Global Tax Alert (News from Americas Tax Center) | 9 September 2013

Mexico's President presents tax reform proposal to Congress

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On 8 September 2013, Mexico’s President Pena Nieto presented the long-awaited tax reform proposal (the Proposed Reform) to the Mexican Congress. The proposal must be debated and approved by the two houses of Congress before becoming law.

In addition to increasing the tax rate and eliminating certain deductions, the Proposed Reform includes anti-abuse provisions. The Proposed Reform is lengthy and eliminates some taxes, while creating new ones.

Some of the reforms affecting businesses in Mexico include the following:

Income tax

  • Scheduled reductions in the corporate income tax rate in 2014 and 2015 would be eliminated, leaving the current 30% rate in place. An additional 10% corporate income tax would be imposed on certain profits and dividends. Because the tax on dividends would be on the distributing company, there would be no tax treaty protection.
  • Payments to a related party, resident in Mexico or abroad would be nondeductible, when these payments are not subject to tax or subject to tax at a rate of less than 75% of the Mexican income tax rate.
  • The ability to benefit from treaty provisions will be dependent on filing certain informative information each year, including a statement as to whether the income subject to the benefit is subject to tax in the jurisdiction of the treaty resident.
  • The income tax law would include a definition of maquiladoras that would need to be met in order to benefit from income tax provisions for maquiladoras, including the exemption from a permanent establishment. Importantly, 90% of the revenue must be from exports.
  • The consolidation regime would be eliminated, effective at the end of 31 December 2013. Companies that are still within the first five years of consolidation would continue to consolidate until the five-year period ends. The recapture of benefits of consolidation would be calculated at the end of the period and be paid over a five-year period.
  • A new optional regime for large groups would be established and would be similar to the consolidation regime; however, the effects would be recaptured after three years and would not include certain benefits such as ability to pay dividends in excess of CUFIN (Net after Tax Profit Account). This new optional regime would require 80% ownership and has a few other differences.
  • Limitations on the deductibility of payroll related expenses would be established with respect to benefits that are not taxable to the employee.
  • The rules for foreign tax credits would change with respect to the calculations.
  • The profit sharing base will be the same for income tax, except no deduction for the profit sharing and no use of net operating losses.
  • Fixed assets would need to be depreciated on a straight line basis as the immediate deduction would be eliminated.
  • Pre-operating expenses (exploration) for companies in the mining industry would no longer be entitled to a deduction in the year incurred. These costs would have to be capitalized and amortized over a ten-year period.
  • The rules for financial institutions to create and deduct a general reserve for losses would be eliminated.
  • The marginal tax rate for individuals would increase to 32%, making it a higher rate than the corporate income tax.
  • Special regimes would be eliminated including the regime for real estate investment companies (SIBRAS) and the simplified regime.
  • The Proposed Reform eliminates the current exemption for individuals and nonresidents on gains from the sales of publicly traded shares. The gain would be taxed at a rate of 10%, which is less than the rate applied to non public shares.

VAT

  • The VAT rate of 11% for the border zone would be eliminated. As such, the 16% VAT rate would apply in all areas.
  • Most temporary imports would be subject to VAT upon import into Mexico. Provisions are established to avoid a second layer of VAT if the import regime changes from temporary to permanent.
  • VAT will be applied to certain previously exempt or 0% items including, pets, pet food, interest on mortgages, gum and other processed foods.
  • The exemption from VAT on sales between non residents of goods physically in Mexico but imported on a temporary basis under a qualified regime would be eliminated under the Proposed Reform.
  • The VAT exemption for primary residences would be eliminated under the proposal.

Elimination of certain taxes

  • The Flat Rate Business Tax (IETU) would be eliminated under the Proposed Reform.
  • The Tax on Cash Deposits would be eliminated under the Proposed Reform.

Other taxes

  • The Proposed Reform includes a royalty tax on mining activities. The tax would be based on earnings before interest, depreciation, amortization and taxes at a rate of 7.5%.
  • In addition, a tax or right on the gross value of sales of gold, silver and platinum of 0.5% would be levied under the Proposed Reform.
  • A new excise tax would be created for all flavored beverages containing any type of sugar. This tax is proposed at a rate of MxP$1 per liter.
  • New environmental taxes are proposed on fossil fuels and certain fertilizers. These are imposed at various rates.

Federal Fiscal Code

  • The Proposed Reform includes a provision that the tax authorities may determine and assess a tax if it identifies a taxpayer practice or transaction that does not fall within the tax rules when there is a lack of business purpose for the transactions.
  • For this purpose, a transaction or practice would not have business purpose when there lacks quantifiable economic income or benefit of a transaction for the taxpayers involved distinct from the elusion deferral or refund of the amount paid.
  • The obligation to file a tax audit report (dictamen fiscal) would be eliminated.

  • The reliance on electronic processing would be increased. Taxpayers would be required to provide more information electronically, which would be reviewed by the tax authorities in detail. In addition, the tax authorities may request information or issue documents electronically.

For additional information with respect to this Alert, please contact the following:

Mancera, S.C., International Tax Services, Mexico City
  • Manuel Solano
    +52 55 11 01 6437
    manuel.solano@mx.ey.com
  • Koen van´t Hek
    +52 55 11 01 6439
    koen.van-t-hek@mx.ey.com
Ernst & Young LLP, Latin American Business Center, New York
  • Alfredo Alvarez
    +1 212 773 5936
    alfredo.alvarez@ey.com
Ernst & Young LLP, Latin American Business Center, New York, Miami
  • Terri Grosselin
    +1 305 415 1344
    terri.grosselin@ey.com
Ernst & Young LLP, Latin American Business Center, Houston
  • Oscar Lopez Velarde Perez
    +1 713 750 4810
    oscar.lopezvelardeperez@ey.com

EYG no. CM3791