The government has identified transfer pricing as an area where there is low-hanging fruit.

The risks of emerging markets are well known and even a savvy global company can stumble over, including:

• Complex regulations
• Local political and cultural nuances
• Bureaucratic obstacles
• Unclear business processes

In this spotlight, we focus on Mexico’s tax system, which can be quite favorable to foreign investors but has nuances that should not be underestimated. We caught up with Manuel Solano, Tax Ernst & Young (Mancera SC) Leader in Mexico, to discuss the most important tax features of the market.

Does Mexico offer any special tax advantages to investors?

"On the tax end, really what Mexico has the most to offer is the ‘maquila’ program,” says Solano.

Created in the 1970s to attract manufacturers to Mexico, the maquila or maquiladora program, which refers to free-trade-zone manufacturing operations, gives foreign manufacturers a 17% corporate tax rate on manufacturing activities. Outside the program, Mexico’s statutory corporate tax rate stands at a fairly competitive 30% of corporate earnings.

What are the biggest tax risks?

“Over the last few years, the tax administration has become fairly aggressive, and it is constantly challenging transactions engaged by taxpayers which they consider to be aggressive. Thus far, this has been largely confined to supply chain structures with a foreign principle in place, debt push-downs, IP migrations and headquarter charges,” says Manuel.

Are there any particular issues companies should be watching closely?

“If I had to pinpoint where taxpayers are most vulnerable, it would be in transfer pricing. The government has identified transfer pricing as an area where there is low-hanging fruit and they're very keen on focusing on that aspect,” Solano says.

"Largely, Mexico follows OECD principles, so basically on the transfer pricing front you would look to pretty much what I guess you're looking at in continental Europe and the US. Probably the most notable difference is that Mexico takes a transaction-type approach and not a profit-based approach, and also the legal formalities related to contemporaneous documentation, the filing of information or returns on related-party transactions, and payments abroad.”

How does Mexico’s tax regime compare to others in Latin America?

“Mexico has by far the most developed tax system in the region,” says Solano.

“It's sort of the exporter of tax legislation. Largely this has to do with historical reasons. Dating back to the Aztecs, Mexico already had a tax system, and again also its proximity to the US has basically in many respects enabled Mexico to be at the forefront of tax legislation.”

“If you look at Mexico, Mexico is among the pioneers in the world when it comes to transfer pricing, CFC legislation, foreign tax credits, the filing of consolidated returns,” Solano says.

“Clearly in the income tax arena, it probably has the most sophisticated tax system in the region, and then on the VAT front, it's the only country in the region that has a European-type system of value added tax.”

Yet taxation is only at the federal level, he adds, so in this respect, the system is quite simple.

Further reading

Tax Policy and Controversy Outlook 2012
For a deep analysis of the perspectives of policy in Mexico and other markets in the Americas, click here.

Trade Watch
To read about the most important updates in Mexico's customs and international trade policy, click here.

<< Previous | Next >>