The first quarter of 2014 has just ended and the initial effects of the recent tax reform, in force as of this past January 1st, can now be seen.
The year has started up slowly and has been characterized by, among other things, an increase in prices, weak consumer spending, and a reduction in job creation. In fact, the International Monetary Fund and several other analysts have lowered growth expectations for the Mexican economy from 3.9 to 2.7 percent.
Under these circumstances, some specialists have raised their voices to argue that the tax reform was a mistake or, at best, insufficient. They presume that an effective reform that favored greater economic growth would have necessarily involved the lowering of tax rates and the combating of tax evasion.
We think it is still too early to evaluate the economic reach of the changes. Undoubtedly, the effects of this reform will be seen in the long term. They involve, as was expected, an immediate contraction of internal consumption and a rise in prices as a result of the changes in the Income Tax and the Special Tax on Production and Services.
In time, the performance of this reform will have to be evaluated together with the financial, antitrust, and energy reforms that were approved at the end of 2013 but whose benefits will not be felt until 2015. The approval of the secondary energy reform legislation in the coming days is of special importance.
The international markets are watching the development of all the above reforms very closely. Their mood is optimistic, especially regarding the energy reform.
We trust that these transformations, together with an increase in the economic activity in the United States, will produce the levels of economic growth that we all so desire.
The following changes have been made to Mexican Income Tax Law (Ley del Impuesto sobre la Renta, LISR).
1. Double Taxation
A procedural rule is added concerning the benefits of treaties to avoid double taxation. In the case of a transaction between business associates, the tax authorities can request residents abroad to inform them of the foreign law whose application could generate double taxation for them.
2. Deductions Eliminated
The following deductions are eliminated:
- The immediate deduction of fixed assets.
- The line deduction of 100 percent of investments, except those related to (i) machinery and equipment for the generation of energy from renewable sources or from efficient cogeneration of electricity and (ii) adaptations of facilities to improve access to them by disabled people.
- The donation of goods that have lost their value, except in the case of basic goods for human subsistence including food, clothing, housing, and health,1 provided those goods are used for these purposes and their sale, supply, or use are not expressly prohibited.
- The deduction of payments that are also deductible by business associates residing in Mexico or abroad.
- Social security contributions made for the worker by the employer.
3. Deductions Reduced
The value of deductions permitted in the following situations is decreased:
- Deductions for donations made to the federal government, states, municipalities, or their decentralized bodies is limited to four percent of the taxable profit obtained by entities or four percent of the taxable income obtained by individuals.
- Only up to 53 percent of the exempt remunerations paid to the worker by the employer (e.g., social security, funds placed in employee savings and loans, severance payments, annual bonuses, overtime, vacation and Sunday premiums, and worker profit sharing [participación de los trabajadores en las utilidades de las empresas, PTU]) can be deducted from taxes. The percentage of the deduction will be 47 percent when those remunerations are decreased.
- The cap on deductions for the purchase of automobiles is reduced from 175,000 to 130,000 pesos (not including the Value Added Tax, VAT).
- The cap on the deduction of the cost of leasing an automobile is reduced from 250 to 200 pesos daily.
- The cap on the deduction of the cost of restaurant meals is reduced from 12.5 to 8.5 percent of the cost of the meal.
4. New Requirements for Deductions
A new requirement has been established for deducting consumer vouchers. These vouchers must be "deposited" in the employee's electronic wallet, as authorized by the Tax Administration Service (Servicio de Administración Tributaria, SAT).
5. Cash Deposits
Financial institutions now have the obligation to inform the tax authority once a year of the cash deposits taxpayers receive in accounts opened in their names when they accrue more than 15,000 pesos monthly, including acquisitions in cash from cashier's checks. This obligation was previously included in the Tax on Cash Deposits Law, which has been repealed.
6. Special Regimes
- The regime for Cooperative Production Companies is eliminated.
- The regime for Real Estate Companies (Sociedades Inmobiliarias de Bienes Raíces, Sibras) is eliminated.
- In the case of the deduction of exploration expenses in the mine sector, the possibility of deducting expenses that accrue during pre-operating periods for the fiscal year in which they were accrued is eliminated. They can now be deducted at a rate of 10 percent annually.
- Accumulation at the time of collection for sales on credit installments is eliminated.2
- The Tax Consolidation Regime is eliminated.
7. Preferred Tax Regimes
- The concept of passive income is revised to include (i) income from the transfer of real estate; (ii) income obtained for allowing temporary use and/or enjoyment of goods; (iii) income received in the form of a gift.
- When the taxes paid under a preferred tax regime cannot be totally or partially claimed as tax credit, they can be claimed in the ten following fiscal years until they are exhausted.
8. Real Estate Investment Trusts (Fideicomisos de Inversión en Bienes Raíces, Fibras)
The following are conditions that must be met before the corresponding tax incentive can be applied: (i) if a lease agreement contemplates compensations determined in variable amounts or percentages, the latter may not exceed five percent of the total amount of the income of the trust, and (ii) trusts must be registered with the registry issued by the SAT for trusts that are used for the acquisition or construction of buildings.
9. The Simplified Regime
The simplified regime is eliminated, as well as the benefits of exemption, reduced rates, and administrative incentives. Nevertheless, similar benefits are introduced for the primary and transportation sectors. 3
10. Tax on Distribution of Dividends
Natural persons and residents abroad will be subject to an additional tax of 10 percent on dividends received from Mexican companies. The tax will be paid through withholdings made by the companies that distribute the dividends.
11. Taxable Base for the Calculation of PTU
It is established that taxable income used to calculate PTU4 must be calculated according to the same procedure used to determine Income Tax (Impuesto sobre la Renta, ISR) without reducing the PTU paid in the fiscal year or the tax losses pending application. The amounts that have not been deducted as exempt remuneration for workers are established as a reducible concept.
12. Profits from a Transfer of Shares
No matter how long a taxpayer has held certain shares, there is only one formula available for calculating the profit realized on the transfer of those shares. This calculation considers the adjusted original amount, the proven cost of acquisition, the difference in the balances of the net tax profit accounts (Cufin), the tax loss carryforwards, the paid reimbursements, the differences between the balance of the net tax profits (Ufin), and the tax losses generated before the shares were acquired but which were redeemed while they were held.
Nevertheless, taxpayers with shares they have held for up to 12 months may choose a calculation method that, in obtaining the original adjusted amount, only considers the proven cost of acquisition updated, reimbursements, and dividends or profits paid updated.
13. Non-profit Organizations
The catalog of activities that charity institutions and non-profit organizations or associations may engage in is broadened.
Regarding non-profits engaged in education, it is established that to be considered exempt from income tax and receive deductible donations, they must obtain and maintain authorization from SAT.
It is also provided that non-profit organizations, authorized to receive deductible donations, may carry out lobbying activities if they comply with certain rules.
Athletic organizations, as of the date of the reform, will pay taxes according to the general regime for legal entities, except for those organizations recognized by the National Sports Commission.
14. The Tax Consolidation Regime
The tax consolidation regime is eliminated.
An exit scheme is established for companies previously falling under this regime. There are two alternative methods for calculating their deferred tax as of December 31, 2013, as well as a payment scheme divided into five fiscal years for the total of the deferred tax.
Additionally, the companies still falling under this mandatory five-year taxation period may continue applying the provisions of the Tax Consolidation Regime and, once this period concludes, they must calculate and deliver the deferred tax they owe at that date through the divided payments scheme.
15. The Maquila Regime5
The new LISR establishes the definition of a maquila operation for the purpose of allowing taxes to be paid under the maquiladora regime; this definition includes the requirement that all income received come entirely from maquila activities.
Under the new LISR, the tax authorities can (i) determine who can make use of this regime, (ii) verify and audit the operation according to the terms of the tax provisions, and (iii) establish sanctions to be used against taxpayers who abuse the regime or apply its benefits without being entitled to them.
16. Shelter Maquiladora Operations
In order to consolidate this regime as an authentic transition scheme in accordance with the statement of legislative intent included in the new LISR, the companies of foreign residents that operate through a shelter maquiladora arrangement may remain under the protection of this regime for up to a maximum of four fiscal years, considered from when they began to operate in Mexico.
17. Claiming a Tax Credit for Income Tax Paid Abroad
- The credit can only be claimed on a country-by-country basis. The amount corresponding to the difference between the tax rate in Mexico and a higher tax rate in another country may not be used to compensate the difference between the tax rate in Mexico and a lower tax rate in a third country.
- Claiming a credit on first and second
levels (crediting on corporate income tax) is still permitted, but
with the following variables:
- According to the new formula, the gross dividend is divided by the profit that served as a basis for distribution (and for which taxes were already paid), regardless of the amount that will be distributed as dividends. The coefficient resulting will be multiplied by the foreign income tax for which the tax credit is intended, thus determining their respective proportional amounts (which maintain two functions: accrual and crediting).
- In order to calculate the proportional amounts of tax that can be credited, entities have an additional obligation of identifying to which fiscal year the distributed dividends or profits correspond.
In general, these modification will give foreign companies a clearer idea of the proportional tax they will have to pay.
18. Foreign Taxes Covered by Double Taxation Treaties
When a foreign tax is covered by a double taxation treaty, said tax will be considered to be income tax and thus can be deducted from Mexican income taxes. This assumes that the company complies with all other general taxation rules.
19. Optional Tax Regime for Groups of Companies (Integration Regime)
Groups of companies that meet certain requirements can choose to be taxed under an integration regime. This regime allows individual companies to defer income tax payments for up to three fiscal years. For this purpose, the integrating company will determine a factor of tax results of the group of companies by adding the taxable income and by adding the tax losses of each fiscal year of the integrated companies, as well as its own. It will also determine a factor of integration in order to calculate the income tax to pay and the tax that can be deferred.
The factor of the integrated taxable earnings will be obtained from the sum of the taxable earnings and losses of the companies making up the group (integrated tax earnings) divided by the sum of the taxable earnings obtained in the fiscal year.
In each fiscal year, both the integrating company and the integrated companies shall calculate the corresponding income tax multiplying their individual tax by the factor of the integrated tax earnings. Under this regime, companies are not allowed to consider the tax loss carryforwards of prior fiscal years.
To choose this regime, it is necessary to have a minimum shareholding percentage of 80 percent in the integrated companies.
Among the companies that cannot participate in this regime are banks and other financial institutions, non-profit organizations, cooperatives, legal entities not subject to taxation, and companies that are authorized to operate as maquiladoras.
Companies that have been paying taxes under the Consolidation Regime up to December 31, 2013, and who meet the requirements of this Regime may apply it without considering any tax losses from prior fiscal years.
B. Income Tax for Individuals
The rate applicable to individuals with income greater than 750,000 pesos annually is modified. A rate of 32–35 percent is applied to individuals in this bracket. The highest rate will apply to incomes exceeding 3,000,000 pesos annually.
2. Personal Deductions
- Personal deductions are limited to an amount that is either ten percent of the taxpayer's total annual income, including exempt income, or an amount equivalent to four times the annual minimum wage in the taxpayer's geographic area, whichever is the lowest.
- In order to take personal deductions, a taxpayer must submit receipts for the deductions and must pay his or her taxes through banks.
3. Sale of a Residential Home
The limit on the exemption of 1,500,000 Investment Units (Unidades de Inversión, UDI) is reduced to 700,000 UDI (approximately 3.5 million pesos). Any profit on the sale of a home over this amount is taxable.
4. Transfer of Agricultural Lands and Ejidos
In order for this transfer to be exempt, the transferor must show that this is the first transfer he or she has made and must provide documentation, proving he or she is the original ejido owner or the representative of the collective rights, to a notary public who will formalize the transaction.
5. The Tax Incorporation Regime
The Tax Incorporation Regime replaces all the special regimes of the LISR for individuals (the Intermediate Regime and the Small Taxpayers Regime).
It applies only to individuals who engage in business activities that involve selling goods or providing services and that do not require a professional degree. The Regime is limited to persons who receive an annual income of less than two million pesos.
This regime is schedular and of temporary application during a period of up to ten years, without the possibility of paying taxes under it again. By the eleventh fiscal year, these taxpayers will fall under the general regime for individuals with business activities.
The taxpayers under this regime will make payments every two months and the income tax to be paid will be determined by subtracting from their total income their authorized deductions and the PTU they have paid. A maximum income tax rate of 35 percent will be applied.
6. Gains Obtained by Individuals through the Stock Market
A rate of 10 percent will be applied to gains obtained by individuals for the sale of (i) shares issued by Mexican companies when they are sold through stock markets concessioned under the Securities Market Law and (ii) shares issued by foreign companies on these stock markets, including sales made through capital derivative financial transactions involving shares listed on stock markets concessioned under the Securities Market Law, or to market indexes that represent those shares.
The financial broker acting for residents abroad who are involved in the sale of these shares must calculate their annual gain or loss, then withhold and deliver to the tax authorities the corresponding tax. In the case of persons living in Mexico, the broker must calculate the gain or loss and deliver to the taxpayer the corresponding information so that he/she can make the tax payment. If a tax loss is generated, a record of loss for the fiscal year must be issued. This tax applies in a schedular manner and, based on this principle, the losses may only be offset against income of the same kind.
C. Income Tax of Residents Abroad
1. Foreign Pension Funds Invested in Real Estate in Mexico
Regarding the exemption enjoyed under the LISR by foreign pension and retirement funds for income derived from interest, capital gains, or granting of temporary use or enjoyment of lands or constructions attached to Mexican land, the time that the temporary use or enjoyment of the lands and constructions attached to the land must be granted, for purposes of applying this exemption, is increased from one to four years.
2. Disbursements That Benefit the Resident Abroad
The treatment provided in the first and third paragraphs of Article 179 of the repealed LISR is changed. In the cases in which payments are made that benefit the resident abroad, including when they allow that resident to avoid a disbursement, and when the person that makes one of the payments referred to in Title V of this Law pays the corresponding tax for the resident abroad, it will be considered that there is income in favor of the resident, and therefore the provisions that apply will be the same as those that apply to the income that originated them.
3. Lease of Trailers and Semi-trailers
The withholding rate of five percent is confirmed for income from the lease of trailers or semi-trailers that have been temporarily imported (for less than one month) and that are being used directly by the lessee to transport goods. This provision was previously applied by decree.
4. Interest Paid to Foreign Banks at the Rate of 4.9 Percent
In order to give continuity to the tax treatment applicable to interest paid to foreign banks as set forth in Article 21, Section I, Number 2 of the Federal Revenue Law for the fiscal year 2013, and to thereby avoid an increase in their tax burden, a one-year provision is included in the new LISR that extends this tax treatment for fiscal year 2014.
This provision establishes that the interest is subject to a rate of 4.9 percent, applicable when the actual beneficiary of this interest is a resident of a country that has signed a treaty to avoid double taxation with Mexico, and the requirements set forth in that treaty for applying the rates contemplated therein for these types of interest are met.
5. Exemption of Debt Derivative Financial Transactions
It is expressly established that all derivative financial transactions in which one part of the transaction is linked to the Interbank Equilibrium Interest Rate (Tasa de Interés Interbancaria de Equilibrio) or to negotiable instruments issued by the Federal Government or the Bank of Mexico or to any other instrument that the SAT allows under its general rules and that is listed on the stock exchange in Mexico, are exempt from income tax, provided they are carried out on recognized stock exchanges or markets and that the actual beneficiaries are residents abroad.
6. Withholding of Royalties from Residents Abroad
The withholding of the Income Tax as royalties for selling the goods or rights referred to in Article 15-B of the Federal Tax Code is limited to those cases in which the sale is conditioned on the productivity, use, or ultimate disposal of those goods or rights, and therefore the simple sale of these goods or rights is not considered a concession of the temporary use or enjoyment and, therefore, is not subject to the withholding established in the LISR.
D. Other Incentives and Benefits
The "Decree compiling various tax benefits and establishing administrative simplification measures", published in the Official Federal Gazette (Diario Oficial de la Federación, DOF) on December 26, 2013, includes the following incentives and benefits:
- The tax incentive granted to authorized donees by the decree published on May 26, 2010 is extended until December 31, 2015. This incentive consists of a tax credit equivalent to the amount of the income tax that is imposed, if any, for receiving income from activities different from those that the donee is authorized to perform. This provision was put in place initially until December 31, 2013.
- The incentive of a tax credit equivalent to 80 percent of the income tax incurred is maintained for the use of certain airplanes. The credit can be claimed only for that tax, by taxpayers residing in Mexico who use airplanes that have a concession or permit from the Federal Government to be used commercially, that are used in the transportation of passengers and goods, and whose temporary use or enjoyment is granted by residents abroad who are not permanently settled in Mexico.
- An additional deduction of 25 percent in taxable income is maintained as a tax incentive for persons with any motor disability that requires them to use a permanent prosthesis, crutches, or a wheel chair; or any mental, hearing, or language disability by which their capabilities are 20 percent of normal, or in the case of blindness.
- Deductions will be maintained for investments in film production and distribution of films made in Mexico. This deduction must be applied against provisional income tax payments.
- The incentive is preserved for taxpayers who carry out long-term projects of productive infrastructure consisting of financed public works agreed on by contract before December 31, 2004. This incentive consists of considering as accruable income the estimates on the work's advancements, even when these estimates are not authorized for collection. The cost of what has been sold corresponding to that income can be deducted.
- The deduction of expenses made in basic and secondary education is maintained. As before, this deduction will not be taken into account in applying the global limit of personal deductions set forth in the new LISR.
- The same benefit to facilitate verification included in the new LISR will apply for the land cargo or passenger transport sector, the land transport of materials sector, and the land transport of urban and suburban passengers sector. This benefit consist of the deduction of up to the equivalent of eight percent of the income from the sectors' own activity, even if they do not have documentation that meets the tax requirements, provided they comply with other requirements.
1. The "Decree that compiles various tax benefits and establishes administrative simplification measures," published in the Official Federal Gazette (Diario Oficial de la Federación, DOF) on December 26, 2013 (the "Decree of December 2013"), in order to continue promoting the donation to food or medicine banks of basic goods for human subsistence in matters of food or health, maintains the benefit of the additional deduction in the income tax on the value of a sale that would have corresponded to that merchandise.
2. The Decree of December 2013 establishes that the tax corresponding to sales made up to December 31, 2013, can be paid in three parts: 33.4 percent in the fiscal year in which it is accrued, 33.3 percent in the immediately following fiscal year, and the remaining 33.3 percent in the next fiscal year.
3. By virtue of the "Resolution of administrative incentives," published in the DOF on December 30, 2013, different forms are established for compliance with tax obligations by taxpayers of the primary and federal land cargo transport, foreign passage, and tourism sectors.
For the fiscal year 2014, these incentives are primarily administrative and for verification. It is also established in this resolution that during the fiscal year brochures will continue to be published and workshops will be offered so that taxpayers in these sectors can learn about their tax obligations and how to comply with them.
4. Through the Decree of 2013, entities in the general regime are permitted to subtract from their tax profit the amount determined for purposes of provisional payments the amount of the PTU paid in the same fiscal year.
5. According to the Decree of 2013, this incentive is offered to the maquiladoras: they may take an additional deduction equivalent to the amount resulting from dividing by two the salaries paid to employees involved in maquila operations (which in turn are tax exempt for them) and subtracting three percent of those exempt payments.
Likewise, those who have paid taxes in accordance with Article 216-bis of the repealed Income Tax Law are granted a term of two years before this Decree enters into force, by which time at least 30 percent of the machinery and equipment used in the maquila operation must be owned by the owner residing abroad with whom the maquila contract has been signed and has not been owned by the company located in Mexico that carries out the maquila operation or by a related party.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.