On October 17, the Mexican Congress modified the proposed tax
reform that was prepared by the executive branch (led by President
Enrique Peña Nieto) and forwarded to Congress on September
8. The executive branch's tax proposal had met with opposition
from conservatives in Congress and many in the global business
community who expressed concern that the adverse tax impact on
multinationals and domestic corporations would negatively affect
Mexico's investment climate. Many of the corporate tax
increases proposed by the executive branch were removed in the tax
reform legislation prepared by Congress.
The two houses of the Mexican Congress (i.e., the Chamber of
Deputies and the Senate) will debate provisions of the tax reform
package during the next few days, and the reform is expected to be
approved—either in its current form or with
amendments—by October 31. Notable provisions are described
below, including tax rate changes, flat tax repeal, VAT reform, and
other provisions affecting the popular maquila program, foreign
residents, and Mexican individuals and companies.
Income Tax
The main income tax proposals are as follows:
New Dividend Tax. An income tax will be imposed
on any dividend received by individual Mexican residents and
corporate and individual nonresidents from a distributing Mexican
company. Dividends distributed to Mexican corporate shareholders
will be exempt. The dividend tax will be imposed at the shareholder
level (unlike the executive branch proposal to impose the tax at
the distributing company level). The tax rate will be 10 percent of
the gross dividend amount, subject to reduction pursuant to one of
the 56 double tax treaties Mexico has in force. The tax is imposed
only on profits generated after 2013. The tax is collected through
a withholding regime imposed on the distributing company.
Corporate Tax Rate. The corporate tax rate, which
was scheduled to be reduced to 29 percent in 2014 and 28 percent in
2015 and future years, will remain at 30 percent (as proposed by
the executive branch).
Individual Tax Rate. The individual tax rate will
be increased from 30 percent to 35 percent. This increase goes
beyond the more modest proposed increase to 32 percent by the
executive branch.
Treaty Benefits. In related party transactions,
foreign residents claiming treaty benefits may be asked to appoint
a Mexican resident as their legal representative that will furnish
a written declaration under oath stating that the relevant
transaction is in fact taxable in the foreign country, including
the foreign legal provisions that generate such double taxation.
The legal representative will be jointly liable for unpaid taxes of
the foreign resident.
Foreign Tax Credit. A new foreign tax credit
system will be introduced on a per-country basket basis. The system
will allow, in some cases, an indirect tax credit when Mexican
taxpayers receive dividends from foreign companies.
Fringe Benefits Deduction Limitation. The
deduction for nontaxable fringe benefits provided to employees,
such as the savings fund, grocery coupons, etc., will be limited to
41 percent of the cost of said benefits paid to the
employees.
Immediate Deduction of Investments. The immediate
expensing of certain investments will be disallowed, as originally
proposed by the executive branch.
Deduction of Deemed Costs for Real Estate
Developers. This deduction, which had been proposed to be
eliminated by the executive branch, will remain in effect.
Deduction for Insurance Companies. This
deduction, which had been proposed to be eliminated by the
executive branch, will remain in effect.
Sustainable Energy Accelerated Deduction. This
100 percent deduction allowable for these investments, which had
been proposed to be eliminated by the executive branch, will remain
in effect.
Foreign Related Party Deductions. An executive
branch proposal—to prohibit the deductibility of payments to
foreign related parties when income derived from those payments is
taxed abroad at a tax rate less than 22.5 percent—will be
substituted with a new prohibition to deduct payments to hybrid
entities not subject to income tax in their country of residence or
establishment. Additionally, payments made by Mexican taxpayers to
foreign related parties will not be deductible if those payments
are also deductible in the foreign country.
Capital Gains Derived from Sales Through the Mexican Stock
Market. Individuals who are tax resident in Mexico and
foreign tax residents will no longer be entitled to the tax
exemption on capital gains derived from sales through the Mexican
Stock Market. As proposed by the executive branch, a 10 percent
capital gains withholding tax will be imposed, to be withheld and
remitted by the intermediaries trading the stock through the Stock
Market.
Maquila Definition. The executive branch proposal
to limit the definition of "maquila" to exporters of 90
percent of their sales is rejected. However, in order for existing
permanent establishment protection and other favorable tax rules to
apply, the maquila must derive all of its income from designated
maquila operations. In addition, new requirements will be
introduced as to which entity must own the equipment used by the
maquila in its manufacturing operations.
Shelter Maquila. The period in which a shelter
maquila is allowed to pay reduced income taxes under the regime
will be broadened from three to four years.
Consolidation Regime. The current tax
consolidation will be eliminated (as proposed by the executive
branch) and replaced with a similar regime (so-called
"integration regime"), which is similar to the
consolidation regime. A significant difference will be that the
consolidation regime allowed a five-year tax deferral, and this new
integration regime will limit deferral to no more than three
years.
Flat Tax Elimination
The 17.5 percent flat tax, which is an alternative cash basis tax, will be eliminated.
Value Added Tax
Border Region. The current 11 percent tax rate
applicable in the border area will be increased to 16
percent.
Tax Exemptions. The proposal by the executive
branch to eliminate the tax exemptions for mortgage interest, sales
of personal residences, and tuition for private schools will be
rejected, and these exemptions will remain in effect.
Maquila Regime. The proposal by the executive
branch to impose a 16 percent VAT on the sale of maquila-produced
goods located in Mexico between foreign residents or between a
foreign resident and a maquila will be rejected. The 0 percent VAT
tax rate for these transactions will remain in effect.
The proposal of the executive branch to eliminate the exemption
applicable to a maquila's importation of goods will likewise be
rejected. Instead, the VAT will be technically imposed on maquilas
for goods that are imported for use in maquila production, but the
tax would be eliminated by a 100 percent tax credit; accordingly,
there will be no cash VAT imposed on these transactions. In order
to be eligible for the credit, each maquila will have to be
certified by the tax authorities beginning in 2015 according to
rules that will be published once the VAT reform is enacted.
Excise Tax
Junk Food. A five percent excise tax will be
imposed on the sale of high-caloric food. This is a new tax and was
not included in the executive branch proposal.
Fuel and Pesticides. An excise tax will be
imposed on fuels and pesticides.
Soft Drinks. A tax of one Mexican peso per liter
of soft drinks will be imposed, as proposed by the executive
branch.
Mining Fee
A fee for mining rights will be charged at the rate of 7.5 percent of net profits of mining companies, as proposed by the executive branch.
Next Steps
The Mexican Congress will debate the provisions of the Tax
Reform package during the next days, and the reform is expected to
be approved (either in its current form or with amendments) by
October 31.
Jones Day has highly experienced international taxation
practitioners who can assist in any matter that may arise on the
subject.
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.
