On December 2013 a constitutional reform was approved that allows the Mexican State to enter into agreements with private investors to participate in the exploration and exploitation of oil & gas. In addition, this reform also allows the granting of licenses to private investors to engage in transportation and to transform oil products and, under specific conditions, to sell oil & gas products (downstream hydrocarbon related activities).
On April 28th, 2014 the Mexican President, Mr. Enrique Peña Nieto, delivered to the Senate of the Federal Congress several bills related to the secondary laws that would regulate how to implement the constitutional reform approved on December 12th, 2013. These bills include modifications to 12 existing laws as well as the creation of 9 new laws.
According to these proposed bills, even though oil & gas will continue to be originally owned by the Mexican State, private investors shall enter into License, Service, Profit Sharing and/or Production Sharing Agreements for their exploration and exploitation, to be assigned through a bidding process.
Proposed tax regime for private investors
It is proposed to enact a new law (the Hydrocarbons Revenue Law) establishing a specific tax regime for the private companies involved in the oil & gas sector, which shall coexist with the existing tax legislation.
The bill presented by the President establishes that several payments shall be made to the Mexican State by the private companies that would act as contractors (i.e. Signing Bonus, Exploratory Phase Contractual Quota, Royalties and Fees based on operating profit or contractual value of oil & gas), under each type of agreements provided under the proposed bill.
The bill does not provide specific rules for the deduction of the payments to be made to the Mexican State by the private companies that would act as contractors, nor for the value added tax implications that would arise for such companies for carrying out their activities, therefore they would be subject to the existing tax legislation for such effects.
The tax bill provides specific depreciation rates applicable to investments in the oil & gas industry upon determining the corresponding income tax, which are: i) 100% to investments for exploration, secondary recovery and maintenance, ii) 25% to investments for the development and exploitation of oil & natural gas fields, and iii) 10% to investments in warehouses and transportation assets such as pipelines, terminals and tanks.
Qualified companies to bid for contracts
In order to segregate the results of each agreement, the proposed bill contemplates a rule that only allows special purpose companies to participate in one contract per company. Also, the bill considers that the Mexican State cannot grant contracts to companies that are taxed under the optional integration regime (a tax deferral regime based on the consolidated tax results of a Group of companies).
Employees' profit sharing
Private companies with oil & gas contracts assigned by the Mexican State, as per the proposed legislation, would not be required to determine and pay the employees' profit sharing (PTU per its acronym in Spanish), which implies distributing 10% of the pre-tax profit of an entity among its employees. Bear in mind that the employee profit sharing is a right granted by the constitution, thus the possibility of relieving private companies engaged on the oil & gas industry would be an exception to the constitutional provision.
The proposed tax bill also establishes that if a non-resident undertakes any of the activities regulated under the Hydrocarbons Law within national territory or the Mexican economic exclusive zone, it should be considered to have constituted a permanent establishment in Mexico, provided that in carrying out said activities the non-resident has a presence of 30 days or more during any 12 month period. In measuring the 30-day period, it would be necessary to consider the activities undertaken by any related party of the non-resident in question, to the extent those activities are identical or similar, or are related to the same project.
Salaries paid to employees of the non-resident
Contrary to the current content of the Income Tax Law, salary payments related to the activities regulated under the Hydrocarbons Law within national territory received by non-resident employees and paid by a non-resident without permanent establishment in Mexico, or when the salaries are not connected to said permanent establishment, shall be considered as liable to Mexican income tax, to the extent the activities carried out in Mexico last more than 30 days in any 12-month period.
It is provided that the private companies acting as contractors that carry out transactions with related parties for the sale and commercialization of hydrocarbons, as well as for supplying goods and services, would be subject to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of the OECD.
Proposed tax regime for PEMEX and its subsidiaries
Under the proposed bill, PEMEX and its subsidiaries would become subject to ordinary taxes (i.e. income tax), but income derived from assignments shall not be considered as taxable income for purposes of the income tax, considering that such assignments would be liable to the payment of Fees.
Nevertheless, the proposed tax bill maintains the current structure and taxes, but it provides a migration into the new regime. According to the tax bill, with this reform the tax burden of PEMEX and its subsidiaries would be reduced, which would allow them to become more competitive.
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.