Mexico Bill Would Reduce Pemex Tax Burden, Increase Mining Take

Mexico’s proposed tax bill would reduce the burden on Petroleos Mexicanos to provide the world’s fifth-largest crude producer more flexibility as output declines, while increasing mining royalties to improve government revenues.

President Enrique Pena Nieto’s tax proposal would modernize the relationship between the government and Pemex, as the state-run company is known, by replacing a hydrocarbons tax with income taxes, dividend payments and royalties similar to that of private companies, according to the legislation. The bill would also increase mining royalties by imposing a 7.5 percent tax over earnings before interest, taxes depreciation and amortization, plus a 0.5 percent tax on sales for gold, silver and platinum.

Pemex, which funds about a third of the federal budget, is heading toward its ninth straight year of declining output as production from the Cantarell field has plummeted more than 80 percent since 2004. Pena Nieto proposed a bill last month that would modify two constitutional articles to allow private companies to pump crude in Mexico for the first time since 1938.

“The proposal provides flexibility to the fiscal burden, adjusting to the uncertain conditions of prices, costs and operative challenges faced daily by Pemex,” the tax legislation says. “The new fiscal regimen will permit Pemex to receive treatment equivalent to any other company.”

Pemex’s 2014 capital expenditures budget proposal was for 358 billion pesos ($27 billion), a 9.8 percent increase from the 326 billion this year. The budget proposal, which was submitted to congress yesterday, must be approved by lawmakers by Nov. 15.

Mining Royalties

Mexico is one of only a few countries that does not charge mining royalties. The current mining tax brings in only 0.6% of total sales mineral sales and provides “practically nothing” in terms of government revenues, according to the legislation.

“The increase in mineral prices at the international level have not generated a significant increase in the resources available to the state for exploitation,” the legislation says. Mexico’s sales revenues from mining are much smaller than other countries that charge more for royalties, according to the bill.

Mining fell 1.8 percent in the first six months of the year compared to the same period 2012. Mining companies Industrias Penoles SAB and Fresnillo Plc (FRES) would suffer the most should the legislation pass, while Grupo Mexico SAB would be less affected due to its activities outside of the sector, according to an e-mailed report by Citigroup Inc.’s Banamex unit.

To contact the reporter on this story: Adam Williams in San Jose, Costa Rica at awilliams111@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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