Mexico: Mexico's Congress Passes Tax Reform

The two houses of the Mexican Congress (the Chamber of Deputies and the Senate) last week passed a tax reform measure which now awaits President Enrique Peña Nieto's signature. The legislation is significantly different than the President's controversial tax overhaul proposal forwarded to Congress on September 8. If signed by the President, as expected, the new tax rules will be effective on January 1, 2014, except as noted below.

The tax reform measure is very similar to the reform measure passed by the Chamber of Deputies and forwarded to the Senate on October 17, which was the subject of a Jones Day Alert dated October 18. Set forth below is a summary of the significant changes included in the reform package as well as a description of material proposals by the executive branch which were rejected or modified by Congress.

Federal Tax Code

New "tax mailbox" process. A new procedure will be established, known as the "tax mailbox", to facilitate and expedite communications between the tax authorities and taxpayers and to allow electronic reviews and tax audits. According to the transitory provisions, the tax mailbox will be available for legal entities on June 30, 2014 and for individuals on January 1, 2015.

Tax reports (dictámenes fiscales). Under current law, companies are obligated to file tax reports prepared by their external auditors, which gives them the benefit of not being audited by the tax authorities until the external auditor is questioned about the tax report. Congress modified the rule to give some companies the option to choose whether or not to file such tax reports, with the continued benefit to delay tax audits. This is more advantageous than the rejected executive proposal, which would have eliminated the opportunity to file such tax reports.

Joint liability for partners and shareholders. Each partner and shareholder having control in the decision making of a Mexican legal entity will be jointly responsible for unpaid taxes and will be required to post a bond or otherwise guarantee tax credits under litigation, according to their percentage share ownership in the legal entity. This new rule is less restrictive than the executive proposal to impose strict liability on all shareholders for the tax liabilities of their legal entities.

Reduced period to challenge tax credits in an administrative appeal. The term to file an administrative appeal to challenge tax credits was reduced from 45 business days to 30 business days. This is less restrictive than the executive proposed 15 business day term. Taxpayers remain entitled to alternatively challenge tax credit determinations directly before the Tax and Administrative Court without first filing an administrative appeal.

Negotiated settlement of tax credit disputes. Taxpayers will be given the option to negotiate directly with the tax authorities, with the participation of the Taxpayer National Ombudsman, to resolve disputes regarding tax credits and amicably terminate tax audits without issuing a tax assessment.

Rejected substance over form provision. Congress rejected the executive proposal to empower the tax authorities to review, under a substance over form approach, transactions in which Mexican taxes were not triggered.

Income Tax

New dividend tax. An income tax will be imposed on any dividend received by individual Mexican residents and corporate and individual non-residents 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% 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% in 2014 and 28% in 2015 and future years, will remain at 30%.

Individual and withholding tax rates. The individual tax rate will be increased from 30% to 35%. This increase goes beyond the more modest proposed increase to 32% by the executive branch. Also, all items of Mexican source payments to non-residents will be subject to withholding at 35% unless the rate is reduced by Mexican law or by tax treaty.

Treaty benefits. Foreign residents claiming treaty benefits will be obligated to appoint a Mexican tax resident as its legal representative in order to file either an informative tax return or a tax report related to the Mexican source payment received by such residents. In addition, the tax authorities may require foreign residents to describe its related party transactions and, through its local legal representative, furnish a written declaration under oath stating that its related party transactions will be taxable in the foreign country and describing the specific foreign legal provisions generating such foreign 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.

Exempted wages and some fringe benefits deduction limitation. The deduction for nontaxable wages and certain nontaxable benefits provided to employees, such as the savings fund, will be limited to 53% of the cost of such nontaxable wages and benefits. Moreover, if the number of different types of nontaxable benefits of the previous tax year are reduced in the following tax year (for example, a company eliminates its savings fund), then the deduction will be limited to 47% instead of 53%. This may be an incentive for companies to reduce different types of nontaxable benefits provided to employees.

Accelerated depreciation of assets. The immediate expensing of certain investments will be disallowed, as originally proposed by the executive branch.

Repeal of deductibility of pre-operating expenses for mines. The allowance of deducting pre-operating expenses for mining companies was eliminated; however, this elimination will enter into force until January 1, 2015. Additional rules impacting the mining industry are discussed below.

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% deduction allowable for these investments, which had been proposed to be eliminated by the executive branch, will remain in effect.

Restricted deductibility of payments to hybrid entities. Payments to related and unrelated hybrid entities will not be deductible unless the payment is proven to be arm's length.

Additional restricted deductibility on foreign related party payments. In addition to the above-described restricted deductibility of payments to hybrid entities, two additional rules will disallow related party deductions. First, technical assistance, interest or royalty payments will be nondeductible when paid to a foreign entity controlled or controlling the Mexican entity if (x) the foreign related party has "pass-through" tax treatment, its shareholders or partners are not taxed in the same jurisdiction and the payment was not agreed on an arm's length basis; (y) the foreign related party considers the payment to be disaggregated; or (z) the foreign related party does not consider the payment to be taxable income. Second, related party payments that are also deducted by another related party will be nondeductible.

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% capital gain 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% 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 much 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 3 to 4 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 5 year tax deferral and this new integration regime will limit deferral to no more than 3 years.

Real Estate Investment Companies. The Congress approved the proposal of the executive branch, eliminating the special tax treatment granted to Real Estate Investment Companies (known as SIBRA for its Spanish acronym). Henceforth, the SIBRA status (that allowed to defer income tax on contributed real estate and allowed not to file monthly tax returns) will not be available anymore.

Flat Tax Elimination

The 17.5% flat tax, which is an alternative cash basis income tax, will be eliminated.

Value Added Tax

Border region. The current 11% tax rate applicable in the border area will be increased to 16%.

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% 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% 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% 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. An 8% excise tax will be imposed on the sale of high caloric food. This new tax was not included in the executive branch proposal and is higher than the 5% rate originally proposed by the Chamber of Deputies.

Fuel and pesticides. An environmental 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

The proposed fee for mining rights was approved by the Congress. The fee will be charged at the rate of 7.5% of net profits of mining companies.

An additional mining fee equal to 0.5% of gross earnings from the sale of gold, silver and platinum was approved.

Next Step

President Nieto is expected to sign the tax reform measure into law after which the new tax rules will enter into force on January 1, 2014, except for provisions having a delayed effective date.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.