On November 26, 2014, the Second Chamber of the Mexican Supreme Court (hereinafter "MSC") ruled the amparo injunction 9/2012 in which, among other items, it determine the tax treatment applicable to the deductions of rigs use on oil-drilling services pursuant to the Mexican Income Tax Law (hereinafter "MITL") in force in 2002.
Base on this law, several taxpayers engaged in providing drilling services for the oil & gas industry in Mexico, deducted the rigs and/or other related assets used as part of their drilling services as fixed assets for Mexican income tax purposes. Specifically, they deducted these rigs by applying the depreciation percentage provided for machinery and equipment used in the construction industry by the MITL (i.e. 25% per fiscal year).
Notwithstanding the above, this tax treatment was questioned by the Mexican tax authorities through the tax audits that were carried out to these taxpayers. Based on these audits, the Mexican tax authorities determined that this type of assets (i.e. oil rigs) must be deducted using the depreciation percentage applicable to machinery and equipment utilized in the extraction and processing of oil & gas (i.e. 7% per fiscal year) instead of the 25% depreciation percentage. Hence, the taxpayers would be impacted by having to recognize a smaller deduction per fiscal year.
As a result, several taxpayers that were audited filed the corresponding legal actions against the tax credits assessed by the Mexican tax authorities based on this tax interpretation taken by the authorities. In this sense, due to the importance of this matter for the oil & gas industry in Mexico, the MSC decided to attract the case and it ordered the suspension on the ruling on any issue related to the Federal Courts while the MSC issue an official position on this regard.
On November, 2014, the Second Chamber of the MSC ruled the case law 9/2012 in which it provided the position of the Court in this matter. Based on the MSC's analysis, the rigs and other related fixed assets used for providing oil-drilling services must be deducted using the 10% depreciation percentage, which is the depreciation provided by the MITL to any other machinery and equipment not listed in the law. This conclusion was reached based on the interpretation that: i) these assets are not used on a stage related to the extraction and/or processing of oil & gas (i.e. 7% depreciation percentage per year) and, ii) these assets are used on an exploration stage related to the oil & gas industry, so the depreciation percentage used in the construction industry is not applicable (i.e. 25% per year). As such, the MSC argued that these assets must fall within a catch-all provision of the MITL that provides for a 10% depreciation percentage on a yearly basis.
Hence, on February 9, 2015, the MSC published on the Federal Official Gazette the General Resolution 4/2015 by which the MSC ordered to the Federal Courts to stop the suspension on the ruling on amparo injunctions related to this matter. Also, the MSC established therein that any amparo injunction related to this issue must be ruled based on the technical analysis and conclusion reached by the Second Chamber of the MSC.
Despite the fact that the amparo injunction 9/2012 ruled by the Second Chamber of the MSC refers to a single case law, the effect of the abovementioned General Resolution 4/2015 will imply that the Federal Courts must rule using the technical analysis and conclusion reached by the MSC. It is important to stress out that the new MITL in force starting 2014 has a similar wording to the MITL that was analyzed by the MSC, so it is foreseeable that the Mexican Courts will continue with this interpretation even under the application of the new MITL.
As such, it is advisable to analyze the tax impact under this case law for those taxpayers engaged on oil-drilling services in Mexico, in order to determine the possible alternatives both on retroactive and prospective manners.
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.