Mexican President Enrique Pena Nieto’s recently proposed Hydrocarbon Revenues Law – which would create a new fiscal regime for state hydrocarbon earnings and exploration and production activities by state-owned oil company Petroleos Mexicanos (PEMEX) – would reduce the tax obligation of PEMEX while raising government revenue through other tax measures, according to an Oct. 7 legal update from law firm Mayer Brown.
The goal of the tax reform is to increase the government’s tax take, to have people pay their taxes, and to find ways that taxes and their payment are more easily tracked and enforced.
“Mexico is thought to be a country in which there are very significant uncollected taxes, even if the law were not reformed,” said Dallas Parker, Houston-based partner in Mayer Brown’s global energy practice and co-leader of the firm’s oil & gas group.
At the same time, the tax reform also seeks to entice PEMEX to produce more oil by the often-used government approach of incentives. Right now, essentially 100 percent of PEMEX’s revenues after expenses goes to the Mexican government, leaving little incentive for PEMEX to operate efficiently, Parker noted.
“If anyone produces more revenue and 100 percent of it goes to the government, what real economic incentive is there to produce more? Certainly there are patriots who want to provide for Mexico, but this is different from the usual profit motive,” Parker noted.
Under the tax reform, the state dividend of PEMEX revenues would be gradually decreased over time. The state dividend in 2016 would be at least 30 percent of PEMEX’s earnings after taxes, but will be reduced to 15 percent in 2021 to zero beginning in 2026. PEMEX could then reinvest remaining revenues into the company’s operations.
Through the profit-sharing regime and a surface fee on non-producing areas, PEMEX would be economically incentivized to produce more. Under the newly proposed regime, new areas granted to PEMEX for exploration would be granted under a profit-sharing contract, in which PEMEX and the government share the profits of a particular field or zone. The surface fee concept is very similar to delay rentals in the United States, in which a company purchases an oil and gas lease and pay a signing bonus based on the number of acres and annual rentals until commercial production begins, Parker noted.
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