Francisco Tapia
Managing Partner
Tax Solution Value
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Skilled Assessments of Mexico's Evolving Contracts and Taxation

Wed, 01/21/2015 - 16:02

Q: How do Mexico’s production-sharing contracts compare with others around the world?

A: Mexico’s production-sharing contracts follow international standards, as the country has drawn from the industry experience of nations such as Colombia, Brazil, and Norway. Our production-sharing contracts have the basic elements of any other contract of this kind, including the duration of the contract, the relinquishment clause, and the cost recovery provision that enables the operator to recover its costs, among others. There is no fiscal regime that can be exactly the same as that in another country. Unfortunately, there are certain financial indicators, specifically in Round One, that have not yet been clarified, such as the State’s participation in the shared profit. Hopefully, the authorities will determine a percentage of profitability in the next type of contract, thereby reducing the currently imposed limitations.

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 are the most common concerns your clients have regarding the Round One contracts?

A: The main concern when making an investment will always be the economic viability of the contracts. However, Mexican authorities have been aware of these concerns and have addressed them with flexibility by modifying the contractual terms in order to improve the economic offer. It is true that the rules established in the contracts regarding cost recovery administration are complicated, particularly when compared to international standards, but our professional team is ready to face this challenge. We have been working alongside the fiscal changes that the Mexican authorities have implemented. Our team has the skills to work in this mutable environment alongside the financial, tax, accounting, and legal scopes that these changes bring. Also, contractors are worried about the authorities using their discretion in setting cost recovery rates and other contractual terms. Nonetheless, we have been working on studying the interpretation of the law in order to act in accordance with the legislation. Beyond the different political perspectives, we must consider that for the last 25 years Mexico has been strengthening its commercial and political relations with countries all around the world. We have been opening up and removing our barriers by signing international trade agreements and Reciprocal Investment Promotion and Protection Agreements.

Q: How has the client base of Tax Solution Value changed as a result of the Energy Reform, and how does the company create value for its clients?

A: We care about our customers, and we work closely with them, making them feel free to ask any question, no matter how small it may seem. Therefore, we are always guiding them, keeping them up-to-date and helping them with their decision-making processes. We are also expanding our client portfolio. We do this by attending local and international forums, such as the Mexican Petroleum Congress in Guadalajara, or the OTC in Houston, where we have been offering our portfolio of services in face-to-face meetings. In addition to successfully working with large Mexican oil companies, such as Grupo Diavaz, Tax Solution Value has been working on preparing audits and financial statements, transfer pricing, tax consulting, and general training. Therefore, we have the knowledge of the previous oil services contracts that PEMEX used. Tax Solution Value is no longer looking for the large players exclusively, and also wants to support small and medium-sized companies in the aftermath of the Energy Reform, helping them to become part of the energy sector’s value chain and to seize the opportunities that will gradually be presented.

Q: What is your firm’s strategy to keep up to date with this changing environment?

A: Staying at the forefront of fiscal, tax, and legal matters in Mexico entails the creation of various strategic alliances, given how rapidly the country is changing. For instance, the Colombian Safety Council is the most knowledgeable entity in Colombia regarding safety matters. Hence, Tax Solution Value has approached it to receive advice on the international best practices implemented in Colombia that could be replicated in Mexico. Currently, we hold the certification of the PCAOB Public Company Accounting Oversight Board, which was created according to The Sarbanes-Oxley Act of 2002. According to this, public company auditors are to be subjected to external and independent invigilation. We also are members of UC&CS Global, an international association of independent firms. In addition to our affiliations, we are attending training courses at an internationally recognized energy school based in London. We recently attended the OTC in Houston, where we provided information to parties interested in Mexico’s Energy Reform and in establishing strategic alliances with both Mexican and foreign companies. This opens up a whole new landscape for us as to how national and international oil companies are working in different parts of the world. Alliances of this nature allow us to stay at the forefront of new developments by obtaining feedback from people and being informed about international developments in the field.