Personal Income Tax Rates
Business tax earnings are taxed at a fixed rate of 34%, and some special rates apply to income from prizes. In other cases, progressive rates apply. The table of progressive rates for the year is, in effect, compiled by adding together the twelve monthly wage withholding tax tables in force during the year. (These tables are adjusted semiannually to take into account the effects of inflation.) Table A shows wage withholding tax rates as of January 1996.
TABLE A WAGE WITHHOLDING TAX RATES AS OF JANUARY 1996 MONTHLY INCOME TAX WITHHELD Lower Limit Upper Limit Fixed Amount Rate on Excess (Ps$) (Ps$) (Ps$) over Lower Limit(%) 0.01 193.31 - 3 193.32 1,640.72 5.80 10 1,640.73 2,883.41 150.53 17 2,883.42 3,351.85 361.80 25 3,351.86 4,013.06 478.90 32 4,013.07 8,093.79 690.49 33 8,093.80 12,756.93 2,037.12 34 12,756.94 - 3,622.59 35
Treatment Of Families
Married couples may adopt the concept either of joint ownership of property or of separate ownership of property. For couples who adopt the concept of joint ownership of property, income from capital gains and capital investments, including interest and rents, is regarded as joint income, and each spouse must declare 50% of such income. Couples who adopt the concept of separate ownership of property must declare all income individually. Children who earn taxable income are regarded as taxpayers in their own right.
To determine annual taxable income, individuals must determine the income earned in the calendar year for each income category prescribed by law, make the deductions authorized for each category, add together the net income from each category, and subtract authorized personal deductions from that sum. If the deductions for a given category of income exceed the income in that category, the difference may be subtracted from other categories of income, excluding income derived from independent personal services. As an exception, income from business activities is taxed separately from other types of income.
Personal income tax is levied on receipts in cash, kind, or credit. Gains on the sale of shares, buildings, land, and personal property are chargeable as taxable income when the transaction is carried out, whether the proceeds are received in cash or by way of credit. Salaries, professional fees, rent from real property, most types of interest, and dividends are generally taxable on the basis of the amount received.
All income derived from employment is subject to tax (apart from that described at "Exempt income" below), including income from profit sharing, remuneration paid to members of boards of directors, bonuses, gratuities, allowances, and some fringe benefits. If the rate of interest on a loan from an employer to an employee is less than the daily average interest rate on a ninety-day treasury certificate during the prior month, the resulting difference or rate is applied to the outstanding balance and is taxable as part of employment income. Employment income is subject to tax withholding at source. The amounts withheld may be credited against the taxpayer's final liability. No deductions are authorized for expenses incurred in earning employment income.
Income From Personal Services
Income from personal services consists of all income from the rendering of independent personal services that does not fall within the category of employment income (for example, royalties earned by authors). Expenses that were necessarily incurred in earning the income may be deducted from gross income. An excess of expenditure over income may not be deducted from other income.
Real Estate Rental Income
Individuals renting out residential real estate may either itemize their deductions or take a standard deduction of 50% of the gross rental income.
Income From The Acquisition Of Goods
Income from the acquisition of goods includes goods received as donations, except exempt donations; treasure troves; goods acquired at a cost lower than their real value; and permanent constructions and improvements made to real property by the tenant when ownership of the construction or improvement is transferred to the owner. The tax authorities may require that the value of the goods be appraised by an expert. In the case of goods acquired at a cost below their real value, if the appraisal value is in excess of 10% of the agreed-upon price, the buyer is taxed on the difference.
Individuals who obtain income from the acquisition of goods may deduct federal taxes (except income tax), local taxes, and notarial expenses incurred for the purposes of the acquisition; expenses incurred in lawsuits establishing the right to acquire; and appraisal expenses and commissions paid by the acquirer.
Income From The Transfer Or Disposition Of Goods
Capital gains realized by individuals from the transfer of immovable property, securities, and personal property are taxed as income from the transfer or disposition of goods. Acquisition cost is reduced by depreciation under rules that vary according to the nature of the asset sold. That reduced acquisition cost is then adjusted for inflation on the basis of a factor for the period from the date of purchase to the date of sale. The adjustments to be made in the case of shares are similar to those applying to companies (see "TAXATION OF RESIDENT ENTITIES"). In the case of real property, payments made for real estate appraisals, both in relation to acquisitions and sales, are deductible. To arrive at tax rates, the gain must be divided by the number of years that have elapsed between purchase and sale, subject to a maximum of twenty. The resulting amount is added to the individual's taxable income for the year. The amount of the gain not added to taxable income is taxed separately at the average effective rate applicable to the individual's taxable income for the year (including the portion of the gain added to income) or at rates over the last five years.
Income From Business Activities
Individuals who carry out business activities must determine their business tax earnings (total income from business activities less authorized deductions, including tax losses carried forward). The rules for determining taxable income and provisional payments of income tax and for setting off losses are similar to those described at "TAXATION OF RESIDENT ENTITIES" for companies. Business tax earnings are not added to income obtained from other categories; a fixed rate of 34% is applied instead of the rates applying to other income. However, individuals who obtain income from business activities may opt to add to their other income any withdrawal or earnings, in which case the accruable amount is that resulting from multiplying these earnings by the factor of 1.515. Tax at the rate of 34% of the accruable amount may be credited.
Individuals engaged in business activities whose income for the previous year did not exceed Ps$1,484,533 (as of January 1996) may opt to have their taxable income from those business activities determined on a simplified basis. Special rules also apply to some low-income retailers.
Dividend income includes profits distributed by resident companies; profits obtained by shareholders of resident companies from repayments arising in the course of a liquidation or capital reduction; and loans to shareholders, except those that are a normal result of company transactions or are for less than one year at an interest rate equal to or higher than that established yearly for late tax payments. Companies that make distributions to their shareholders must pay tax at the rates given in "WITHHOLDING TAXES". For residents and nonresidents alike, this tax is generally final. For individuals, this rule means that they do not have to add dividends to other income in calculating tax payable. However, resident individuals whose level of income gives them an effective income tax rate below the maximum rate of 35% may add an adjusted figure for dividends received to the other income earned during the calendar year. The adjusted figure for 1996 is determined by multiplying the actual dividend by a factor of 1.515. Tax at the rate of 34% of the adjusted figure may be credited to annual income tax.
Interest income includes interest derived from any class of bonds, debts, financing granted by credit institutions, securities quoted on the Mexican stock exchange, and exchange gains on transactions denominated in a foreign currency but payable in Mexican pesos. Certain items of interest are regarded as other income (see below).
Income From Prizes
Income from prizes includes income from lotteries, raffles, games of chance, and contests. Income tax is charged at special rates of 8% on prizes of up to Ps$8 and 15% on prizes over that amount.
Other income includes all income of individuals that does not fall within any of the other categories and is not expressly exempt from tax. Various types of interest are regarded as other income, including interest on credit documents or credit acquired from or transferred to persons other than credit institutions or the stock exchange. The taxable amount of interest derived from such credit documents or credit is arrived at by deducting the inflationary component from nominal interest, which means that tax is incurred only when interest earned exceeds inflation for the period. If inflation is higher, the individual may deduct the inflationary loss. Other types of interest regarded as other income, including exchange gains treated as interest, are taxable. Other income for individuals also includes that arising from derivatives, in which case the same rules applicable to corporations are followed to determine accruable gain or deductible loss and interest.
Exempt income includes fringe benefits provided to individuals earning only the general minimum wage for their geographical area, as long as the benefits do not exceed the minimum amounts prescribed by labor law; for employees earning more than the general minimum wage, a portion of vacation bonuses and profit-sharing payments; a portion of overtime pay and pay for work on nonworking days; a portion of retirement and pension fund benefits; as a rule, income from savings funds established by companies; severance or retirement pay received from employers, up to specified limits; fringe benefits such as scholarships for employees and their children, provided that they are extended to all employees; gains on the sale of a home if the taxpayer lived there for at least two years prior to the sale; gains on sales of specified shares or other securities traded through an authorized stock exchange or similarly active market; income from specified derivatives related to publicly traded shares or securities; gains on sales of other personal property, up to specified limits; yields on treasury certificates and some other bonds issued by the federal government if various conditions are met; inheritances; gifts to immediate family members; other donations that do not exceed specified limits; and royalties on copyrights for musical and literary works if conditions are met.
PERSONAL DEDUCTIONS AND RELIEFS
In addition to the deductions that are allowed under the rules for each category of income, individuals may claim personal reliefs. A general credit may be claimed against the final tax liability, equivalent to 10% of wages at the annual general minimum salary, restated semiannually. Deductions include medical and hospital expenses for the individual and dependents, to the extent that they are paid to persons or institutions resident in Mexico; funeral expenses for dependents; donations to authorized institutions; and voluntary employee contributions toward retirement insurance.
In addition, residents may deduct from their total income deposits made in the tax year in special personal savings accounts, pension plan insurance premiums paid to Mexican institutions, and the cost of shares in specified investment companies. These deductions may not, in total, exceed in any calendar year Ps$69,237 (as of January 1996). When the deposits are withdrawn, the pensions collected, or the shares sold, the proceeds are treated as other income (see "Other income" above) for the year in which the event occurs. However, the applicable tax rate may not exceed that in force for the year in which the deposits or other payments were made. These transactions are subject to a withholding tax of 35%. If this withholding results in an overpayment of tax on total income, the taxpayer may set off the overpayment against future tax payments or may request a refund.
All individuals are entitled to tax credits that take into account both the income receivable and the tax chargeable on that income. In effect, the lower the amount of the individual's income, the higher the amount of the credit. The credits are calculated according to tables (see Table B for an example).
TABLE B TAX CREDITS AS OF JANUARY 1996 MONTHLY INCOME TAX WITHHELD Lower Limit Upper Limit Fixed Amount Rate on Excess (Ps$) (Ps$) (Ps$) over Lower Limit (%) 0.01 193.31 - 50 193.32 1,640.72 2.89 50 1,640.73 2,883.41 75.27 50 2,883.42 3,351.85 180.89 50 3,351.86 4,013.06 239.46 50 4,013.07 8,093.79 345.24 40 8,093.80 12,756.93 883.89 30 12,756.94 16,187.56 1,359.53 20 16,187.57 19,425.05 1,599.68 10 19,425.06 - 1,712.99 -
The rules for deducting losses on business activities are similar to those applying to companies (see "TAXATION OF RESIDENT ENTITIES"). Capital losses must be divided by the number of years that fall between the date of purchase and the date of sale of the asset, up to a maximum of ten years. The resulting portion of the loss may be deducted from taxable income in the year of sale only. The remaining capital loss (excess of the total capital loss less the current-year deduction) may offset capital gains in the next three years by way of a tax credit.
Recoverable tax is calculated by multiplying the remaining capital loss by the individual's average effective tax rate in the year in which the loss was suffered or, if no tax was payable in that year, by the rate for the next year in which tax is due, provided that the year falls within three years of the year of loss. Recoverable tax determined in this way is credited in the subsequent three years against tax due on capital gains and not against tax due on other categories of income.
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.
For further information contact Deirdre Silberstein, Deloitte & Touche, Washington on +1 202 955 4000 or enter a text search 'Deloitte & Touche' and 'Business Monitor'.