Mexico slows fuel market opening, retains tax
OREANDA-NEWS. September 16, 2016. Mexico's finance ministry put forward a proposal to retain some control over fuel prices until the end of 2018, and effectively retain fuel tax revenue that is expected to reach 284bn pesos (\\$15bn) next year.
The proposal, included in the ministry?s 2017 budget bill presented to the congress last week, appears to backpedal on a prior government pledge to allow market-based fuel prices in January 2017, or a year earlier than an original deadline.
Mexico is opening up its long-cloistered oil industry, moving toward market pricing and competition, under a comprehensive 2014 energy reform that ended state-run Pemex's monopoly. But the government appears to be slowing down implementation of some aspects of the reform, such as fuel pricing, in anticipation of 2018 general elections, and to make up for revenue lost to lower oil prices.
If adopted, the new finance ministry proposal could further hamper the launch of private-sector gasoline and diesel imports by perpetuating a fuel tax, known as the IEPS. Although many local and foreign companies have been authorized to import gasoline and diesel since April, none have actually started because the tax undermines the economics compared with fuel purchased from Pemex, even though Pemex itself is also subject to the levy.
In contrast, the private sector has been importing LPG, which is subject to a much lower IEPS tax.
"When the government announced that prices would be liberated in January 2017, we thought they would decrease the tax, but really we're seeing that they will manage it the way that suits them best," said one fuel import permit holder. "Everything suggests they will keep control over prices until 2018, until the change of government."
Aside from impeding imports, the tax is widely seen as thwarting investment in much-needed oil transportation infrastructure and storage.
"We need the market opening to come with a lower fiscal burden," opposition PAN party senator Jorge Luis Lavalle told Argus today. "We need more clarity and better market conditions so that long-term investments can be made."
The 2017 budget bill recommends the introduction of a market-driven fuel pricing system in January 2017, but the shift would be implemented gradually, a few regions at a time, over a two-year transitional period.
Until the end of 2018, the end of the current administration, the ministry would continue to set maximum prices in regions that have not yet been liberalized, but it would also be able to intervene in liberalized regions in the event of price spikes. The proposal does not specify what or how many regions would be subject to market pricing, or when.
Currently, fuel prices are calculated based on an opaque formula partially tied to international prices, with a 3pc band around 2015 Mexican prices.
The new finance ministry proposal would allow the government to retain considerable tax revenue associated with the IEPS.
Although the IEPS on gasoline and diesel remains the same in the government's 2017 draft budget as this year, the actual revenue from the tax is forecast to jump by 27pc over the 223bn pesos anticipated this year, reflecting a projected recovery in oil prices and a resulting rise in fuel prices.
The revenue would help to ease some of the pressure on the government?s finances, which have been hit by the collapse in oil prices over the past two years. Last week, the finance ministry unveiled a 239bn peso cut in the draft 2017 budget.
The fuel tax represents around 65pc of the revenue of a larger extraordinary tax on production and services (IEPS), which also includes levies on alcohol, tobacco and high-calorie food and beverages.