Mexico: Energy Reform - Chapter IV: Implications On Income Tax Of Exploration And Extraction Activities Of Hydrocarbons

Last Updated: 30 June 2015
Article by Turanzas, Bravo & Ambrosi

1. Accruable income for Contractors under Contracts for Exploration and Extraction of Hydrocarbons

Pursuant to the provisions set forth in Article 31, paragraph II of the LISH, Contractors must have as their sole corporate purpose the Exploration and Extraction of Hydrocarbons; this matter is extremely relevant to determine the origin of accruable income that such entities are enabled to receive.

As a result of this restriction in their corporate purpose, Contractors may not carry on with any kind of activity other than Exploration and Extraction of Hydrocarbons, which from the Income Tax perspective implies that such entities will only receive accruable income from these activities, and cannot receive any other kind of income for any other activities.

Accruable income from the Exploration and Extraction of Hydrocarbons are the considerations received according to the nature of each of the Contracts in which Contractors take part; it is therefore essential to analyze the several considerations set forth in each one of those Contracts for this purpose, since these considerations will constitute accruable income when they represent a positive change in the Contractor's assets and estate.

That in the understanding that pursuant to the provisions set forth in Article 29 of the LISH, the consideration that Contractor is entitled to receive for its participation in the Contracts for Exploration and Extraction of Hydrocarbons, shall be paid once the Contractual Production is obtained; understanding as such these Hydrocarbons extracted in the Contractual Area, measured pursuant to the provisions issued by the CNH in the Point of Measurement, for the corresponding Period. Until there is such Contractual Production, Contractor is not entitled to receive any consideration or advance payment whatsoever.

While the Contractors' corporate purpose is limited to Exploration and Extraction of Hydrocarbons, the above does not imply such Contractors are prevented from carrying out any other activities that are required for the adequate compliance of such corporate purpose; therefore, such entities may well acquire real estate properties, obtain credits, subscribe credit instruments and, in general, carry on with any activity geared to the full execution of its corporate purpose.

The above opens the possibility to accidental or extraordinary acts that cause accruable income, such as the sale of those real estate properties; in which case, the Contractor must accrue such accidental or extraordinary income to those coming from the Exploration and Extraction of Hydrocarbons and, consequently, determine the corresponding Income Tax pursuant to the general rules set forth in the LISR.

1.1. Consideration from License Contracts

Consideration in favor of the Contractor under License Contracts is the transfer of Hydrocarbons once they have been extracted from the subsoil for money. For such consideration to be paid, the Contractor must be current in payment of the considerations set forth in favor of the State (non-tax-based income).

The price fixed for the transfer of Hydrocarbons in favor of Contractor for money must be attractive for Contractor, because after receiving those Hydrocarbons, this shall resell them for profit, and such resale contains the essence or economic benefit under the License Contract.

There are two positions regarding whether the Consideration under License Contracts is or not an accruable income in favor of Contractor.

  1. Not an accruable income.- The first view gears in the sense that the transfer of Hydrocarbons for money does not constitute accruable income for Contractor, inasmuch this has paid an economic consideration for the transfer of property of Hydrocarbons, but this does not cause a positive amendment to its assets or estate; that in the understanding that Contractor shall cause the respective Income Tax until it actually receives a profit for the resale in the domestic or international market of Hydrocarbons acquired under the License Contract.
  2. Accruable income.- The second view gears in the sense that the transfer of Hydrocarbons for money does constitute an income in credit for Contractor, in the proportion that the price fixed for such transfer is below the Hydrocarbon's market value. The above in other words, the economic benefit (difference between the preferential price and market value) that the Contractor receives for the transfer of Hydrocarbons for money that is made in its favor under the License Contract represents a positive change in its assets or estate, by creating an income in credit.

1.2. Consideration from Contracts of Shared Profit and Contracts of Shared Production

In the Contracts of Shared Profit and Contracts of Shared Production there are two considerations in favor of Contractors. The first of them is a specific consideration; while the second is the recovery of costs incurred in by Contractor.

- Specific considerations.

In the Contracts of Shared Profits, Contractors shall deliver all of the Contractual Production to the Trader (Comercializador), which shall deliver income from the trade of Hydrocarbons to the Mexican Oil Fund for Stabilization and Development.

The Mexican Oil Fund for Stabilization and Development shall retain considerations corresponding to the State (non-tax-based income) and pay to Contractor its respective consideration pursuant to the terms set forth in the Contract of Shared Profit. These considerations shall be the remainder of the Operating Profit after paying the Specific considerations in favor of the State (non-tax-based income).

The consideration delivered to the Contractor by the Mexican Oil Fund for Stabilization and Development shall have the legal nature of an income in cash that will have to be accrued by the Contractor in order to determine the corresponding Income Tax.

In the Contracts of Shared Production, on the other hand, the consideration in favor of the Contractor shall be paid in kind, with a ratio of the Contractual Production de Hydrocarbons that is equal to the value of the consideration set forth. This consideration shall be the remainder of the Operating Profit after paying the Specific considerations in favor of the State (non-tax-based income).

The consideration in kind delivered to Contractor shall have the legal nature of income in assets, which would have to be accrued by Contractor in order to determine the corresponding Income Tax, but the LISH fails to establish the parameters to accrue such income in assets.

There are several parameters to determine the amount for income in assets; the most relevant ones are appraisal value, market value and value set forth in a contract. We consider that the ideal method to determine the amount for income in assets under this Contract must be the value set forth in the contract, since payment in kind that shall be made to Contractor shall be determined based on the value of Hydrocarbons set forth in the contract.

- Cost recovery.

Recovery of costs is the second kind of consideration in favor of Contractors under the Contracts of Shared Profit and the Contracts of Shared Production. Said consideration shall be the amount equal to recognized costs, expenses and investments pursuant to guidelines issued for such purpose by the SHCP.

Said consideration, in each term, may not be above the Limit for Recovery of Costs, understanding as such the result of multiplying the Cost Recovery Ration by the Contractual Value of Hydrocarbons. The product of such multiplication shall determine the maximum ration of the Contractual Value of Hydrocarbons that may be allocated to cost recovery in each Period.

Recognized costs, expenses and investments that exceed the Limit for Recovery of Costs and that, therefore, are not paid to Contractor as considerations, shall be included in the consideration for subsequent periods.

Article 19 of the LISH provides that the following concepts may not constitute part of the consideration for cost recovery:

  1. Financial costs.
  2. Costs incurred in due to negligence or fraud of Contractor, or any person acting on its behalf.
  3. Donations.
  4. Costs and expenses related to rights-of-way, rights-of-pass, temporary or permanent occupations, leases or the acquisition of land, indemnifications and any other analogous figure.
  5. Costs incurred in consulting services, except those set forth in the guidelines issued by the SHCP.
  6. Expenses in connection with the infringement of applicable provisions, including risk management.
  7. Expenses regarding training or training program that do not comply with the guidelines issued by the SHCP.
  8. Expenses arising from the infringement of any conditions for security, as well as those resulting from the acquisition of assets that do not have manufacturer's guarantee or its representative against any manufacturing defects, in accordance with practices generally used by the oil industry.
  9. Expenses, costs and investments for use of own technologies, except those that have a transfer price study pursuant to the applicable legal provisions.
  10. Amounts recorded as provisions and fund reserves, except those for the abandonment of facilities as set forth in guidelines issued by the SHCP.
  11. Legal costs for any arbitration or dispute involving the Contractor.
  12. Commissions paid to agents.
  13. Payments for Royalties and Contractual Fees for the Exploration Phase under the Contract, as well as payment of the corresponding Considerations, expenses, costs and investments under other Contracts.
  14. Costs, expenses and investments above benchmarks or reasonable market prices, pursuant to the rules and basis for registration of costs, expenses and investments under the Contract.
  15. Those that are not strictly essential to execute the purpose of the Contract, those that are set forth in each Contract considering its circumstances or specific circumstances set forth in the guidelines issued for such purpose by the SHCP.

We consider that this consideration, due to the fact that it is cost recovery, must not be considered as an accruable income in favor of Contractor, because far from changing its assets and estate, it seeks to create a neutral effect thereon, by the recovery of costs.

Notwithstanding the above, there can be a double benefit in favor of Contractors, in case these deduct such costs for Income Tax purposes, because they are disbursements strictly indispensable to carry on with its Exploration and Extraction activities of Hydrocarbons and, additionally, they recover (without accruing) these expenses as contractual consideration. According to this view, it could then be argued that recovery of costs must be accrued by Contractor in order to create a neutral effect; however, due to the fact that the LISR does not establish the same catalog of non-deductible costs as Article 19 of the LISH establishes as non-recoverable, there would be a sensible distortion that would damage Contractors.

1.3. Consideration from Service Contracts

Pursuant to the provisions set forth in Article 21 of the LISH, considerations in favor of Contractor under Service Contracts shall be in cash and be set forth in each Contract, considering the industry's standards or uses.

The Mexican Oil Fund for Stabilization and Development shall pay such consideration to Contractor with funds from the trade of the Contractual Production arising from the respective Service Contract.

The consideration delivered to Contractor by the Mexican Oil Fund for Stabilization and Development shall have the legal nature of an income in cash, which will have to be accrued by Contractor in order to determine the corresponding Income Tax.

To read this Report in full, please click here.

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”

Related Topics
 
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions