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What Mexico's Electricity Reforms Mean For Tax

Author:Mr Alfredo Alvarez
Profession:Ernst & Young
 
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Unbundling, the creation of a wholesale electricity market and an increased push for clean energy carry important tax implications and open new opportunities.

After 75 years of nationalization, Mexico's oil and gas and electricity sectors are opening fully to the private sector. Unbundling, the creation of a wholesale electricity market and an increased push for clean energy carry important tax implications and open new opportunities.

According to Bank of America, Mexico's sweeping energy reforms could generate an additional US$20b of foreign direct investment as early as 2015, strengthen the peso and boost economic growth. (See our RECAI publication, in the Mexico section.)

"We have all the regulations but still do not know what the rules of the market will be." Alfredo Alvarez Laparte, EY

Mexicans hope that electricity prices will fall: current prices can run as high as 75% more (though the Government subsidizes low-income residential customers) than its neighbor, the US. This has created a significant disadvantage for Mexico's energy-intensive industries, such as manufacturing.

What's changing?

Unbundling will fully open up generation and retail for investment by the private sector. Co-investment will also be possible with the Government in transmission and distribution (T&D). Creation of a wholesale electricity market covering the country's entire generation capacity - this could be up and running by the end of 2015, with further functionality added in 2016. The Government has set a target of 35% from clean energy by 2024, including effective cogeneration with natural gas and hydro power generation. Tax implications and challenges:

CFE now taxed: Government-owned Comisión Federal de Electricidad (CFE) was incorporated into the regular tax system as of 1 January 2015 - a significant change for the institution, as it used to be fully tax-exempt. Deeper pockets needed after loss of waiver on thin capitalization: Companies investing in generation and retail no longer qualify for a waiver on thin capitalization. Given that the applicable debt to capital ratio is 3:1, it will be hard to justify subordinated debt on top of regular project finance. Although large companies may be happy to loan those funds, new generators must evaluate the opportunities carefully. Support for renewables: Investment in solar and wind...

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