Mexico alters fuel tax deduction as pump prices rise

Mexico's finance ministry started this week basing the formula it uses to set deductions from fuel excise taxes (IEPS) on wholesale instead of retail margins, a change it said is aimed at trimming higher prices at the pump.

The government started the weekly fuel tax deduction mechanism in February 2017 to smooth volatility in gasoline and diesel prices as price caps were being removed. Yet prices have still risen by more than 30pc since then to above $3/USG, prompting early protests. President Andres Manuel Lopez Obrador made the promise after taking office on 1 December that fuel priceswould not rise above the inflation rate in 2019.

Since the fuel tax is passed through to consumers the higher deductions are meant to translate into lower prices at the pump. But even when deductions were offered, "prices at the pump did not diminish at the same speed or in the same proportion," the ministry said.

The problem is that retailers are not obligated to cut retail prices by the same proportion as the deductions, said energy and tax lawyer Oscar Lopez Velarde with Ritch Mueller. "The deductions were actually becoming a great business for retailers [who] kept increasing differences between the wholesale prices and the retail prices," he said.

The finance ministry said that even with previous lower deduction levels, profit margins for retailers increased by 60pc in the first two months of this year compared with the same period of 2018 for regular gasoline, by 111pc for premium gasoline and by 18pc for diesel.

The deduction is the difference between the country's average retail price posted by the energy regulatory commission (CRE) multiplied by an inflation index — the base price — and a reference price. The reference price is a combination of the international wholesale reference price, a quality adjustment factor, logistics costs, taxes — and now the average wholesale margin instead of the retail margin.

By factoring the domestic wholesale margins into the new deduction formula the ministry said it hopes it will help "protect the purchasing power of final users."

The change in the formula will enable bigger deductions, but it may not resolve the issue since there is still no requirement the savings are passed on to drivers, Lopez Velarde said.

"What the change will do is deductions are granted but traders and retailers will still keep the benefit," he said.

Based on the new formula, IEPS deductions posted for this week increased to Ps0.32/l for regular gasoline from Ps0.094/l and diesel's deduction will increase to Ps1.404/l from Ps1.030/l for 12-15 March. There will still be no deduction for premium gasoline.

Pemex still supplies 93pc of the gasoline market in Mexico — and posts its wholesale prices publicly. The supply from independent importers has grown to 7pc from nothing before the 2014 energy reform.