File No. 812.512/1894
The Ambassador in Mexico (Fletcher) to the Secretary of State
No. 815
Mexico,
March 1, 1918.
Sir: Continuing my No. 812 of February 27,
1918,1 enclosing
the unofficial text of the Presidential decree fixing taxes on
petroleum lands, and confirming my telegram No. 820 of March 1, 7
p.m., I have the honor to enclose, herewith, copy of the official
text of said decree as published in the Diario
Oficial under date of February 27, accompanied by an
English translation.
After a conference with Mr. Hutchison of the Aguila Oil Co., from
whom I learned that General Aguilar, the Minister for Foreign
Affairs, had unsuccessfully opposed the new decree when under
discussion by the Cabinet, I decided to call upon the Minister for
Foreign Affairs to ask if it would be possible to postpone the
application of the new law for 30 days. He was vague and
non-committal; he could not inform me when the law would go into
effect, but promised that he would take the matter up with the
President and his colleagues at the first opportunity. He said the
next cabinet meeting would take place next Thursday and that by that
time, at the latest, he would give me a definite reply.
In this connection, he handed me a printed copy of the petroleum bill
which, as Governor of the State of Vera Cruz, he had presented to
the Legislature of that State for the purpose of being sent to the
National Congress.1
This bill, I have been given to understand by representatives of
American and British oil interests, is open to very little objection
on their part. A synopsis of General Aguilar’s argument in support
of the bill was forwarded in translation with the Embassy’s No. 797
of February 20, and I now enclose the complete bill as presented to
me by General Aguilar.2 It is generally understood that the
issuance of the latest petroleum decree is a triumph of Mr. Pani and
the radicals. Mr. Nieto was absent in the United States when the
decree was issued.
The Department will observe that the decree applies only on oil
leases executed prior to the first of May last. This is taken to
mean that leases executed since that date—the day on which the new
Constitution of Mexico went into effect—are considered by the
Government null and void.
[Page 701]
From a legal aspect, the new decree is possibly open to objection on
the grounds: (1) That while it is based on the special financial
powers delegated to the President by Congress, it exceeds those
powers by attempting to legislate on matters other than fiscal; (2)
that it provides for payment in kind; (3) that the amount of the tax
may be considered confiscatory; and (4) that lessees are held liable
for payments assessed against owners, without adequate provision for
their repayment.
In practice, the provision obliging lessees to pay the tax and deduct
same from the owners, is likely to provoke serious difficulties and
conflicts; in many cases the owners have not accepted the Carranza
régime and live in territory not controlled by his forces, and will
seriously object to giving the lessees credit on contracts for the
amount of these taxes. The lessee, on the other hand, can be
compelled by the Government to pay the tax for the owner, and may
thus be obliged to cancel their contracts or pay this tax in
addition to the rent or royalties stipulated in their leases. It is
possible that the fact that the owners of oil lands are in many
cases outside the jurisdiction of the present Government was an
additional reason for making the lessee responsible for the owner’s
taxes.
Both Excelsior and El
Universal have had leading articles criticizing and
condemning the new law, and there is every indication that there
will be a storm of protest from the Mexican petroleum landowners and
Mexicans interested in the oil industry.
As suggested in my telegram, I think it is highly advisable that the
oil interests, irrespective of nationality, act as a unit with
respect to their compliance or non-compliance of this decree. It
would seem to me that the legal objections which I have pointed out,
and others which will no doubt occur to the expert counsel of the
oil companies, give sufficient ground for testing the legality of
this decree in the courts.
According to Article 17, taxes not paid as provided by the decree,
shall be subject to a fine of 10 per cent, for each month of delayed
payment, and the companies would have to decide to run the risk of
liability for this additional amount in case they decided to appeal
to the courts. In this connection, some apprehension has been
expressed lest the Mexican Government would attempt to force payment
by the companies—irrespective of any action in the courts—by
refusing to give clearance papers to the oil companies’ ships until
the taxes were paid. This procedure was resorted to, as the
Department will remember, in connection with the dredging
contributions imposed on the oil companies using the Panuco River,
and, as suggested in my telegram, our Government, as well as that of
Great Britain, may be called upon to take a definite and energetic
stand in this regard. If the Mexican Government should receive the
impression that the British and American Governments are indifferent
or lukewarm in the matter, it will have no difficulty in finding
means of compelling compliance on the part of the companies.
The enforcement of this Executive decree will raise the whole
question as to Article 27 of the new Constitution, and it would seem
that the Governments of the United States and Great Britain will
soon be called upon to decide how far they are willing to go in
support of the interests involved. Should the Mexican Government
[Page 702]
proceed to the
nationalization of the petroleum industry as contemplated by Article
27, and towards which this decree is regarded by many as the first
step, the oil supply of the Allied Governments would be placed in
serious jeopardy.
Finally, I beg to remind the Department that at the inception of the
negotiations recently carried on in Washington between
representatives of the Mexican and United States Governments,
Messrs. Bonillas and Nieto handed to me a memorandum outlining the
points on which they hoped to secure a modification of the export
restrictions of the United States, in which it was stated that, “the
Mexican Government, on its part, will permit the exportation into
the United States of the following commodities, during the time and
in the form agreed to in the negotiations, without increasing
disproportionately the existing export duties”; there followed a
list of such articles, which included petroleum and its derivatives.
On reading this statement, I distinctly asked the Mexican
representatives whether my Government could understand that there
would be no increase in production taxes as well. In reply, I was
informed by Mr. Nieto that such was the case, and that the
non-increase referred to would cover production as well as export
taxes. It is true that the negotiations have not been concluded, and
that the Mexican Government may not consider itself bound by these
statements of its representatives during the conversations in
Washington; nevertheless, it has occurred to me that the Department
may wish to avail itself of the pending negotiations in connection
with the subject matter of this despatch.
I have [etc]
[Enclosure—Translation]
Decree of President Carranza fixing taxes on
petroleum lands
Venustiano Carranza, Constitutional President of
the United Mexican States to the people, know ye,
That, using the extraordinary powers in the Ministry of Finance
vested in me by Congress, I have issued the following decree:
-
Article 1. A tax is
established on oil lands and on oil contracts executed
prior to May 1, 1917, having for their object the
leasing of lands for the exploitation of carbides of
hydrogen or permission to do so under an onerous
title.
-
Art. 2. The annual rentals
stipulated in the contracts cited in Article 1 shall be
taxed in the following proportion:
- (a)
- Those of five pesos per annum per hectare or
less, with ten per cent of their value.
- (b)
- Those of more than five pesos and less than
ten, per hectare and per annum, with ten per cent
the first five pesos and with twenty per cent the
rest.
- (c)
- Rents greater than ten pesos per annum per
hectare, with ten per cent the first five pesos,
with twenty per cent the next five pesos, and with
fifty per cent anything exceeding the first ten
pesos.
-
Art. 3. All royalties
stipulated in oil contracts are charged with fifty per
cent of their value, in cash or in kind, as may be
determined by the Department of the Treasury.
-
Art. 4. Properties worked by
surface landowners are charged with an annual rental of
five pesos per hectare and besides with a royalty of
five per cent of the products, in cash or in kind, as
may in each case be determined by the Department of the
Treasury.
-
Art. 5. The Department of the
Treasury shall advise taxpayers during the last
fortnight of each bimonthly period if they are to pay in
cash or in kind, the royalty corresponding to the
bimonthly production ending in that fortnight.
-
Art. 6. The taxes fixed in
Article 2 shall be paid at the local stamp offices in
the jurisdiction the lands belong to and should such
lands belong to various jurisdictions, at the office
appointed by the Department of the Treasury, after
consulting the taxpayer. This payment shall be made in
advance in the first fortnight of each bimonthly
period.
-
Art. 7. The royalties payable
in cash shall be deposited at the offices cited in the
preceding article on the same dates set therein at the
end of each two months.
-
Art. 8. Payments of amounts
mentioned in Articles 2, 3, and 4 shall be made using
special stamps marked “Oil Revenues”.
-
Art. 9. Payers of taxes
established in this law must present within the first
fortnight of each bimonthly period a statement according
to the authorized form of the general stamp office,
giving rentals, production, and other necessary data for
assessing taxes. These statements shall be made before
the stamp offices referred to in Article 6.
-
Art. 10. Transfer of contracts
chargeable under this law shall be notified to the same
offices mentioned in Article 6 within thirty days after
execution. Besides this obligation the contracting
parties must immediately notify the general stamp office
through the notaries before whom such transactions are
effected.
-
Art. 11. All amounts
corresponding to royalties or their fractions payable in
kind shall be delivered at any of the storage stations
belonging to the operator, as desired by the Department
of the Treasury, which shall designate the place of
delivery simultaneously with this form of
payment.
-
Art. 12. When the royalties or
fractions are payable in cash they shall be estimated
taking the fiscal values of the products at ports of
shipment as fixed by the bimonthly tariffs of the
Department of the Treasury and deducting the cost of
transportation by pipe line, according to the distance
of the field of production from the port of shipment and
the average public tariff authorized by the Department
of Industry, Commerce, and Labor for pipe lines in the
district under consideration. The tax department of the
Department of the Treasury must duly advise the local
stamp offices as to the aforementioned values, so that
such offices may judge the returns.
-
Art. 13. For oil lands not
actually paying rent five pesos per annum per hectare
shall be paid, and for those at present not paying
royalty, five per cent of the products. Payments
mentioned in this article shall be made under the same
conditions which this law provides for other
taxpayers.
-
Art. 14. Landowners who desire
to work for their own account subsoil petroleum deposits
and have not made any oil contract, as well as the last
cessionaries of the right of exploitation in contracts
mentioned in Article 1 of this law, shall make a
statement within three months from the promulgation
hereof, with certified copies of their contracts of
purchase, of lease, or of any other kind, to the
Department of Industry, Commerce, and Labor, which will
examine such statements and reject those containing
unsupported facts. During this term all oil properties
will be considered vacant which have not been registered
in the form prescribed in this article, their
denouncement and exploitation being governed by the
regulations to be issued which shall determine those
liable for the payment of taxes.
-
Art. 15. Contracts referred to
in this law must be embodied in public deeds and those
executed in private shall only be valid when the
importance of the business does not require the
formality of a public deed and when by other means of
unquestionable evidence they are shown to have been
really executed on the dates indicated and with the
clauses therein contained.
-
Art. 16. The royalties
established in this law, fractions of the royalty fixed
in Article 3, the tax on rentals fixed in Article 2 and
the other rentals established in this same law shall be
paid at the local stamp offices by the operators or the
last cessionaries to the right of exploitation who when
making payments to intermediaries or owners shall deduct
the proportional part of the taxes corresponding to the
latter so that the rentals and Federal royalties be
distributed in the same proportion as the rentals and
royalties now established on oil lands in the various
existing contracts for oil exploitation.
-
Art. 17. Taxes not paid in the
terms fixed by this law shall be subject to a fine of
ten per cent for each month of delayed payment.
-
Art. 18. The proceeds of this
tax shall be distributed as follows: sixty per cent to
the Federal Government; twenty per cent to the State
Governments; twenty per cent to the respective
municipalities, taking into account the situation of the
[Page 704]
lands.
When they are in two or more municipalities or two or
more states the Finance Ministry shall distribute the
tax taking into consideration the area in each
jurisdiction, situation of the wells and their output
and other circumstances.
-
Art. 19. Transgressions of the
precepts of this law shall be punished by fines varying
from fifty to a thousand pesos, according to the
seriousness of the case which will go to the courts
should there be fraud to prosecute.
-
Art. 20. This law will become
effective from the date of its promulgation.
Therefore, I hereby order that the same be printed, published,
circulated, and given due compliance.
Given in the National Palace of the Executive Power, in Mexico,
on the nineteenth day of February, one thousand nine hundred and
eighteen.
