Oil Production VAT Claims Rejected

Originally published November 2004

To avoid the exportation of indirect taxes, Article 69(a) of the Internal Tax Regime Law recognizes the right to a refund for value added tax (VAT) paid on the importation and local acquisition of goods and services used for the production of export goods. Based on this legal provision, companies with upstream contracts have claimed from the Internal Revenue Service a refund of the VAT paid on the production of the oil they produce and export. The service rejected this claim, arguing, among other things, that: (i) petroleum is not produced, but is rather extracted; and (ii) oil companies had already considered this cost when establishing in the upstream contracts they executed with the state their participation in the production of petroleum extracted from their oil fields.