Mexico: Energy Reform – Chapter VI: Implications On International Tax Matters

1. Permanent Establishment

1.1. Subjects and activities that generate a PE

Article 64 of the LISH provides that a PE is created whenever ever a resident abroad for tax purposes carries on with activities under the LH in Mexican territory or the exclusive economic zone over which Mexico has jurisdiction.

Let us be reminded that pursuant to the provisions set forth in Article 27 of the CPEUM, the exclusive economic zone is that which spans to 200 nautical miles, from the base line from which territorial sea is measured.

We consider that the wording used in Article 64 of the LISH is extremely ambiguous, which in practice may lead to generate several interpretation conflicts.

Actually, the reference to carrying on with “activities under the LH” is so wide that carrying on with any of the activities set forth therein may (verbatim) create a PE; the same also goes for the reference to “whenever a resident abroad”, without specifying the scope of such phrase, which implies that any resident abroad, such as a provider of goods and services, would create a PE.

Rule 10.10 of the RMF 2015 attempts to overcome this ambiguity, by establishing that “activities under the LH” are those mentioned in Article 2 of such Law, notwithstanding the quality of the resident abroad that carries on with them. Let us be reminded that the following are activities set forth in such provision:

Reconnaissance and superficial exploration, as well as the Exploration and Extraction of Hydrocarbons.
Treatment, refining, sale, trade, transportation and storage of oil.
Processing, compression, liquefaction, decompression and regasification, as well as transportation, storage, distribution, trade and sale of natural gas to the public.
Transportation, storage, distribution, trade and sale of oil derivatives.
Transportation of petro-chemical products through pipes, and pipe-related storage.
1.2. Time rule to create a PE

A time rule is set forth to create a PE, which consists in activities made by the resident abroad that are developed in a period that adds, in aggregate, more than 30 days in any given 12-month term.

During such term, activities that are made by the related party of a resident abroad, provided such activities are identical or similar, or constitute part of a same project must be considered.

Article 36 of the Regulations to the LISH provides that calculation of the days of duration of the above-mentioned activities shall be made considering all of the calendar days comprised between the beginning and termination of activities.

Rule 10.11 of the RMF 2015 provides that it shall be considered that activities continue to be carried on until they are completely finished. It shall not be considered that activities have been finished whey they are interrupted in time. Seasonal interruptions or for any other cause must be taken into consideration to calculate the term of duration of activities. Seasonal interruptions include those due to bad weather. Seasonal interruptions may be motivated, amongst others, lack of materials or difficulties with labor.

Said rule also provides that in case due to the nature of activities it is considered that their duration shall exceed 30 calendar days in any 12-month period, the taxpayer shall comply with its obligations pursuant to the provisions set forth in the LISH and in Title II (legal entities) or Chapter II of Title IV (residents abroad) of the LISR, as the case may be, from the beginning of their activities.

1.3. Problem of attributing income to PE

In case a resident abroad creates a PE as set forth above, it shall determine and pay the corresponding Income Tax pursuant to the rules set forth in the LISR, and such resident abroad shall pay taxes as a Mexican legal entity, pursuant to the provisions set forth in Title Second of the LISR.

Notwithstanding the above, the LISH fails to establish any rule specifying which income are attributable to the PE created in our country by the resident abroad carrying on with any of the activities set forth in the LH, so that the rules of the LISR must be applied, which we believe can be equivocal (that is, they allow more than one interpretation).

1.4. Enforcement of treaties to avoid double taxation

We consider treaties to avoid double taxation signed by Mexico are totally applicable on this matter, and each of such treaties must be analyzed in order to determine its scope in connection with the grounds (and exceptions) on the PE, some of which contain reference to the field of Hydrocarbons.

As an example, the Agreement executed between the United States of Mexico and the Kingdom of Norway to Avoid Double Taxation and Prevent Tax Evasion of Income Tax and Assets (Convenio entre los Estados Unidos Mexicanos y el Reino de Noruega para Evitar la Doble Imposición e Impedir la Evasión Fiscal en Materia de Impuesto sobre la Renta y sobre el Patrimonio), published in the DOF on August 26, 1996, contains several specific rules on oil matter.

2. Exploitation of transboundary fields

Transboundary fields are those that are located inside the national jurisdiction and continue beyond the same.

Article 3 of the LH provides that Exploration and Extraction of Hydrocarbons located in transboundary fields may take place in accordance with the terms of treaties and agreements to which Mexico is party.

On this matter, the Agreement between the United States of Mexico and the United States of America on Transboundary Hydrocarbon Fields in the Gulf of Mexico (Acuerdo entre los Estados Unidos Mexicanos y los Estados Unidos de América relativo a los Yacimientos Transfronterizos de Hidrocarburos en el Golfo de México), signed in Los Cabos on February 20, 2012, which Decree of enactment was published in the DOF on July 18, 2014, provides in its Article 13 “Tax matters” the principle of international law regarding the enforcement of domestic law first and, thereafter, the corresponding treaty to avoid double taxation.

Actually, said article provides that income from the Exploitation of Transboundary Fields must be taxed pursuant to the laws of the United States of Mexico and the United States of America, respectively, as well as the Agreement executed between the Government of the United States of Mexico and the Government of the United States of America to Avoid Double Taxation and Prevent Tax Evasion on Income Tax, executed on September 18, 1992 with its respective amendments (and any possible future amendments) or any Treaty or Convention that the Parties may execute in the future to replace such Agreement.

3. Wages, salaries and similar compensations

Article 64 of the LISH provides that wages, salaries and similar compensations obtained by residents abroad, that are paid by residents abroad without a PW in the country, or that having it, are not related to such establishment, in connection with a work position related to activities of Contractors or Assignees as set forth in the LH, made in Mexican territory or the exclusive economic zone over which Mexico has jurisdiction, within a term that exceeds 30 days in any 12-month period, shall be taxed in accordance with Article 154 of the LISR.

The hypothesis set forth in Article 64 of the LIHS mention work positions related to the activities of Contractors or Assignees, which translates into the fact that wages, salaries and similar compensations that are taxed are limited only to upstream activities.

On this matter, Rule 10.12 of the RMF 2015 provides that the following, amongst others, shall be regarded as work positions related to the activities of Contractors or Assignees as set forth in the LH:

In case the service is provided to legal entities, consortia or Joint Ventures that are considered contractor or assignee in accordance with the LH.
In case the service is provided to persons considered related parties, pursuant to Article 179 of the LISR, of the entities mentioned in the preceding paragraph.
In case the main purpose or activity of whoever makes payments is the reconnaissance of superficial Exploration or the Exploration and Extraction of Hydrocarbons, as set forth in the LH.
Such remission made by Article 154 of the LISR implies that such items shall be taxed under the following rules:

There is an exemption for the first $125,900.00 obtained in the corresponding calendar year.
A rate of 15% shall be applied to income received in the corresponding calendar year that exceed the amount set forth in the preceding paragraph and that are not above $1,000,000.00.
A rate of 30% shall be applied to income received in the corresponding calendar year that exceed $1,000,000.00.
Such article also provides that whoever makes such payments shall withhold the corresponding Income Tax in case it is a resident in the country or a resident abroad with a PE in Mexico to which the service is related. In any other cases, the taxpayer shall pay the corresponding tax by filing a tax return that will be submitted before the authorized offices within 15 days after the income is received.

Finally, Article 251 of the Regulations to the LISR provide the following rules to calculate the days required to cause the tax, which we consider are applicable to Hydrocarbons by analogy:

The day of arrival, the day of departure and the other days in the year including Saturdays, Sundays, official holidays, holidays, vacations and labor interruptions of short duration such as strikes and sick leaves shall be taken into consideration.
In such calculations, full days in which there is no physical presence in the country, whether due to trips, vacations or for any other caused shall not be taken into consideration. When present in the country during part of a day, this shall be taken into consideration to calculate the term.
Finally, Rule 10.13 of the RMF 2015 provides that for purpose of calculating such days, the following days will be included: part of any day, day of arrival, day of departure and any other day of stay in Mexican territory, including Saturdays, Sundays, days of compulsory rest, official holidays, vacations (taken before, during or after the service), interruptions of short duration (training periods, strikes, closure, delays in receiving supplies), sick leaves and any death or sickness in the family environment.

Said rule also provides that the following shall be excluded from such calculations: days spent in transit in the country during a trip between two places located outside the Mexican territory, as well as full days without physical presence in the country, whether due to vacations, business trips or any other cause.

In case the taxpayer is present in Mexican territory during part of a day, the day shall be regarded as a day with presence in the country for purpose of calculating the 30-day term. In case due to the nature of the employment, it is regarded that its duration shall be over 30 calendar days in any 12-month period, the taxpayer shall comply with its obligations pursuant to the provisions set forth in the LISH and in Title V of the LISR (residents abroad), as the case may be, from the beginning of such employment.

We believe these rules are very adequate, because they clarify several scenarios that can take place in practice, granting legal certainty to taxpayers; however, it is questionable that said rules are set forth in an administrative resolution and not in the law itself.