Think Tank- Oil and Gas Industry
• Panel 1. Energy reform and the new tax
regime for hydrocarbon producers.
• Panel 2. Financing & Structuring Investment
in Mexico
• Panel 3. Energy Tax Hot Topics
July 10, 2014
Energy reform and the new tax regime for
hydrocarbon producers.
10 July 1014
Think Tank- Oil and Gas Industry
Page 3
Presenters
► Iván Sandrea
CEO Sierra Energy
► Stephen Landry
EY’s America Oil & Gas Tax Leader
► Richard Overton
EY ITS Partner
► Moderator: Oscar López Velarde
EY ITS Partner
Page 4
E&P contracts for public and private
companies
Independent regulators
Permits for midstream and
downstream
Pemex and CFE modernization
Oil and gas reform
Highlights of the reform
Page 5
?
Flexibility, risk or opportunity?
UNKNOWN BOX
Cost recovery and cost deductibility limits + 10 year carry-forward
R Factor – Windfall Profits Surtax
REGRESIVE PROGRESIVE
Bonus
Royalties
% of Value of Hydrocarbons
Contractual Quota Exploration Phase
% of Operating Profit
Corporate Income Tax
Contractual terms will define Mexican take, but % shared will define winning bidder
Page 6
Ring-fencing
• Rules yet to be defined
• JOA not available
• Lack of consolidation
• Government take
Contract Mexican
Tax
Local Content
Legal Entity
Ring-fencing
Page 7
Operating Profit
► Relevant to determine government share under license
contracts and production/profit sharing contracts
Contractual Price of Hydrocarbons (Gross revenue)
(-) Royalties* Non deductible for PSCs
(-) Costs, expenses and DD&A eligible for deduction
OPERATING PROFIT
► Deductibility limitations, among others:
► Financing expense
► Expenses for the use of owned technology unless proven to be
arm’s length
Page 8
Capex depreciation
► New rates:
► Might be used also for income tax
► Upon election of the taxpayer
► Lack of clear definitions
► Tax or accounting rules?
► Only applicable to contractor
Depreciation Rate Capex Item
100%
• Exploratory phase
• Secondary recovery and improvement
• Non-capitalizable maintenance or IDC
25% • Development and production phase
10% • Storage and transport infrastructure
Page 9
Arm’s length principle
Cost oil + mark-up or margin = Contractor’s Take
Deductible and recoverable Cost Oil?
Operating Co. SPV
Contractor
Cost Plus
Mark-up
Operating Co. SPV
Contractor
Arm’s length
compensation
Royalties,
Procurement,
Financing
Eligible and not eligible costs
Page 10
License – Profit Share
Take*
$101 FMV Hydrocarbons
$10 - Royalty
$0.5 - CQEP
$45 - Total Cost Oil
$45.5 Profit Oil
$25 - 50% Government Share
$6.22 - 30% CIT
$14.28 Contractor’s Take
Operating Profit
$100 Contractual Price
$10 - Royalty
$40 - Allowed Cost Oil
$50 Operating Profit
$25 50% Government Share
* Bonus and dividend WHT not included
Corporate Income Tax
$101 FMV Hydrocarbons
$10 - Royalty
$0.5 - CQEP
$45 - Total Cost Oil
$25 - 50% Government Share
$20.75 Taxable Profit
$6.22 30% CIT
Page 11
License – Value of Hydrocarbons Share Additional royalty
Take
$101 FMV Hydrocarbons
$10 - Royalty
$0.5 - CQEP
$45 - Total Cost Oil
$45.5 Profit Oil
$25 - 25% Government Share
$6.22 - 30% CIT
$14.28 Contractor’s Take
Value of Hydrocarbons Share
$100 Contractual Price
$25 25% Government Share
* Bonus and dividend WHT not included
Corporate Income Tax
$101 FMV Hydrocarbons
$10 - Royalty
$0.5 - CQEP
$45 - Total Cost Oil
$25 - 25% Government Share
$20.75 Taxable Profit
$6.22 30% CIT
Page 12
Profit Sharing Contract
Take*
$101 FMV Hydrocarbons
$1 +/- Dif. FMV and Contractual Price
$10 - Royalty
$0.5 - CQEP
$45 - Total Cost Oil
$44.5 Profit Oil
$30 - 50% Government Share
$4.35 - 30% CIT
$10.15 Contractor’s Take
Operating Profit
$100 Contractual Price
$0 - Royalty
$40 - Allowed Cost Oil
$60 Operating Profit
$30 50% Government Share
* Dividend WHT not included
Corporate Income Tax
$30 50% Contractor’s Share
$40 + Cost Oil Recovery
$10 - Royalty
$0.5 - CQEP
$45 - Total Cost Oil
$14.5 Taxable Profit
$4.35 30% CIT
Page 13
Production Sharing Contract
Take*
$101 FMV Hydrocarbons
$.3 +/- Dif. FMV and Contractual Price
$10 - Royalty
$0.5 - CQEP
$45 - Total Cost Oil
$45.2 Profit Oil
$30 - 50% Government Share
$4.56 - 30% CIT
$10.64 Contractor’s Take
Operating Profit
$100 Contractual Price
$0 - Royalty
$40 - Allowed Cost Oil
$60 Operating Profit
$30 50% Government Share
* Dividend WHT not included
Corporate Income Tax
$30 50% Contractor’s Share
$40 + Cost Oil Recovery
$.7 +/- Dif. FMV and Contractual Price
$10 - Royalty
$0.5 - CQEP
$45 - Total Cost Oil
$15.2 Taxable Profit
$4.56 30% CIT
Page 15
Presenters
► Deborah Byers
EY TAS Partner
► Carlos Vargas Rodriguez
BBVA Oil & Gas
► Adolfo Osorio Hernández
BBVA Oil & Gas
► Moderator: Alfredo Alvarez Laparte
EY ITS Partner
Page 16
Oil & Gas Investment Opportunities
Find it…
Get
it out…
Turn it into
something
useful…
Sell it…
Upstream Midstream Downstream
Transportation and Storage
Services & Local Supply / Construction …
Page 17
Investment Needed in 10 years – 350 bn usd
Energy & Gas
PEMEX
Midestream
Refining
Upstream
Source: Texas A&M International University
Page 19
Oil & Gas Wells – US Eagle Ford Texas
0
300
600
900
1200
1500
1800
2100
2400
Eagle Ford Bakken Permian Net other Total US
pro
du
cti
on
gain
s (
00
0 b
/d)
US crude oil production gains: last three years (Dec 2010 production vs. Dec 2013 production)
1,088
97
437
656
2,278
Page 22
Resources Feeders
National &
Foreign
Corporations
Private
Equity
Banking
System
Government
Resources
Stock
Exchanges (MSE, NYSE, …)
Page 23
US Market Cap on Real Estate and Energy
Oil & Gas Production
Midstream
Others
MLPs 620 b
Real Estate
Infraestructure
REITs 790 b
Page 24
Mexican Market – Real Estate and Infrastructure
FIBRAS
CKDs
CKDs / FIBRAs 23 b
FIBRAS & CKDs
Others
AFORES 168 b
Page 25
MLPs for the Mexican resources need
Mexican
Subsidiary
Mexican
Subsidiary
30% Income Tax – Profits
10% dividend withholding
MLP
Holding Co
MLP
FIBRA
“Ideal Structure*”
MLP
30% Income Tax – Profits
0 - 10% dividend withholding
Financing
30% on distributions
Treaties?
* Regulations need to be adapted
Infrastructure RIETS?
Regulatory?
Mexican
Stock Ex
Page 27
Presenters
► Rodrigo Ochoa
EY ITS Partner
► Jorge Libreros
EY Controversy Partner
► Moderator: Koen Vant Hek Koot
EY ITS Partner
Page 28
Bareboat Charter (BBA)
Main Considerations
Income Tax Law
Use or enjoyment of goods
Royalties
Chartering (Fletamiento)
Tax Treaties:
Royalties?
Industrial Equipment?
Deductibility for Income tax purposes
Overview
Requirements
2. Fee 1. Bareboat
(BBA)
Treaty Co.
Mex Co.
Page 29
Bareboat Charter (BBA)
Main Considerations
Double Income tax withholding?
Beneficial ownership
3. Fee
2. Bareboat
(BBA)
Treaty Co.
Mex Co.
REFIPRE (*)
(*) Owner of the equipment
4. Fee
1. Bareboat
(BBA)
Page 30
Time Charter
2. Fee 1. Time
Charter
Treaty Co.
Mex Co.
Main Considerations
Business Profits
Permanent Establishment
Page 31
Financial Lease Agreement (FLA)
Temas actuales de la Industria Petrolera “Hot Topics”
2. Interest +
principal payment
1. Financial
Lease
Treaty Co.
Mex Co.
Main Considerations
Characterization for tax purposes
Tax Depreciation
Construction equipment?
Vessel / Boat ?
Other kind of asset?
Accelerated depreciation
Temporary importation
FLA vs. BBA
Page 32
Mexican tax authorities (SAT) Audits
► Deductibility of services
► Service entities (employees)
► Permanent establishment
► Prorate expenses
► Beneficial ownership
► Base Erosion and Profit Sharing (BEPS)
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