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Photo credit: Pemex by Matthew Rutledge

Two things are certain on this Mexican Energy Reform: Pemex and Taxes. President Peña proposed changes in the taxation rules for Pemex trying to set a more flexible and standard tax system applicable for any type of hydrocarbon, allowing re-investment and reducing the red tape. As this is a very complex topic, I tried to describe the proposal as simple as possible, skipping some tricky details:

1. Pemex would have budget autonomy for managing and borrowing, repealing the current authority of Ministry of Finance for that purpose;
2. There will be a homogeneous tax system for all hydrocarbons. In brief, Pemex has a complex and combined tax system. As a general rule, it has a 71.5% tax over net income from production of oil crude and associated gas, as well as a 10.683% for gross income on production for oil crude and 0.683% for associated gas. In addition there is a special tax regime for Chinotepec and deep waters oil that has a 30-36% tax on net income and 15.683% on gross income. For marginal fields (inventory proposed by Pemex and approved by Ministry of Finance) combines the general and special regimes. Also, associated gas has a levy or 50 cents per each thousands of square feet produced. The proposal would allow to pay ISR as any other private company (up to 30% on net profits), plus a flat rate royalty on sales and a percentage on each oil contract. Government would apply all incomes from Pemex into investment projects through a public trust;
3. Pemex can only deduct some acknowledge costs with caps. The proposal would allow deducting total and real costs;
4. Currently, Pemex has a monopoly on oil production. With the proposal, Pemex would migrate to assigned oil wells that exploit to profit-shared agreements. These agreements would be set as service level agreements (SLA). Mexican State will receive a monthly flat rate, a percentage over gross value of produced hydrocarbons and a percentage over operating profit. Likewise, the SLA would establish the percentage of operation profit for Pemex; and
5. Pemex will be regulated by Ministry of Finance and Ministry of Energy.

From 2006 to 2012, Pemex had an average net profit of 4.24 Billion USD, but in 2012 was 8.8 Billion USD. So, any change that could increase the profit is substantial and matters.

Under this tax reform to Pemex, there is a preview on the SLA for private companies. Will Peña deliver?


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