Mexico: Worldwide Tax Guide 2015 – Determination Of Taxable Income

Last Updated: 1 July 2015
Article by Mario Camposllera, Carolina Ramírez and Ricardo Martínez
This article is part of a series: Click Worldwide Tax Guide 2015 – Key Tax Points for the previous article.

B. DETERMINATION OF TAXABLE INCOME

Taxable income of companies is computed taking into account all income received less deductions allowed by law. The law mentions certain specific items which are not considered income. These include: capital gains, recognition of the equity method of accounting, revaluation of assets and capital.

Allowable Deductions

In general terms, all expenses needed to generate income and recorded pursuant to IFRS may be deducted, except in specific cases where there are certain limits and special rules for deduction.

Allowable deductions include sales discounts, bad debts, interest paid and losses due to exchange and inflation.

Non-deductible expenses include taxes, costs of representation, commercial credits, provisions to estimated reserves, etc.

Investments in certain assets can be deducted in the tax year at a discount, beginning in 2007.

The new Income Tax Law provides that payments for interest, royalties or technical assistance to a foreign entity that controls or is controlled by the taxpayer, will not be deductible when:

  1. The entity receiving the payment is considered to be transparent except where the transaction is carried out at market value and its shareholders or partners are then subject to income tax on income through the foreign company;
  2. Payment is considered non-existent for tax purposes in the country where the alien is located;
  3. The foreign entity receiving the payment does not consider it as taxable income.

Nor are deductible payments that are also deductible for a related party resident in Mexico or abroad, unless the related party accumulates income generated by the taxpayer, either in the fiscal year or the following.

Depreciation And Amortisation

Deduction for investment in tangible or intangible assets is allowed by the law through the depreciation or amortisation of such assets. Freight and handling, insurance, commissions and fees are allowed in addition to the purchase value of the asset. Depreciation and amortisation are calculated for full months commencing with the month when the asset was purchased and using the straight-line method with no allowance for estimated disposal values.

As a general rule, all types of assets except land, may be depreciated or amortised for tax purposes. The basic depreciation and amortisation tax rates allowed are as follows:

Outlays made prior to commencing Operations 10%
Industrial buildings and warehouses 5%
Machinery and equipment 10% except on assets used for specific activities
Furniture and fixtures 10%
Cars, vans and trucks 25%
Leasehold improvements Lease terms
Environmentally-friendly machinery and equipment 100%

Stock / Inventory

Purchases of raw materials, goods in process or finished goods intended for sale are deductible under the cost of sales system when sold by the company. Taxpayers may choose either method of inventory valuation indicated below:

  1. First in - First Out (FIFO);
  2. Identified Cost;
  3. Average Cost;
  4. Retailer.

Inflation

The law recognises the effects of inflation on taxpayer's debts and financial assets so that, in the case of assets, the view is taken that there is a loss of purchasing power of said assets with the passing of time and, in the case of liabilities, a gain is recognised. For such purpose, an annual average of financial assets and debts are determined. The inflation factor is applied to the delta obtained comparing the assets and debts, when the debts are higher there will be a taxable income, and when the assets amount is higher there will be a deduction.

Interest Deductions

A thin capitalisation regime was incorporated into the law in 2005 in relation to loan finance obtained by Mexican-resident companies from overseas. Taking both related party and non-related party debt into account, interest payments are not deductible where the debt/equity ratio exceeds 3:1. Companies that do not meet this ratio will have a term of five years to reduce it in equal proportions per year. These rules do not apply to financial institutions. The interest paid that exceeds this ratio will be non-deductible. From 1 January 2007 onwards, only loans with foreign parties on which the company is required to pay interest are taken into account in determining the debt/ equity ratio.

Losses

Tax losses may be used to offset taxable income obtained during the following ten years. The amount of tax losses is uplifted for inflation for the period from July of the year when they occur to June of the year when they are offset.

Employee Profit Sharing

All employees of a company are entitled to a share of its profits. The profit sharing is computed each year at the rate of 10% of taxable income if any. There are certain specific items described in the law which have to be added or deducted from the taxable income for profit sharing computation purposes. Most of these relate to differences in the treatment of inflation accounting.

From 1 January 2005, profit sharing paid in one year is deductible from the after tax profit or loss of the following year.

Incentives

The Federal Revenue Law establishes the following incentives for the FY 2015:

  • Fiscal tax credit against Income Tax for consumption of diesel in business or transportation activities.
  • Refund of the Special Tax on Production and Services from consumption of diesel in agriculture activities.
  • Fiscal tax credit against Income Tax of the fees for use of toll roads.
  • Exemption of the New Car Tax for sale or imports of electric vehicles.
  • Exemption of the Tax on imports of natural gas.

C. FOREIGN TAX RELIEF

Controlled Foreign Corporations / Tax Havens

The CFC regime when enacted was based on a geographical conception such that it only applied to transactions realised in specific countries or regions (Black List). Currently, this regime applies to income wherever derived where the tax charged was less than 75% of the tax that would have been paid in Mexico.

Income is not subject to the CFC regime where the Mexican company does not control the overseas company or less than 20% of its annual income is passive income. For this purpose, control is that which allows the parent to decide the timing of distributions of dividends or profits.

D. CORPORATE GROUPS

The new Income Tax Law provides the elimination of Tax Consolidation regime, however, it grants the possibility to benefit from the following schemes:

  • Continue to tax under the consolidation regime until FY 2017, for which determination of tax must continue to be calculated in the same way as in the prior legislation. Once completed the aforementioned period, the taxpayer must choose one of the two taxation schemes indicated below.
  • Avail to new rules for determining the tax under the scheme of "deconsolidation" under which tax must be calculated and reported within the time specified by the new Income Tax Law. The tax charge resulting from the deconsolidation will have to be paid to the tax authorities as follows:

    • 25% by the last day of May 2014.
    • 25% by the last day of April 2015.
    • 20% by the last day of April 2016.
    • 15% by the last day of April 2017.
    • 15% by the last day of April 2018.
  • In lieu of the tax consolidation regime, it is created a new optional regime of inclusive corporations in which payment of tax is partially deferred by three fiscal years.

E. RELATED PARTY TRANSACTIONS

The Secretary of the Treasury is empowered to alter the tax loss or profit in the case of transactions between related parties made at prices other than market prices, including sales or purchases, loans, rendering of services, lease or sale of real property, as well as use or transfer of intangible assets, when they are not realised at a fair market value.

Taxpayers are obliged to carry out an annual transfer pricing study. Taxpayers must apply the best method rule. As a default, this is taken to be the Comparable Uncontrolled Price Method (CUP), unless the taxpayer can prove that such a method is not applicable.

Since 2014, the maquiladoras (Related Parties) are required to perform the calculation of safe harbour or submit an advance transfer pricing agreement (APA)

For the application of the benefits contained in tax treaties and in the case of transactions between related parties, the tax authorities may request the resident abroad to demonstrate the double juridical taxation through a under oath statement.

F. WITHHOLDING TAXES

Dividends

From FY 2014 individuals will be subject to an additional fee of 10% on dividends or profits distributed by corporations resident in Mexico. Entities distributing dividends are required to withhold tax and will pay it together with the interim payment of the corresponding period.

Additionally, individuals who receive dividends from foreign companies shall be required to make payment of an additional 10% tax, by the 17th of the following month in which the income is received.

Interest

The withholding tax payable on interest to non-residents depends on the type of interest in a range from 4.9% to 21% for payments to banks and other financial institutions and 35% in other cases.

Royalties

Royalties payable to non-residents are taxed at the following rates:

For the right to use railroad wagons 5%
Other categories of royalties 25%
Royalties paid to residents of countries with a preferential tax regime 40%

G. EXCHANGE CONTROL

There are no exchange restrictions in Mexico. Foreign currencies can be freely bought, sold and sent or transferred abroad. However, since 2010 there are limitations to USD cash transactions.

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 – Key Tax Points for the previous article.
This article is part of a series: Click Worldwide Tax Guide 2015 – Electronic Accounting for the next article.
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