Energy Reform in Mexico: Impact on Tax and Revenue
23.09.2014 / Santamarina Steta, Juan Carlos Machorro , Partner in charge of the energy department of the firm for Energyboardroom.com
On August 11, 2014 the Federal Executive Branch issued decrees implementing at the federal law level the reforms to the Political Constitution of the United Mexican States, integrating historic changes in the manner in which the energy industry will be developed in Mexico, generating an increase in investment by allowing private participation, the transformation of the state-owned companies that currently manage the sector, and the strengthening of the institutions that govern the activity of that industry.
The oil and gas and electric power sectors are emphasized. In both cases, the active participation of the private sector is encouraged, allowing participation in activities that were previously reserved to the State through its state-owned companies, Petróleos Mexicanos (“Pemex”) and the Federal Electricity Commission (“CFE”). In addition, the powers of the governmental institutions to regulate the new market niches created with this process are reinforced, through the institutional strengthening of the regulatory bodies of the sector, the creation of independent operators and the redistribution of powers among the relevant authorities.
With this new regulatory framework positive consequences are expected for the sector, among which are: (i) an increase in the production of oil and gas and derivative products, (ii) the strengthening of the energy security of the country; (iii) the eventual decrease of electricity rates and gasoline prices; (iv) an increase in investment in the power industry and; (v) an increase in the Gross Domestic Product of the country estimated at 1% (one percent) annually, among others.
The changes occurring in the regulatory framework resulted, among many other things, in the need to adjust the regime applicable to the energy industry in tax and revenue matters through the issuance and amendment of several laws. The following are among the most important elements:
- The Oil and Gas Revenue Law, the purpose of which is to establish (i) the regime of the revenue that the Mexican State will receive from the activities of exploration and extraction done through the permits and contracts referred to in article 27, seventh paragraph, of the Political Constitution of the United Mexican States and the Oil and Gas Law, as well as the compensation that will be established for those contracts; (ii) the provisions on the management and supervision of the financial aspects of the contracts; and (iii) the obligations in relation to transparency and accountability with the resources referred to in the LIH.
- The concept of regulatory contributions is established in the Federal Fees Law, making it possible for the regulatory bodies to receive certain amounts paid to the State as fees for carrying out their regulatory activities.
- Chapter XII “Oil and Gas” of the same law is repealed, in order to harmonize its content with the Oil and Gas Revenues Law, which will go into effect as of December 1, 2015.
- Articles of the Tax Coordination Law are amended in order to exclude from taxable federal collection (i) the activity of extraction of oil, (ii) the Income Tax from the contracts and permits for the exploration and extraction of oil and gas referred to in the Oil and Gas Revenue Law, and (iii) the tax on the activity of exploration and extraction of oil and gas set forth in the Fourth Title of the Oil and Gas Revenue Law.
That law also establishes the obligation of using funds from the Mexican Petroleum Fund for Stabilization and Development (the “Mexican Petroleum Fund”) for the municipalities on the border or coasts through which the oil and gas materially leaves the country.
The permit holders for the sale to the public and distribution of gasoline and diesel are also included under the law where previously there was only Pemex.
Finally, the manner in which the Oil and Gas Extraction Fund will be formed is redefined, establishing that its resources will be transferred by the Mexican Petroleum Fund.
- The Mexican Petroleum Fund for Stabilization and Development Law is issued, the purpose of which is to establish the rules for the creation and operation of the Mexican Petroleum Fund, a public trust managed by the Bank of Mexico, which will receive, manage, invest and distribute the income from the permits and contracts referred to in the seventh paragraph of article 27 of the Political Constitution of the United Mexican States, with the exception of the taxes, in terms of article 28 of the Constitution and the transitory articles of the energy reform Decree issued in December of last year.
- The Federal Budget and Treasury Accountability Law is amended in order to: adapt it to the new definitions and concepts of the other amended laws; (ii) exclude the EPEs from its provisions; (iii) guarantee the continuity of the subsidies to electricity in case of increases in its price, (iv) make it possible to offset the revenue of the State with the funds of the Mexican Petroleum Fund, when it is due to lower petroleum income; (v) consider the regulatory fees as part of the Revenue Budget; and (vi) add the title “Transfers from the Mexican Petroleum Fund” as the fifth title of the law.
- The General Public Debt Law is amended, including the following elements: (i) to include the EPEs as entities having public debt, and (ii) make it possible for the Federal Government to be able to assume a proportion of the labor liability of Pemex and CFE in relation to pensions and retirement funds currently being paid, and those corresponding to active workers of those organizations, conditioned on the renegotiation of the collective bargaining agreement of both companies.
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