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Mexican tax authorities suspend Ferromex, KCS imports of fuel, chemicals

Highlights

Tax authority SAT suspended 82 companies

Joint operations aimed at curbing tax evasion

Suspensions not permanent, but could be lengthy

Mexican tax authorities on July 19 announced they had suspended 58 companies, including the country's largest railroad operator Ferromex, and the local unit of US railroad operator Kansas City Southern, from importing specific products into the country, like chemicals and refined products.

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Ferromex is the transportation arm of Grupo Mexico, one of the country's largest conglomerates. Additionally, 24 more companies were banned from conducting exporting activities, including Repsol from Spain.

The tax authority (SAT) argued the move was part of Mexico's broader operations to combat tax evasion, which market observers and participants say is a real problem that needs solving. However, the sources argue the measure also eliminates competitors to state oil company Pemex.

Mexico has increasingly depended on imported fuels to meet demand. Data from the Energy Secretariat (SENER) shows Pemex, while still dominant, has consistently lost market share in the import business. At the end of June, imports of gasoline were 643,000 b/d, the highest reading since the coronavirus pandemic began, the data shows.

"SAT's move is a consequence of a previous decision by SENER to cancel import permits," said Diego Compean, an independent consultant in Mexico City.

Most of the companies suspended by SAT had already lost their import permit, which is granted by SENER, and there is word in the industry that a few of the companies had indeed been avoiding taxes, Compean said.

Ferromex, KCS and Repsol do not currently hold an active import permit, SENER data shows. Market observers said these companies were unlikely avoiding taxes, but either directly compete with Pemex, or facilitate transport for Pemex competitors.

SAT's decision does not affect Repsol in any way, as the company's registration was cancelled because it was not utilizing its import permit, the company told Platts in a statement, adding that it has secured supply through contracts with other importers.

"Repsol fully complies with all tax, legal and market obligations in Mexico," the company said.

Grupo Mexico and KCS did not respond to requests for comment. SAT authorities were not available for comment. Joint operations by regulators, including the energy, environment and tax authorities, have recently been reported at major import terminals and border checkpoints. The Mexico unit of California-based Sempra Energy is among the companies that recently had its terminal operations temporarily suspended by these operations, sources told S&P Global Platts.

KCS said July 16 during its earnings call that Mexican authorities have started doing more sampling to cars at the border to make sure products are labeled properly. KCS management said the Mexican government is mainly targeting so called "manifest trains," made up of mixed rail cars, as opposed to unit trains, and that the supervisions were creating "a bit of backlog."

Operations conducted by Mexican authorities in the recent months are actually positive for the market, said Santiago Arroyo, CEO of Urusus Energy, a trading and consulting firm.

Prices are beginning to fall, partly because of lower demand and partly because the legal import market is adjusting as the illegal market fades out, Arroyo said.

"As illegal distributors disappear, legal players are fighting for business. This healthy competition is bringing efficiencies," said Arroyo, who owns fuel stations. Discounts as high as Peso 0.40 can be seen in contracts for future gasoline delivery, he said.

The government's actions are also having an impact in market indicators, which are beginning to reflect the true state of the sector, Arroyo said.

"There was a distortion in the market's data; the real demand was not seen, as many users bought illicit products which were not registered," he said, adding that the government should have done this years ago.

According to the law, companies may request SAT to lift the sanction provided they prove they have resolved the issue that caused the suspension.

Arroyo said SAT is taking longer to approve requests related to hydrocarbons and the process could take as much as one year.