Global Insight Perspective | |
Significance | The opposition parties have rectified an omission in the government's tax reform proposal by presenting a bill to modify Pemex's tax regime further. |
Implications | Reducing Pemex's tax burden will free up more resources for investment in the hydrocarbons sector. |
Outlook | If approved, the bill would reduce Pemex's tax payments a little, but more reform is needed if Mexico is to be able to finance new investments in the oil sector, including allowing some degree of opening to private investment. |
Opposition Parties Present Proposal to Amend Pemex's Tax Regime
Senator Carlos Lozano de la Torre on Tuesday presented an opposition bill on behalf of his party the Institutional Revolution Party (PRI), the Democratic Revolution Party, and three other smaller parties the Workers’ Party, Convergencia, and the Green Party. The bill to modify Pemex's fiscal regime is aimed at increasing funds for investment in the oil sector. It proposes reducing royalties on production paid by Pemex from 79% to 70% with effect from January 2008 and creating a 1% tax on the value of oil and gas extracted each year (applicable at this rate from 2010) with proceeds allocated to research in technologies related to oil production and refining and renewable energy. According to a report in La Reforma, Francisco Labastida, the president of the Energy Commission in the Senate and a member of the PRI, has said that the proposal would provide Pemex with an additional 60 billion pesos.
In June, the government submitted a tax reform aimed at increasing the overall tax take from its current poor level of 10% of GDP, to a still low 13% of GDP. However, the reform did not include any specific proposal for reform of Pemex's tax regime and while it is true that a broadening of the non-oil tax base is a pre-condition to any further lowering of Pemex's tax burden, the government's modest reform proposal may offset future government revenue losses as a result of lower oil export volumes and Mexico's oil mix getting heavier, rather than freeing up significant resources for new investments in the oil sector.
Outlook and Implications
A modest reform of Pemex's tax regime implemented by the previous government has allowed the company to make some savings that can be reinvested in production, but Pemex's fiscal contributions to the state still represented 55.2% of the company's total sales in 2006 while the oil sector provided almost 40% of federal government revenue.
The heavy tax burden means that Pemex regularly posts an annual loss (2006 was the first year in six that it did not). As a result, the company has been forced to finance its ambitious exploration and production programme through the increase of debt. This has in turn raised concerns about the credit quality of Pemex debt and increased its dependence on the sovereign to act as a guarantor of last resort.
This financing model is not sustainable and to make matters more difficult the rapid decline of production at the Cantarell field complex means that greater levels of investment will be needed to increase production levels and proven reserves.
If approved, the opposition-sponsored tax bill would result in a further reduction of the financial burden placed on the state oil firm and leave Pemex with more funds to invest. As such, the proposal is a positive development even though it did not come from the government, which stands to lose revenue if the reform of Pemex's tax regime is approved.