This GT Alert provides a general overview of the main tax amendments in the energy sector, specifically the amendments of the special tax on Production and Services Law (LIEPS) and of the Income Tax Law (LISR), approved by the Mexican Congress in November 2013, as part of the tax reform proposal submitted by the President.

  1. LIEPS

Regarding the amendments undertaken in the analyzed special tax, specifically in connection with the energy sector, we note the imposition of environmental taxes that aim to discourage those behaviors that negatively affect the environment, among them, the use of fossil fuels.

Congress considers natural gas, the least polluting fossil fuel, as the tax base in order to determine the subsequent payment of the new special tax.

In other words, since natural gas is the fuel that generates less CO2 emissions per ton, any other fuel that generates higher emissions shall be taxed on the amounts to be established by the law.

On October 31st, the Plenary Senate approved the modifications that shall enter into force on January 1, 2014.

A. Objective of the tax: Taxing the sale and import of fossil fuels according to carbon content. It is worth noting that the Law also contemplates as alienation the consumption of the goods made by the taxpayers of such fossil fuels.

B. Subjects of the tax: The law is imposed solely on manufacturers, producers and importers for the sale or import of fossil fuels. In this regard, the sales made by persons other than the manufacturers, producers or importers shall be exempt from this tax, provided that the tax on the import of fossil fuels is properly credited.

C. Tax base: Natural gas is considered as the tax base and is exempt from this tax. Any other fossil fuel shall be taxed per unit measure according to their carbon content.

D. Tax fee or rate:

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E. Tax causation: The tax shall apply at the time the compensations are effectively charged and over the amount of such charges.

It is important to note the recognition of actions that mitigate pollution. Therefore, the Law provides the possibility to pay the tax through carbon credits, obtained from the development for energy saving and/or efficiency projects under the guidelines of the Kyoto Protocol.

The inclusion of this payment mechanism, not only encourages the generation of energy efficiency projects, but aims to develop, within a not too distant future, a carbon market.

In other words, the law allows taxpayers to pay the tax with carbon credits, derived from projects developed in Mexico and endorsed by the UN under the United Nations Framework Convention on Climate Change. The value of such credits shall correspond to their market value at the time the tax is paid.

  1. New LISR

Regarding the income tax as it applies to the Mexican energy sector, its provisions that shall enter into force on January 1, 2014, will allow taxpayers to deduct at 100% investments of machinery and equipment destined for:

  • The generation of electricity from renewable sources or from efficient cogeneration systems;
  • Conversion into natural gas consumption and to prevent and control environmental pollution, as well as cash registers for tax inspections.

Certainly this benefit, besides being in line with the energy reform under discussion in Congress, which intends the opening up of the sector, shall encourage investment in this area.

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