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Mexico: Tax treatment of expenses during pre-operative period, hydrocarbon industry

Mexico: Expenses during pre-operative period

The tax authority in late 2017 issued a miscellaneous rule 10.25 (“regla miscelánea 10.25”) to establish that during the “pre-operative period,” entities can include expenses and investments incurred before the first payment is made to the Mexican petroleum fund (“Fondo Mexicano del Petróleo”). This treatment effectively corresponds to the treatment of such expenses and investments in “regular” commercial production situations, and has implications for value added tax (VAT) purposes.


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In general, expenses made during the “pre-operative period” are incurred before the taxpayer generates income. The new rule looks to the VAT implications relating to such expenses made during the pre-operative period.

In some instances, during the evaluation stage, an entity may possibly realize income related to the extraction of test hydrocarbons if allowed to make commercial use of the hydrocarbons in order to determine the characteristics of the deposit. In this regard, the tax authority’s rule clarifies that during such pre-operative period, expenses and investments made before income is realized will be allowed. The pre-operative period is deemed to end with the first payment to the Mexican petroleum fund. 


Read a June 2018 report (Spanish) prepared by the KPMG member firm in Mexico

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