Armando Valera
President and Chairman of the Board
Baker Tilly Mexico
Karen Sainz
Karen Sainz
Energy Desk Associate
Baker Tilly Mexico
View from the Top

Energy Reform Leads to Fiscal Diversification

Wed, 01/21/2015 - 15:56

Q: What are the main strengths of Baker Tilly’s Energy Desk?

KS: Baker Tilly Mexico belongs to Baker Tilly International, the eighth largest public accounting and business advisory firm in the world with a presence in 140 countries. Baker Tilly came to Mexico just seven years ago but already has 23 offices in this country. Our Energy Desk is a business development unit that integrates projects according to the needs of our clients, whether these are immersed in the industry or not. Our solid interdisciplinary team, ranging from accountants and lawyers to engineers and financial experts, gives the Energy Desk the ability to develop a project from its conception to the construction phase. We also work with investors who want to place their money despite lacking knowledge of the industry. In addition to being business developers, we are also a creative incubator because of our ability to work with investors and inform them about the possible areas of opportunity where they can allocate their money. However, if investors come in with a concrete plan or want to enter a tender, we are happy to help them out.

Being involved in some aspects of natural gas pipelines such as Los Ramones and Mayakan, I can say Mexico needs to develop much more of this kind of infrastructure, and I see pipelines, cogeneration, and similar projects as solid opportunities for investors. This is all part of the revolutionary element in the Energy Reform, which is facilitating access to this market for investors.

Q: What would be the optimal taxation system for heavy oil and deepwater operations?

A: Mexico’s heavy oil production represents 50% of its total output, so more investments are needed for activities ranging from its extraction to its transformation. Compared to shallow waters, deepwater requires a higher amount of technology. Therefore, the optimal taxation system will be the one that offers fiscal stimuli for the infrastructure and technology that is needed. It is true that Mexico needs a technological overhaul in the oil and gas industry, so, for this reason, companies need to have an attractive fiscal model that encourages their investment in state-of-the-art technology 

Q: what do you foresee being the fiscal benefits of the Energy Reform?

AV: The oil and gas industry is responsible for a third of federal income and even though PEMEX will see its fiscal burden reduced, it will still have to pay taxes. New companies in the energy sector will also do so, thus increasing the fiscal collection rate. Overall, tax rates for companies in the energy sector are competitive enough to make the country an attractive investment destination. In spite of the highly skilled people working in the Ministry of Finance and Public Credit, the country’s fiscal policies have not been successful. The government will rely on private investments, but it does not have its own resources to invest in large infrastructure projects. Besides, the current administration has essentially put all its eggs into one investment basket, as can be seen by the importance of the Energy Reform, which dwarfs the other structural reforms. The government sees that since PEMEX will no longer provide a third of the federal budget, it must find new sources of income.

Q: Will the reforms lead to positive wider economic and social change?

KS: Large companies cannot remain disassociated from the events taking place in the country and how people perceive them. For instance, people have never seen the price of gasoline drop in Mexico, while it does so in other countries. Fluctuations in oil prices do not seem to impact the general population. Mexico’s oil resources are also described as a tragedy disguised as a blessing because the country became dependent on them, which hindered the development of other industries. While Germany developed technology, India became an expert at IT, and Japan is proficient in electronics, Mexico views its natural resources as a trust fund. Now that the oil and gas industry will have to report taxes in a different way and will stop being the major provider, other industries will be able to bloom. In this sense, the changes brought about by the Energy Reform may well have positive social impact. This must lead to a situation where the federal budget can rely on elements other than oil revenues. The productive companies have to be more efficient and generate value while ensuring benefits for the general population.