Global Tax Alert (News from Americas Tax Center) | 21 October 2013
Mexico's revised tax reform still impacts Oil and Gas industry
Mexico's lower House of Congress voted on and approved a revised version of the proposed tax reform (the Revised Proposal) presented by President Pena Nieto on 8 September 2013. The Revised Proposal will move on to the Senate for debate and vote, however, no further changes are expected on the issues discussed in this Tax Alert.
Overall, the House accepted many of the Original Proposal's changes, including the elimination of the flat rate business tax (IETU) and the tax on cash deposits. This Tax Alert discusses the more significant items included in the Revised Proposal for the Oil and Gas industry.
Income tax rates
Under the Revised Proposal, the corporate income tax rate would remain at 30% as per the Original Proposal. However, the top marginal tax rate for individuals would increase to 35%. The domestic withholding tax rate on certain payments to nonresidents would also be increased to 35%.
10% dividend withholding tax
Additionally, the Revised Proposal would subject dividends paid to Mexican individuals or any foreign residents to a 10% withholding tax. Note that the definition of dividend for this purpose would include, among others, in addition to declared dividends: (1) interest paid on preferred shares; (2) loans to shareholders and partners unless the loan is established for less than one year, incurred in the operations of the business and meets certain requirements; (3) payments that are considered non-deductible and benefit the shareholders; (4) amounts not recognized as a result of omissions of income or unrealized purchases; and (5) transfer pricing adjustments to income or expenses as a result of assessments by the tax authorities for related party transactions. The 10% distribution tax would also apply to distributions from a branch to the home office.
A transitory provision is also included in the Revised Proposal which would limit the withholding tax on dividends to earnings generated in 2014 and subsequent years. For this purpose, the transitory provision refers to distributions from CUFIN as of 2013, being free of tax. Taxpayers will be required to maintain a separate CUFIN account for earnings after 2013. There is not an ordering rule to require that 2014 and beyond earnings be distributed first.
Because this withholding tax would be a tax on the shareholders under the Revised Proposal, treaty benefits should be available. However, the tax authorities would be allowed to request a certification that income, for which a treaty benefit is available, is subject to double taxation, which could have an effect on the application of the treaty benefits for many shareholders (i.e., shareholders subject to participation exemption regimes).
New requirements to claim treaty benefits
The Revised Proposal would retain the requirement for a foreign entity seeking treaty benefits to file certain information with the tax authorities and to appoint a tax representative in Mexico. The Revised Proposal now also makes reference to tax audit reports, which should only be required for the Mexican resident.
The Revised Proposal also would provide the tax authorities with the ability to request that related parties obtaining treaty benefits provide a sworn statement of their tax position and that the income is subject to double taxation. Although it is not clear that the tax authorities could deny a treaty benefit under this provision, this new rule may affect withholding on payments made to entities not subject to taxation abroad or that are taxed under regimes such as the participation exemption or tonnage exemption.
New deductibility requirements
The rule that was included in the Original Proposal to deny a deduction of payments to related parties that were not subject to tax or subject to tax at an effective rate of less than 75% of Mexico's corporate tax rate was amended in the Revised Proposal to deny deductions to residents in a tax haven jurisdiction, if the payment is not at arm's length. Although already required for most taxpayers, compliance with transfer pricing regulations now becomes a requisite for taking the deduction of intercompany payments.
Deductions also would be denied to related parties if payments for interest, royalties or technical assistance that are made to a foreign entity that controls or is controlled by the Mexican taxpayer meet one of these conditions: (1) the payments are made to a foreign entity that is fiscally transparent (as defined), unless the shareholders or partners are subject to tax on the foreign entity's income and the payments are made at arm's length; (2) the payments are not deemed to exist for tax purposes in the country or territory in which the entity is resident; or (3) the foreign entity does not accrue the taxable income under the applicable tax rules.
For this purpose, control is deemed to exist when one of the parties has, either directly or through an intermediary, effective control or control of the administration of the other to the level of deciding the moment to distribute or share revenue, income or dividends.
Among other related party transactions, agreements and structures related to the lease of vessels, rigs or other type of machinery and equipment used by the oil and gas industry would have to be revised base on this new rule, as rental payments are deemed royalties for tax purposes in Mexico.
The Revised Proposal would amend the Original Proposal's rule to deny the deduction of expenses that are also deducted by a related party in another jurisdiction by allowing the deduction if the affiliate is also recognizing income of the Mexican taxpayer in the same year or the subsequent year. This change is significant for branches or other companies treated for tax purposes as branches in other jurisdictions in which their home offices were subject to taxation on income allocated to such branches.
Fifty-three percent of the payments that are considered exempt income for employees would be considered nondeductible, which is in line with the Original Proposal. The Revised Proposal does allow for a deduction for contributions to pension funds, however, subject to this 53% limitation.
VAT on temporary importation is still included in the tax reform; however, as proposed, it should not affect equipment used in the oil and gas industry. Furthermore, the Revised Proposal would allow an immediate credit for “certified” manufacturing companies. The introduction of this VAT rule would be postponed until rules are issued related to the “certification” process and companies have had a chance to obtain the certificate.
The VAT exemption for transfers between nonresidents is included in the Revised Proposal with certain limits. This is relevant for the transfer of vessels, rigs or other machinery and equipment while it is located in Mexican territory, including offshore waters.
Federal Tax Code
The Revised Proposal does not include the general anti-abuse provision. Rather, the recommendation of the tax committee was to strengthen existing rules.
The dictamen fiscal (tax report) would remain as an option for businesses with more than MxP$100 million of gross revenue, MxP$79 million of total assets or more than 300 employees. The annual detailed reporting requirements included in the Original Proposal were maintained for other taxpayers.
The joint liability for shareholders with respect to taxes of a company was amended. Under the Revised Proposal, shareholders would be held jointly liable for the taxes of a corporate entity, in proportion to each shareholder's interest in the company, for certain types of non-compliance. This rule only applies in the case of shareholders or groups of shareholders that exercise effective control. The Revised Proposal includes a definition of effective control.
The requirement to maintain an electronic mailbox for taxes and correspond with the tax authorities electronically remains a provision of the Revised Proposal. The monthly electronic reporting of “accounting” is also still included in the Revised Proposal without detail as to what would be required.
Oil and Gas taxation: One of the tax reform's missing discussions
The Original Proposal included a new tax regime for the Mexican National Oil Company, Pemex; however, its discussion was postponed by the lower house of Congress.
Despite the fact that the Mexican Congress will likely discuss energy reform in the next few months, and there remain many unresolved disputes between the Mexican tax authorities and the oil and gas industry, neither the Original Proposal nor the Revised Proposal contain changes to solve the specific tax issues of the industry. For example, clarification is still needed for depreciation rates for rigs or vessels, the withholding rates applicable for the lease of equipment and the new complications arising from the “Integrated Exploration and Production Contracts.”
For additional information with respect to this Alert, please contact the following:
Mancera, S.C., Mexico City
- • Koen van´t Hek
+52 55 1101 6439
- • Rodrigo Ochoa
+52 55 52 83 1493
Mancera, S.C., Latin American Business Center, Mexico City
- • Terri Grosselin
+52 55 1101 6469
Mancera, S.C., Monterrey
- • Enrique Rios
+52 81 81 52 1850
Mancera, S.C., Merida
- • Henry Gonzalez
+52 999 926 1450 Ext. 2344
Ernst & Young LLP, Latin American Business Center, New York
- • Alfredo Alvarez
+1 212 773 5936
Ernst & Young LLP, Latin American Business Center, Houston
- • Oscar Lopez Velarde
+1 713 750 4810
- • Manuel Perez
+1 713 750 8120
EYG no. CM3896