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New Guidelines for Applying Income Tax Credit in Mexico

27 Mar 2012

The Mexican Income Tax Law ("MITL") establishes that Mexican residents may credit the income tax they have paid abroad on income from sources located abroad against the income tax required to pay under the MITL. Such income is subject to tax under this Law. Taxand Mexico discusses the new guidelines and criteria for applying the Income Tax credit.

On 12 January 2012, the Ministry of Finance and Public Credit issued a note which contains the guidelines for determining whether or not income tax paid abroad on income from sources located abroad will be deemed to be creditable against the income tax required to be paid under the MITL. Below, you will find a summary of these guidelines:

a. Taxpayers must determine whether or not the amount paid abroad is income tax and if it is, will be subject to tax under MITL provisions.

For the purposes of this example, income tax has to be understood as the levy imposed on income obtained by taxpayers. The levy must be considered as a tax in accordance with the Federal Fiscal Code provisions.

When the amount paid abroad does not meet the requirements it could be considered as income tax, provided that its tax base is substantially similar to that provided in the MITL provisions.

c. In determining the origin of the credit of the amount paid abroad, it will not be relevant if (i) the name established to such amount by the applicable tax provisions, (ii) the nature of this amount established by a third country and (iii) whether it is imposed by the Federation, the Central Government or any of the Subdivision of the Government.

d. For the purposes of the MITL provisions, if requirements mentioned above are met, the amount paid abroad by taxpayers will only be creditable against income tax triggered in Mexico. This income tax credit will only be applied by the person who effectively paid such an amount.

e. When the amount paid abroad is recognised as a tax within the provisions of a Double Tax Treaty entered by Mexico, the credit will be applicable in the terms established in the Double Tax Treaty, without carrying out the current analysis.

If the country with which Mexico entered into a Double Tax Treaty introduces a new levy in its jurisdiction, these guidelines could be taken into account, to the extent that such a new levy is considered as a similar levy to those established in the Double Tax Treaty.

It is important to note that these guidelines for applying income tax credit in Mexico entered into force on 1 February 2012.

Taxand's Take

We believe that these guidelines will provide legal certainty to taxpayers and tax authorities alike. The criteria is now consistent and must be followed to determine whether an amount is paid outside of Mexico and the possibility to credit this amount against Mexican income tax, with no risks of interpretation and challenge of such creditable amounts.

Your Taxand contact for further queries is:
Manuel Tamez Zendejas
T. +52 55 5201 7403

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