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Mexican tax bill for 2014

Mexico
The Mexican tax bill for 2014 has been recently submitted by the President of the United Mexican States to the Mexican Congress. This bill includes several proposals which would affect foreign investors with operations in Mexico, either directly (eg through a branch) or indirectly (eg through a subsidiary). These proposals would be effective on 1 January 2014, however, the bill is yet to be discussed and approved by the Mexican Congress. It is expected that the majority of the amendments will be approved as they are, or with only very slight modifications. Taxand Mexico explores these amendments in detail.

The Mexican tax bill proposals include changes impacting direct and indirect investments andMaquiladoras (factories in Mexico run by a foreign company and exporting its products to the country of that company).

Direct investments

  • The maximum withholding rate for certain items of income from Mexican sources will be increased from 30% to 32%. This rate would apply to capital gains on the sale of shares or real estate property, interest, royalties and leasing income. Nevertheless, this rate may still be decreased by virtue of the application of an income tax treaty.
  • The exemption for capital gains obtained by foreign investors selling shares through the Mexican Stock Exchange is repealed. Under the proposed amendments, foreign investors selling shares through the Mexican Stock Exchange will be subject to a 10% income tax on the gain, which will be calculated based on the difference between the sales price and the purchase price. These gains may still be exempt under an applicable income tax treaty. However, the foreign resident will have to fulfill certain formalities, such as appointing a legal representative in Mexico, obtaining a tax residence certificate and filing a notice with the Mexican tax authorities.
  • Profits remittances by Mexican branches of foreign investors to their head office or to another foreign branch will be subject to a 10% income tax. This tax will not apply to other types of payments such as interest or royalty payments.
  • The 4.9% withholding rate on interest payments to foreign banks which are resident in a country that has concluded an income tax treaty with Mexico remains. However, such banks will no longer be required to be registered with the Mexican tax authorities.

Indirect investments

  • The flat tax (commonly known as IETU) and the tax on cash deposits are repealed[1]
  • A 10% income tax on dividend distributions by Mexican subsidiaries to their shareholders is imposed. This is not a withholding tax on foreign shareholders and as such cannot be decreased by virtue of an income tax treaty. Likewise, this tax will apply even if the distribution is derived from profits that have already been subject to taxation (ie if they come from the balance of CUFIN). Thus dividend distributions by Mexican subsidiaries of multinational groups will be subject to an additional income tax burden as of 2014.
  • Payments made by a Mexican company to a related party[2] will not be deductible if such payment is not taxed or if it is taxed with an income tax which is lower than 75% of the income tax that would be assessed and paid in Mexico (ie an effective tax rate lower than 22.5%)
  • Regarding transactions carried out between related parties where Mexico is entitled to impose a withholding tax but the withholding rate is reduced by virtue of an income tax treaty, the Mexican tax authorities may request a statement under oath from the foreign resident providing that income which may be subject to taxation in Mexico will be subject to tax in the State of residence
  • The accelerated depreciation provisions generally available to Mexican companies located outside of the urban areas of Mexico City, Guadalajara and Monterrey are repealed
  • The current tax consolidation regime is replaced by a new regime which limits the tax deferral to three fiscal years
  • The 11% VAT rate applicable to residents of the border region is repealed. Now any transaction carried out by such persons will be subject to the general 16% rate.

Maquiladoras

  • The Mexican Income Tax Law is amended to include a threshold for maquiladoras. A Mexican company that wants to operate under the maquiladora regime will be obligated to derive at least 90% of its income from exports
  • The maquiladora regime under the modality of shelter is limited to three consecutive years counted as of the date in which the company began its operations
  • Temporary importations by maquiladoras will now be subject to value added tax (“VAT”), however such tax may be offset against payable VAT

Your Taxand contacts for further queries are:
Manuel Tamez
T. 52 55 5201 74 03
E. mtamez@macf.com.mx

Luis Monroy
T. 52 55 5201 74 66
E. lmonroy@macf.com.mx


[1] IETU is a minimum tax with respect to income tax on income derived from the sale of goods, provision of services and rental income which is triggered on a cash-flow basis at the 17.5% rate. The tax on cash deposits is a 3% tax on monthly cash deposits exceeding MXN $15,000.

[2] Two or more persons are deemed related parties when one participates directly or indirectly in the management, control or capital of the other, or when a person or group of persons participate directly or indirectly in the management, control or capital of such persons. 

Taxand's Take

If approved, these modifications will have a significant impact on business in Mexico and not necessarily a positive one. Overall, increased taxes on profits distributions and additional restrictions on deductions will increase the tax burden of multinational groups. 

As mentioned above, we expect the majority of these proposals to be approved and to be effective as of 1 January 2014.   

Taxand's Take Author

Manuel Tamez
Mexico

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