indirect taxes and customs implications for downstream in ...page 11 mexico’s energy reform –...

Indirect Taxes and Customs implications for downstream in Mexico

March 27, 2017

The Energy Reform – Downstream Sector

Source: EY Analysis, Secondary Research

► Controlled pricing all

under Pemex

branding.

► Timetable established

to open markets.

2013 2014

2015 2016

Controlled Price

Increase

Maximum Prices

Free Prices Free Market

► Controlled pricing to

reach maximum levels

all under Pemex

branding.

► Prices may be

adjusted by

international prices

and will differ

regionally due to

logistical differentials.

► SHCP established

maximum price

controls per region.

► CRE will eliminate

maximum price

controls following a

schedule consisting in

5 phases.

► Pemex will carry out an

open season to

reserve pipes and

terminals capacity.

► Full open market.

Energy Reform

Approval ► Controlled price

increases all under

Pemex branding.

2018

► Permits for the sale of

gasolines and diesel to

the public were

granted by the CRE.

► Non-Pemex retail

branding is now

allowed.

► Since April, 2016, all

companies are allowed

to import gasoline and

diesel.

Permits for the Sale

and Import of

Gasolines

2017

Gasoline and diesel market chronogram

1

3

2

4 5

15-Feb-2017

30-Mar-2017

• Baja California

• Sonora

14-Sep-2017

30-Oct-2017

• Baja California Sur

• Durango excepto Gomez Palacio

• Sinaloa

16-Oct-2017

30-Nov-2017

• Aguascalientes

• Ciudad de México

• Colima

• Chiapas

• Estado de México

• Guanajuato

• Guerrero

• Hidalgo

• Jalisco

• Michoacán

• Morelos

• Nayarit

• Puebla

• Querétaro

• San Luis Potosí

• Oaxaca

• Tabasco

• Tlaxcala

• Veracruz

• Zacatecas

15-Nov-2017

30-Dec-2017

• Campeche

• Quintana Roo

• Yucatán

1-May-2017

15-Jun-2017

• Chihuahua

• Coahuila

• Nuevo Leon

• Tamaulipas

• Municipio de Gomez Palacio, Durango

► As of January 1, 2017, the Ministry of Finance will establish maximum regional prices, which would recognize the production, transportation and storing costs of gasoline and diesel.

► In a gradual and orderly manner, CRE will liberalize prices, which will fluctuate according to market conditions, in accordance with the following schedule:

Open season decision

Price liberalization

Gasoline and diesel maximum prices

► Ministry of Finance (SHCP) establishes maximum prices for those regions where the

gasoline & diesel prices are not fully liberalized according to the chronogram published

by CRE.

Maximum Price = Reference Price + Quality Adjustment + Logistic Costs + Margin + IEPS + VAT

Tuesday

Wednesday max prices available 24 hours

Thursday

Friday

Saturday

Sunday max prices published on Saturday

Monday

Period in which the maximum

prices are applicable

SHCP maximum prices 2017

Date in which maximum prices

are set & publishedJanuary 1 February 4 February 11 February 18

Max prices (approx USD per Gallon)

ITEM GASOLINE < 92

OCTANOS

GASOLINE > 92

OCTANOS DIESEL

MAX $3.14 $3.48 $3.35

MIN $2.90 $3.24 $3.11

AVG $3.04 $3.38 $3.24

Mexico’s Energy Reform – Potential customs implications

Customs Implications

► Private entities entering the Mexican energy market need

to proactively identify customs strategies that can benefit

them and reduce the duty impact of their import

operations, including:

► Meeting requirements to obtain applicable import and sales

permits for the distribution of gasoline and diesel by private entities

► Identification of preferential customs regime for the importation of

products or the machinery and equipment required for distribution

and sale

► Strategy to minimize duty impact, excise and VAT impact on the

importation of goods, as well as machinery and equipment

required for exploration and manufacturing activities


Customs Implications

► Some of the available alternatives that may be useful for

private entities entering the Mexican energy market may

include the use of Free Trade Agreements for duty

savings, IMMEX programs for temporary importation of

goods for manufacturing purposes, RFE’s, among others

► Considering that Mexico’s energy sector is set to become

very competitive, private entities should consider

appropriate strategies to maximize their duty savings

which could quickly translate into competitive cost

advantages


Specific Customs Impact Per Activity

► Upstream Activities: Before, limited to performance-based

service contracts; today, limitation is lifted to allow

production sharing contracts, profit sharing contracts and

license agreements; attracting additional operators

► Increase importation of Machinery & Equipment

► Use of temporary and permanent import regimes

► Use of Free Trade Agreements

► Midstream Activities: Allows transportation and storage of

natural gas, petrochemicals and refined products

► Use of different customs regimes (i.e. fiscal deposit, RFE, transit,

etc.)


Specific Customs Impact Per Activity

► Downstream Activities: Private companies may carry out

refining and commercialization of fuels, LPG distribution

activities and, as of 2017, retail sales of gasoline and

diesel

► Importation of Machinery & Equipment

► Use of import regimes and customs programs (i.e. IMMEX, RFE,

PROSEC, etc.)

► Use of Free Trade Agreements

► Inbound (raw materials and M&E)

► Outbound (finished goods)


Importation of Gasoline and Diesel

► Relevant import considerations

► Import taxes

► Customs processing fee (CPF)

► Recinto Fiscalizado Estratégico (RFE):

► RFE Operator

► RFE User

► Responsibilities and benefits


Imp

ort

C

on

sid

era

tio

ns

Permits (only granted to

Mexican Companies)

Import

Commercialization

Customs Duties and Fees

Gasolines and Diesel exempt from General Import Duty

Customs Processing Fee waiver under NAFTA

In the absence of certificates of origin a CPF of .008 of the value of the gasoline and diesel should apply

Other Indirect Taxes

IEPS (Mexican Excise Tax)

16% Value Added Tax

Relevant Import Considerations


Import Taxes

► The permanent importation of gasolines and diesel into Mexico is subject to

payment of various taxes and fees including import duties, CPF, VAT and excise

taxes.

► Goods are subject to payment of the general import duty, when permanently

imported.

► The taxable base of the import duty is the customs

value of the imported goods, which is generally the

transaction value (i.e. price actually paid or payable)

► The importation of gasoline and diesel is unconditionally

duty free (no need to claim NAFTA or other Mexican

FTA)


Customs Processing Fee (CPF)

► The CPF is charged by the Mexican government on all customs

operations which are performed using an import declaration or

“pedimento” to cover the services provided by the Mexican government

during the customs clearance process

► A permanent importation is subject to a 0.8% CPF rate on the

customs value of the product

► Some FTA’s implemented by Mexico, including NAFTA and the EU-

Mexico FTA, provide a CPF waiver or a reduced fixed amount. Special

programs such as the RFE also provide reduced CPF rates


Recinto Fiscalizado Estratégico (RFE) - Operator

► An entity that owns a property within the territorial limits of any

customs office may request authorization from the Tax Administration

Service to designate and operate such property as a RFE.

► The request must include an investment plan, documentation

demonstrating legal ownership of the property, compliance with minimum

security requirements of the property, etc.

► The authorization may be granted for a 20 year period and can be

extended for an additional 20 year period if requested by the entity.


Recinto Fiscalizado Estratégico (RFE) - User

► An entity that is legally incorporated according to Mexican legislation,

who owns or leases property within a RFE may request authorization to

introduce goods under the RFE customs regime, as long as it can

demonstrate its technical, administrative and financial capacity and is in

compliance with its tax obligations

► The RFE user will be responsible for performing the customs

clearance process for introducing the goods under the RFE regime

► The authorization may be granted for a 20 year period and can be

extended for an additional 20 year period upon request


RFE Responsibilities (Comparison Chart)

Operator User

Responsible for managing, supervising and

controlling the RFE

Responsible for customs clearance process

of goods introduced under the RFE regime

Covers expenses related to the

maintenance of the RFE

Must maintain an automated inventory

control system with online access for the

authorities

Build infrastructure for common use within

the RFE

Responsible for filing introduction and

extraction declarations

Responsible for security within the RFE Obligation to return abroad or import on a

permanent basis the goods introduced to

the RFE within 60 months

RFE operator cannot obtain authorization to

introduce goods under the RFE customs

regime

Must comply with VAT and excise tax

certification requirements to obtain the

waiver on the payment of VAT and excise

taxes upon introduction to the RFE


Determining Value of RFE

Imports under the RFE Permanent importation

Duty payment No payment of import duties will be

due upon entry into the RFE

Import duties, if applicable,

must be paid at time of import

(imports of gasoline, diesel

and aviation fuel are duty free)

Customs processing fee Reduced fixed CPF rate of $297

Mexican pesos (approximately $20

USD)

0.8% of the customs value of

the goods (CPF is waived for

NAFTA originating goods)

VAT / excise tax payment Payment is due upon entry into the

RFE but the VAT / excise tax

certification provides a waiver

Payment is due at time of

importation

Duration Foreign goods may remain for up

to 60 months in the RFE

Goods may remain for an

indefinite period of time

Non-tariff restrictions Compliance at time of entry into

the RFE is not required

Goods must meet all

applicable non-tariff

restrictions at time of entry

x

IEPS 101

It only applies to producers and importers

Presidential Decrees provide different IEPS incentives

IEPS on gasoline and diesel is composed by 3 different fees, all IEPS

Mexican Importer

IEPS < 92 ≥ 92 Diesel Import

Fixed Fee Art. 2-I D 4.3000 3.6400 4.7300 ✓

Fossil Fuels Art. 2-I H 0.1141 0.1141 0.1384 ✓

Fixed Fee Art. 2-A 0.3800 0.4637 0.3154 X

IEPS < 92 ≥ 92 Diesel Import

*Fix Fee Reduction 1 - 0.955 ✓

Border Zone

Based on neighbor

prices and only

applicable to Gas

Stations

- X

IEPS Law provided a transitory regime in 2016, that adjusted the IEPS on a

monthly basis.

P = 𝑷𝒓𝒆𝒇𝒆𝒓𝒆𝒏𝒄𝒆 +𝑴𝒂𝒓𝒈𝒊𝒏 + 𝑰𝑬𝑷𝑺 + 𝑽𝑨𝑻

If P within range = no adjustment

IF P > range = reduction

If P< range = increase

Distributors

x

* It has constantly been changing. This incentive was publishes for march 25 - 31, 2017. Needs to be continuously monitored.

Example – IEPS computation

< 92

octanes

> 92

octanes

Fixed fee (Article 2, section I (D) of the ETL) 4.3000 3.6400 4.7300

Incentive applicable to Fixed fee of Article 2, section I

(D) of the ETL(1.1200) (0.0500) (1.1500) <----

Additional fee for fossil fuels (Article 2, section I (H)

of the ETL)0.1141 0.1141 0.1384

Total IEPS fees applicable for importation

(pesos per liter)3.2941 3.7041 3.7184

< 92

octanes

> 92

octanes

Fixed fee (Article 2, section I (D) of the ETL) 4.3000 3.6400 4.7300

Incentive applicable to Fixed fee of Article 2, section I

(D) of the ETL(1.1200) (0.0500) (1.1500) <----

Additional fee for fossil fuels (Article 2, section I (H)

of the ETL)0.1141 0.1141 0.1384

Fixed fee (Article 2-A of the Excise Tax Law) 0.3800 0.4637 0.3154 <----

Total IEPS fees applicable for sales

(pesos per liter)3.6741 4.1678 4.0338

This fee is not included in

the VAT taxable base

Note that this incentive has

been constantly changing

Note that this incentive has

been constantly changing

IMPORTATION

Concept

Gasoline

Diesel

SALE

Concept

Gasoline

Diesel

IEPS paid upon importation 3.2941 3.7041 3.7184

IEPS collected in sales 3.6741 4.1678 4.0338

IEPS payable / (favorable) 0.3800 0.4637 0.3154

IEPS Credit Mechanism

< 92

octanes

> 92

octanes

January (1.1200) (0.0500) (1.1500)

February 4 - 11 (1.7730) (0.1570) (1.6010)

February 11 - 18 (1.7730) (0.1570) (1.6010)

February 18 - 24 (1.3050) (0.0900) (1.4600)

February 25 - March 3 (1.1500) - (1.3430)

March 4 - 10 (0.9760) - (1.1350)

March 11 - 17 (0.8440) - (0.9890)

March 18 - 24 (0.8960) - (0.9220)

March 25 - 31 (1.0000) - (0.9550)

Incentive applicable to Fixed fee of Article 2, section I (D) of the

ETL

Gasoline

Diesel

Breakdown of maximum prices

Acquisition price

Importation costs

Transportation / Storage

Exchange rate

Profit margin

IEPS & VAT Approx. USD $1.14 per

Gallon

Approx. USD $1.89 per

Gallon ?

% of IEPS and VAT within the Max Prices published for January 2017

Maximum price

MxP per liter IEPS VAT IEPS + VAT

% of IEPS vs max

price

% of VAT vs max

price

% of IEPS + VAT vs

max price

MAX $16.59 $3.67 $2.24 $5.91 22.15% 13.48% 35.62%

MIN $15.33 $3.67 $2.06 $5.74 23.97% 13.45% 37.42%

AVG $16.06 $3.67 $2.16 $5.84 22.87% 13.47% 36.34%

ITEM

GASOLINE < 92 OCTANOS

Maximum price


% of IEPS vs max

price

% of VAT vs max

price

% of IEPS + VAT vs

max price

MAX $18.41 $4.17 $2.48 $6.64 22.64% 13.45% 36.08%

MIN $17.11 $4.17 $2.30 $6.46 24.36% 13.42% 37.78%

AVG $17.85 $4.17 $2.40 $6.57 23.35% 13.43% 36.78%

ITEM

GASOLINE > 92 OCTANOS

Maximum price


% of IEPS vs max

price

% of VAT vs max

price

% of IEPS + VAT vs

max price

MAX $17.68 $4.03 $2.40 $6.43 22.82% 13.55% 36.36%

MIN $16.41 $4.03 $2.22 $6.25 24.58% 13.53% 38.11%

AVG $17.11 $4.03 $2.32 $6.35 23.57% 13.54% 37.11%

ITEM

DIESEL

* Note that today, maximum prices for controlled regions are published daily.

Speakers’

credentials

22

Tax Services (Dallas Office)

Armando is a Global Trade Executive Director in Dallas Office .

►Armando F. Beteta is an Executive Director of Ernst & Young LLP’s Global Trade practice. He also leads the customs and

international trade practice in the Latin American Business Center. Based in Dallas, he advises multinational corporations with

business interests in Mexico and Latin America.

►Prior to joining Ernst & Young LLP, Armando was Mexico’s former representative at the North American Free Trade Agreement

(NAFTA) Center, a tri-national office in charge of providing exporters, importers and producers from North America with technical

information regarding customs procedures under NAFTA. He was appointed to the NAFTA Center by the Ministry of Finance and

Public Credit of Mexico (Tax Administration Service) in March 1995.

►During his 10-year career in the public sector, he served as the Chief of Staff for the Federal Fiscal Attorney of Mexico, Deputy

Director of Legislative Affairs on Indirect Taxes. He has also served as Legal Advisor to the Technical Secretariat of the Economic

Cabinet in the Presidency of Mexico.

►Armando has extensive experience with customs guidelines for the establishment of IMMEX (Maquila or Pitex) operations in Mexico;

customs and NAFTA due diligence and compliance reviews; customs and international trade advisory services; as well as duty

strategic planning through Free Trade Agreements.

►Armando received his law degree from the Escuela Libre de Derecho in Mexico City and his master’s degree in international trade law

from the University of British Columbia. He has written several articles in the customs and international trade area and is also a

frequent lecturer at various international trade conferences.

Armando F. Beteta

Executive Director – Global Trade – Latin

American Business Center

Tel +214 969 8596

Mobile: +972 743 2639

Email [email protected]

23

Tax Services (Mexico Office)

Salvador is a Business Tax Advisory Senior Manager based in Mexico City.

►From 2012 to 2014 Salvador was an International Tax Manager in the Latin American Business Center of the EY NY office.

►Currently, Salvador is a Senior Manager in the EY Mexico City office, specialized in international tax services, particularly active in the

oil and gas industry.

►Salvador has been advising several E&P companies participating in Mexico’s Round 1, as well as in the migration of Integrated

Exploration and Production Contracts (CIEPS per its acronym in Spanish) previously granted by PEMEX to oilfield service companies.

►Salvador regularly provides tax advisory services to oilfield service companies, pipeline operators, drillers and shipping companies

operating in Mexico.

►Salvador has been very active in investment projects in the midstream and downstream sectors in Mexico.

►Salvador has in depth knowledge in excise tax and VAT applicable to the importation and sale of automotive fuels in Mexico.

►Salvador has been very active in advising private equity firms investing in energy projects in Mexico.

►Main Oil & Gas clients during my career; PEMEX, Chevron, Halliburton, Perseus, Sierra Oil & Gas, Diavaz, Sanchez Energy, CASA

Exploration, Fieldwood Energy, Jaguar, among others.

Salvador Meljem Elías

Senior Manager | Oil & Gas

EY Mexico

Office: +52 55 1101 7254

Mobile: +52 1 55 2755 1850

[email protected]

24

Tax Services (Houston Office)

Professional experience summary

Sam is a manager in EY’s Indirect Tax Practice specializing in excise and sales & use tax. Sam has experience in managing federal and state excise

tax compliance, consulting, and IRS and state audit engagements for fuel producers and consumers. He has a breadth of experience in consulting on

alternative fuels, tax implications of legislative changes, excise tax licensing and registration requirements, audit defense, and tax position

memorandum drafting. Sam also has experience with the air transportation excise tax, medical devise excise tax, and various other transaction tax

matters.

Engagement experience

Sam has managed and consulted on a wide array of process improvement and data integrity projects surrounding indirect tax compliance issues,

including full process reviews and implementation of process improvement protocols in the midstream and downstream oil and gas industry.

Sam has had the opportunity to manage or serve on projects in a variety of industries. During his tenure in the Big Four, Sam has written and

submitted a federal and state private letter rulings related to sales & use and excise tax transactional issues; drafted multiple technical memorandum

and opinion letters on various topics, including the gross income treatment of federal excise tax credits and the sales tax imposition of atmospheric air

capture at a GTL facility; and developed and successfully executed audit defense strategies and responses for multiple clients encompassing many

areas of excise tax law, both on a federal and state level.

Sam has had the privilege of presenting technical topics to the Federation of Tax Administrators concerning the tax effects of legislative changes to

the current alternative fuel landscape on both a federal and state level as well as co-presenting to an industry group on the future of natural gas use

as a transportation fuel in the United States, focusing on federal and state funding issues and the congressional actions over the past years to correct

such issues through taxation.

Samuel R. Dagley

Manager | Indirect Tax

Houston, Texas

Office: +1 713 750 8614

Mobile: +1 254 716 4006

[email protected]

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