Mexico: Energy Reform – Chapter II: Income By The State From Activities Of Exploration And Extraction Of Hydrocarbons (Upstream)

Last Updated: 26 June 2015
Article by Turanzas, Bravo & Ambrosi

The State shall receive income from activities in connection with the Exploration and Extraction of Hydrocarbons, including general concepts: (i) fees and (ii) taxes, and (iii) specific: Sign-in bonus, contractual fee, Royalties, specific Considerations set forth in the Contracts, and state Dividend by PEMEX and its EPS.

We believe a classification that provides a practical understanding of such income has been proposed by Carlos Giuliani Fonrouge1 within the scope of Financial Law, which classifies income in tax-based and non-tax-based, depending on the legal tax income of their origin or source.

Tax-based income are those that arise from the legal-tax relationship, that is, taxpayers' obligation to contribute part of their income, profits or yielding to be contributed towards public expense; whereas non-tax based income are those that have another origin or source, they are not generated from the above-mentioned legal-tax relationship.

The regime of tax-based and non-tax-based income for activities in connection with the Exploration and Extraction of Hydrocarbons is established mainly by the LISH, the LPEMEX, and their corresponding regulations.

1. General scheme of tax-based income and non-tax-based income from activities related with the Exploration and Extraction of Hydrocarbons

2. Tax-based Income

Contributions on energy matter arising from activities related to Exploration and Extraction of Hydrocarbons.

The following five are contributions on energy matters arising from activities related to Hydrocarbons:

  1. Fee for shared profits,
  2. Fee for the extraction of Hydrocarbons and
  3. Fee for exploration of Hydrocarbons),
  4. Tax on the activities of Exploration and Extraction of Hydrocarbons.
  5. Income tax for profits arising for Contractors and Assignees.

The three above-mentioned Fees (Fee for shared profits, Fee for the extraction of Hydrocarbons and Fee for exploration of Hydrocarbons), are contributions especially designed for Assignees, which are regulated in the LISH.

Let us be reminded that the only subject that can act as Assignees2 are PEMEX or any other EPE that is holder of an Assignment and operator of an Assignment Area; understanding as Assignment the administrative act by which the Federal Executive grants the right to carry on with Exploration and Extraction activities of Hydrocarbons in the Assignment Area, exclusively to an Assignee, for a given duration.

Taxes for Exploration and Extraction activities of Hydrocarbons are a contribution set forth for Contractors and Assignees, that are also regulated in the LISH; while Income Tax caused by Contractors and Assignees for income arising in connection with their Exploration and Extraction activities shall be caused and determined pursuant to the rules set forth in the LISR, with certain specific rules for their determination set forth in the LISH.

All of the above-mentioned tax-based income, with the exception of the Income Tax, shall be received by the Mexican Fund for Stabilization of Oil and for Development and is exempt from concentration rules contained in the Law on Federal Income.

Let us be reminded that concentration rules contained mainly in Article 12 of the LIF, essentially refer that income collected by agencies of the Federal Public Administration or their de-concentrated administrative bodies for the different concepts set forth in the LIF itself, shall concentrate in the Federal Treasury on the business day following that of their reception and shall, whichever their nature, be reflected both in the records of the Treasury itself, as in the Account of the Federal Public Treasury.

2.1. Fee for shared profits

a) Subjects and Purpose.- The subjects that shall pay the Fee for shared profits are the Assignees, that is, PEMEX or any other EPE that holds an Assignment and is operator of an Assignment Area.

In case SENER authorizes migration of an Assignment to Contracts for Exploration and Extraction, PEMEX or the EPE that acted as Assignee, shall immediately forfeit its quality as subject that shall pay the Fee for shared profits, since such migration implies the extinction of the administrative act of the Assignment giving rise to the applicable legal-tax regime for Contracts for Exploration and/or Extraction.

This same scenario occurs with the rest of the contributions (tax-based income) that an Assignee has obligation to pay.

This Fee has the purpose of taxing the extraction of Hydrocarbons made by Assignees during the corresponding tax year.

b) Grounds.- The grounds for this Fee is the (positive) difference between the value of Hydrocarbons extracted in the corresponding year (including their consumption by the Assignee, as well as any waste for spillages or burn of said products) and permitted deductions.

- Deductible items:

Article 40 of the LISH provides the Fee for extraction of Hydrocarbons actually paid, costs and expenses, the original amount of certain investments as items subject to being deducted from the value of Hydrocarbons extracted in the term, with the following relevant provisions:

(i) Extraction fee for Hydrocarbons actually paid during the corresponding term.

(ii) Costs and expenses.

For the purpose of determining the grounds for this Fee, costs and expenses are the disbursements required for the extraction from the Oil or Natural Gas fields determined in accordance with the Mexican Financial Information Provisions, in the understanding that the only costs and expenses that can be deducted are those of the Exploitation, transportation and delivery of Hydrocarbons.

An exception is set forth for those investments which original amount is also subject to being deducted, which are not considered costs and expenses; this is consistent and avoids duplicity in the deduction.

The rule regarding the time of deduction of costs and expenses is the same set forth for Income Tax purposes, in which these items shall be deducted when they have been effectively paid in the term for which payment is made.

Assignees have a formal obligation to keep record of Exploration and Extraction costs and expenses for each Hydrocarbon's Extraction field, as well as the specific types of Hydrocarbons obtained, which shall be sent regularly to the Lower Chamber (Cámara de Diputados) and the Tax Administration Service (SAT, for its initials in Spanish, Servicio de Administración Tributaria). Such record shall be integrated in accordance with the general rules that are issued for such purpose.

Rule 10.3 of the Miscellaneous Tax Resolution 2015 (RMF 2015, for its initials in Spanish, Resolución Miscelánea Fiscal) provides that Assignees shall submit to SAT information included in the cost and expenses record of exploration and extraction of each Hydrocarbons' extraction field, as well as the type of Hydrocarbons obtained, no later than on February 15 of each year.

(iii) Original investment amount.

The original amount of the following investments may be deducted:

  • 100% of the original investments made in connection with the Exploration, secondary recovery and non-capitalized maintenance, in the year in which they are made.
  • 25% of the original amount of investments made in connection with the development and extraction of Oil or Natural gas fields, in each year.
  • 10% of the original amount of investments made in Storage and transportation infrastructure essential to carry on with the activities under the Assignment, such as oil pipes, gas pipes, terminals or Storage tanks, in each year.

The LISH provides that the original amounts of investments mentioned in items "b" and "c" shall be adjusted pursuant to the ad hoc provisions of the Income Tax, which implies that Assignees must update such original amounts in accordance with the rules set forth for such purpose in Article 31 of the LISR.

Unlike the rule for determining the original amount of investment set forth in the LISR, which provides several items that compose such original amount of investment, the LISH only provides two items to conform said amount: the price of the corresponding investment; and foreign trade duties actually paid in connection with such investments.

It is questionable that the LISH limits or shortens the determination of the original amount of such investments so drastically, because such restrictions imply a determination of a concept that does not match with the economic reality to obtain them.

We want to note that the fact of considering only foreign trade duties actually paid in connection with such investments constituting objects of deduction, as part of the original amount of investment, excludes the possibility of considering DTA as part of such original amount, because their nature is different to that of taxes.

Regarding the moment in which the Assignee can begin to deduct the above-mentioned original amount of investments, the LISH provides a rule that differs from the one set forth in the LISR. Actually, while the latter provides that the taxpayer can begin to deduct investments from the year in which the authorization for the asset begins, or from the following year; the LISH provides that the Assignee may begin to deduct from the moment in which the disbursement is made to acquire the investments, or from their use; we find this rule to be logical and fair, by acknowledging that the right to begin deducting such items is from the moment in which the taxpayer made the disbursement for their acquisition, said rule conforms to the Assignee's economic reality.

To read this Report in full, please click here.

Footnotes

1 Giuliani, Carlos, Derecho Financiero, Ed. Fondo Editorial de Derecho y Economía, Buenos Aires, Argentina.

2 This, consistent with the Administrative Law principle under which entities of public order may hold Assignments inasmuch as private entities of concessions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.