Mexico: Worldwide Tax Guide 2015 – Key Tax Points

Last Updated: 26 June 2015
Article by Mario Camposllera, Carolina Ramírez and Ricardo Martínez

BASIC FACTS

Full name: United Mexican States

Population: 117.5 million (2013 PRB)

Capital: Mexico City

Area: 1.96 million sq km (758,449 sq miles)

Major language: Spanish

Major religion: Christianity

Monetary unit: 1 peso = 100 centavos

Internet domain: .mx

International dialling code: +52

SHCP website: www.shcp.gob.mx

KEY TAX POINTS

  • All income obtained by companies resident in Mexico is taxed, regardless of the source.
  • Every state in Mexico requires specific contributions from its inhabitants, the largest being property tax. In some states employers are charged tax on wages paid to employees.
  • Assets tax is charged on the value of a taxpayer's assets.
  • The Treasury may alter the tax loss or profit where transactions between related parties are not made at market prices. Taxpayers are obliged to carry out an annual transfer pricing study.
  • A controlled foreign companies' regime applies to transactions realised in specific countries or regions.
  • Individuals will be subject to an additional fee of 10% on dividends or profits distributed by corporations resident in Mexico. Additionally, individuals who receive dividends from foreign companies shall be required to make payment of an additional 10% tax
  • Resident individuals are taxed on their worldwide income. In the case of foreign income, taxes paid abroad are generally credited against taxes payable in Mexico.

A. TAXES PAYABLE

Federal Taxes And Levies: Company Tax

Tax is calculated for each calendar year, comparing income obtained less allowable deductions. Currently, the corporate tax is 30% of taxable profits.

All income obtained by companies is taxed, regardless of the source, except in the case of branches of foreign companies. Branches are taxed based on income attributable to the branches.

Foreign companies, branches and persons established in Mexico which obtain income abroad are allowed to credit any foreign taxes paid against Mexican taxes payable by them up to the total local tax applicable in each case.

As of FY 2014, with the entry into force of the New Income Tax Law new rules are expected to establish the credit of income tax paid abroad, among which are the following:

  • In case of indirect interest, the crediting would proceed the entity must reside in a country with which Mexico has a broad information-sharing agreement.
  • It is stated that limiting the crediting will be established by each country.
  • In the case of dividends, new obligations are foreseen:

    1. The creditable tax and credit limit must be calculated for each fiscal year;
    2. Keep a specific record for this identification since the acquisition of the equity interest, which should contain information on earnings on which dividends are distributed even if they relate to previous years;
    3. Failure to identify elements for the financial year to which those profits corresponds to, they will be deemed as a FIFO (first profits generated are the first to be distributed);
    4. To have the supporting documentation.

Failure to comply with the above requirements, accreditation will not be able to be done.

In the case of Permanent Establishment in Mexico, the crediting can only be made by those revenues attributable to the PE which may have been object of withholding tax.

The new provisions provide that a foreign tax paid abroad is considered as income tax when complying with SAT rules and is covered by a treaty to avoid double taxation in force to which Mexico is a part of.

Capital Gains Tax

Taxable profits on the sale of land, securities and other assets are calculated by deducting the tax cost from the selling price. The tax cost is based on the original cost of the asset being sold, adjusted for inflation for the period during which the asset was owned.

The procedure for determining the gain on disposal of shares is generalized by establishing shareholder with a shareholding of up to 12 months, the option to calculate the fiscal cost considering the proven acquisition cost decreased from paid reimbursements and dividends.

Loss from the sale of shares and other securities is deductible only if certain requirements are met, and may be offset against profits obtained in the same year or in the following five years.

Branch Profits Tax

Branches compute income tax in the same manner as companies established in Mexico and apply the 30% corporate tax rate on taxable income.

Branches are entitled to deduct expenses incurred both abroad and in the country provided that certain conditions are met. In respect of the prorate expenditures, payments made by tax payer will not be deductible when such payments are also deductible for a related party resident in Mexico or abroad, except that the related party accumulates earned Income in the same fiscal year or the following.

Remittances sent abroad in the form of payments of invoices, interests, royalties, reimbursement of expenses or for any other reason are subject to withholding tax of between 25% and 28% and are deductible for income tax purposes if adequately supported.

Value Added Tax (VAT)

Companies and persons who engage in the business of selling, rendering services, leasing, importing or exporting goods are subject to VAT. In most cases, this tax does not represent an expense for the companies or persons since it is collected from the consumer of the goods or services and paid monthly to the tax authorities.

The VAT paid on purchases of goods and services received can be offset against the VAT collected and payable. In the case that the VAT paid exceeds the VAT collected in a given period, companies and persons are entitled to be refunded for the difference by the tax authorities or, under certain conditions, to offset the VAT receivable against other taxes payable.

The following rates apply in general, depending on the type of activity:

  • 0% in the case of priority activities such as basic foods, medicines, agricultural, exports, etc.;
  • 16% for all other activities.

The law provides for specific exemptions on certain other activities.

From 1 July 2006, tourists are reimbursed for the VAT tax charged upon the sale of Mexican merchandise when departing to their home countries by air or sea.

Fringe Benefits Tax (FBT)

Specified employee benefits provided to employees over and above those required by law are exempt from income tax up to certain limits and are deductible for companies insofar as they are granted to all employees.

Local Taxes

Every state in the Mexican Republic requires specific contributions from its inhabitants, the largest being property tax. Some states tax wages paid to employees at an average of 2%.

In the Federal District (Mexico City), employers (physical persons and companies) must pay 2.5 % on wages paid to their employees every month.

Real estate is subject to a bi-monthly payment based on the official assessed value of the property. The maximum bi-monthly rate paid amounts to approximately 0.065%.

Other Taxes Social Security Payments

All employers must register their employees with the Mexican Institute of Social Security which provides benefits to them for job-related and other disabilities, as well as pensions and death benefits.

Amounts paid for each employee to the Institute are computed on the basis of all payments made to the employee for wages and benefits, with few exceptions that meet certain requirements. These include savings, food, prizes for attendance and punctuality, as well as a portion of overtime and profit-sharing.

Approximately one third of the payments are withheld by the employer from the employees' wages and the other two thirds are paid by the employer.

Both employee and employer contributions should be made by the employer on a monthly basis.

Beginning FY 2014, it is required to issue digital tax receipts for wages paid by employers to each of employee.

National Housing Fund For Workers (INFONAVIT)

The objective of this Institute is to provide housing for all workers, usually favouring workers in low-income brackets.

The employer, on behalf of the employees, must make bi-monthly contributions to the Institute of 5% of the wages and benefits paid with a limit of 25 'minimum monthly wages' (approximately MXN $52,575.00). As in the case of social security, contributions and benefits received by employees from the Institute are tax-exempt. With this payment, the employers comply with their constitutional obligations to provide housing for employees.

Foreign Trade Taxes

Customs duties are maintained both for import as well as for export. Duties on export are minimal or none and import duties average 20%, depending on each specific item. In accordance with the North American Free Trade Agreement (NAFTA), duties on imports from the United States and Canada will be gradually eliminated over a 15 year period and will disappear completely at the end of that time. Beginning in 1994, Mexico eliminated taxes on the importation of specific products from the United States and Canada.

Special Taxes

Taxes on production and services are levied on relatively few items such as the importation and sales of cigars, alcoholic beverages and supplying agency services for brokerage, distribution, flavoured drinks, etc of said goods. There is also a special tax on telephone services. A tax on new automobiles and vehicle ownership is applied directly to purchasers and owners of automobiles.

Tax On Purchase Of Real Property

A tax of 1% to 5% of the assessed value of the property is paid by the buyer on all purchases of property. The federal government works with the states of the Republic so that in co-operating states only the local tax applies with no levy of federal tax.

To read this Guide in full, please click here

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.

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This article is part of a series: Click Worldwide Tax Guide 2015 – Determination Of Taxable Income for the next article.
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