ENERGY ALERT

December, 2017

ENERGY ALERT Optional payment of Excise Tax to fossil fuels through the delivery of carbon bonds Article 5 of Mexican Excise Law establishes that in the case of the tax referred to in subsection H) of fraction I of article 2, taxpayers may elect to pay it through the delivery of the carbon bonds (“CER’s” per its acronym in Spanish), when they derive from projects developed in Mexico and endorsed by the United Nations Organization within the framework of its Climate Change Convention. In this regard, on December 18, 2017, the Ministry of Finance (Secretaría de Hacienda y Crédito Público “SHCP”) and the Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales “SEMARNAT”) published in the Federal Official Gazette the general rules which establish the procedure that should be met in order to apply this option of payment of the Excise Tax through the delivery of CERs, establishing that during the first year it will only proceed up to a maximum amount of 20% of said tax, which must be paid in the monthly tax returns. The mechanism of the CER’s was proposed in the Kyoto Protocol for the reduction of emissions causing global warming or greenhouse effect (“GHG” or greenhouse gases). This mechanism offers economic incentives for companies that are under the Protocol to contribute to the improvement of the environment, especially the regulation of emissions of gases and polluting substances that arise through the productive processes of these companies. In this way, through the Carbon Market, companies have the right to emit carbon dioxide (“CO2”) as a commodity that can be exchanged and with a price established in the market. In Mexico, CER’s are represented by certificates of purchase and sale of the reduction or capture of GHG, regulated by the SEMARNAT, which, in 2016, announced a pilot program of Emissions Trading System, in conjunction with the Mexican Stock Exchange (“BMV” for its acronym in Spanish), through which companies would voluntarily join this dynamic of sustainable and financial development. In this sense, according to the abovementioned general rules, the owner of the CERs will transfer them to the Tax Administration (“SAT” per its acronym in Spanish), on the date on which the payment of the Excise Tax is carried out, to a specific account held by said tax authority. In the corresponding tax return, the taxpayers who choose to pay the Excise Tax through the delivery of the abovementioned CER´s, should consider the following: a. Declare the unit value of the closing price of the CERs in euros; the unit value of the CERs in national currency (Mexican peso); the amount of CER´s transferred, and; the value in national currency of the CER´s corresponding to the Excise Tax paid. In the scenario that the transferred CER´s had a higher value than the amount of the Excise Tax that is covered by such instruments,

the excess will not grant the right for compensation, credit or refund. b. Provide the identification number of the transfer of the CERs made to the SAT account. The internal mechanisms in order to carry out the registration of the Excise Tax payment to fossil fuels through carbon bonds will be established by SAT. The market value of the CER´s should be the closing price of the Green Certified Emission Reductions of the day immediately prior to that in which the payment of the Excise Tax is carried out (www.eex.com/en/market-data/environmental-markets/ spot-market/green-certified-emission-reductions#!). If the closing price of the immediately preceding day is not published, the closing value that has been published for the last time before the day in question should be considered. The conversion to national currency (Mexican Peso) should be carried out according to the procedure established by the Mexican Federal Fiscal Code.

The market value of the preceding years of the abovementioned carbon bonds have been as follows:

When the operating conditions of the market that are used as reference for the payment of the Excise Tax through carbon bonds change and affect the mechanics of determining the value of such bonds, a diverse carbon bond market may be used. In addition, there may be a market change when a market that results more suitable arises for the determination of the value of the carbon bonds. Likewise, this payment mechanism may be suspended when, in seven days of consecutive market publication, the prices of carbon bonds behave unusually compared to what was observed in the previous twelve months. The Ministry of Finance will use methodologies to determine when the mechanics of determining the value of the CERs is affected or unusual market behavior occurs. If the above occurs, the application of new markets for carbon bonds or the suspension of this payment mechanism will be announced through the Federal Official Gazzete, as well as the timing of the suspension.

It is important to mention that during the first year of validity of these Rules, the payment through carbon bonds of the Excise Tax will only proceed up to a maximum amount of 20% of the tax that must be paid in the monthly tax returns and that the general rules mentioned in this document will enter into force 60 days after their publication in the Federal Official Gazette. As mentioned above, it is important to bear in mind that the abovementioned mechanism cannot be used to pay the whole amount of the Excise Tax, it is only applicable to pay the quote established in Article 2 section I subsection H of the current Excise Tax Law (i.e. for gasoline is $11.41 cents by liter and for diesel is $13.84 cents by liter). In addition, It will be understood that the CER´s comply with the requirements referred in this document when they are listed on the SEMARNAT website (https://www.gob.mx/semarnat) Please consider that this document only includes general comments, which should not be considered as a formal opinion from our Firm.

Finally, the SAT will transfer the CERs received in accordance with these rules to the Administration and Alienation of Assets Service (“SAE” per its acronym in Spanish) for its alienation to the public in the CERs according to several provisions.

Contacts: Alfredo Álvarez

Mario Karim

Rodrigo Ochoa

Salvador Meljem

Mexico City Office - Energy Leader [email protected] Mexico City Office – Oil & Gas Tax Leader [email protected]

Enrique Pérez Grovas

New York City Office - Tax [email protected]

Javier Noguez

Houston Office - Tax [email protected]

Mexico City Office – Tax [email protected] Mexico City Office – Tax [email protected]

Jimena González de Cossío Mexico City Office - Legal [email protected]

Jeffrey Helm

Mexico City Office – Tax Modelling [email protected]

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