ceased.
The Proposed Reform would establish that the creditable VAT
amount should be calculated under the simplified method
included in the VAT law. Under the simplified method, when
calculating the creditable VAT amount for the current fiscal
year, taxpayers must take into consideration the proportion
of activities taxed for VAT purposes in the preceding year.
Alternatively, the Proposed Reform would establish that, for
the first and second years of operation, taxpayers must take
into account the preceding month’s VAT determination when
calculating the current month’s creditable VAT amount.
Import VAT on leased assets
The Proposed Reform would clarify the VAT treatment
applicable to assets that are being leased by non-Mexican
residents and imported by the Mexican lessee. For VAT
already paid upon the importation of the assets, the Proposed
Reform would clarify that it is not necessary to pay VAT for
the fees or rents paid for the use of such assets.
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Global Tax Alert Americas Tax Center
Import of services rendered abroad
The Proposed Reform would clarify that services rendered abroad are deemed as imported into Mexican territory when they
are effectively paid.
Goods and Services Excise Tax (IEPS)
The Federal Government did not propose any modifications to this specific tax. It is expected, however, that gasoline and diesel
prices will be liberalized (i.e., prices will no longer be set by the Government) at the beginning of 2017, and the transitioning
pace to open market conditions will be determined for each region by the Energy Regulatory Commission and the Federal
Anti-Trust Commission. For reference, below is an excerpt from a chart included in the Proposed Reform, which includes a
tax revenue comparison as a percentage of the GDP considering revenues that include the collection of IEPS from oil and gas
companies and revenues that do not include the collection of IEPS from oil and gas companies. This could be intended to show
Congress the effect on Federal revenues of oil and gas IEPS collection from oil and gas companies. Accordingly, the Proposed
Reform would not reduce the IEPS imposed on oil and gas companies.
Federal Fiscal Code (FFC)
The Proposed Reform would add new provisions to the FFC that would simplify the proper application of tax regulations,
improve the voluntary compliance of tax obligations and strengthen tax authorities’ auditing abilities. Accordingly, the
Proposed Reform would broaden the use of the electronic signature by allowing taxpayers to use the electronic signature
in private transactions, to the extent taxpayers comply with the electronic signature regulations. In addition, the Proposed
Reform would broaden the use of the “electronic inbox” or “Buzón Tributario” –used only for tax compliance purposes– to
allow taxpayers and, in general, individuals to interact with authorities from all sectors through this electronic platform.
The Proposed Reform also would require a company’s legal representatives to register with the Federal Taxpayer Registry.
Additionally, electronic invoices would only be cancelled if the person to whom the invoice is issued agrees to the cancelation.
Federal Duties Law
A prior tax reform modified PEMEX’s legal nature from a decentralized organization to a State Productive Company. Despite
that change, under the Federal Duties Law, PEMEX still receives special treatment as a decentralized organization. Therefore,
the Federal Government proposed eliminating the following provisions to give PEMEX the same economic conditions as its
competitors:
•PEMEX and its subsidiaries’ exemptions from customs duties for natural gas importations or exportations, as well as
customs duties on the provision of fuel for leased foreign vessels used for its activities
•Preferential rates on annual duty payments for the transportation and distribution of refined products through pipelines
•Preferential rates on duties for the transfer, storage and distribution of refined products through pipelines
Global Tax Alert Americas Tax Center
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2017 Federal Revenue Act
The proposed 2017 Federal Revenue Act includes two new articles. One article would impose additional obligations for holders
of marketing, distributing and retailing permits for certain petroleum products. The second article would increase the functions
to be carried out by the Energy Commission with regard to the regulation of oil prices.
In addition, below is an illustration of some relevant budget adjustments made to PEMEX in terms of authorized leverage for
2017 vs 2016. The amounts represent how much PEMEX would receive from domestic borrowings (i.e., internal leverage)
and foreign institutions, banks and other organizations (i.e., external leverage).
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Global Tax Alert Americas Tax Center
For additional information with respect to this Alert, please contact the following:
Mancera, S.C., Mexico City
•
•
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•
Alfredo Alvarez Laparte
Rodrigo Ochoa Tella
José Fano Gonzalez
Yuri Barrueco Andrew
Salvador Meljem Elias
+52 55 1101 8422
+52 55 5283 1493
+52 55 5283 6425
+52 55 1101 8433
+52 55 5283 1300
[email protected]
[email protected]
[email protected]
[email protected]
[email protected]
Ernst & Young LLP, Latin American Business Center, Houston TX
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•
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Oscar Lopez Velarde Perez
Santiago Llano Zapatero
Javier Noguez Estrada
Juan Jose Paullada Eguirao
+1 713 750 4810
+1 713 750 8376
+1 713 751 2043
+1 713 750 8726
[email protected]
[email protected]
[email protected]
[email protected]
Ernst & Young LLP, Latin American Business Center, New York
• Ana Mingramm
• Enrique Perez Grovas
• Calafia Franco Jaramillo
+1 212 773 9190
+1 212 773 1594
+1 212 773 2779
Ernst & Young LLP, Latin America Business Center, London
• Jose Padilla
+44 20 7760 9253
[email protected]
[email protected]
[email protected]
[email protected]
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