The annual bill containing tax changes has been submitted to Congress. As usual, the changes affect, among others, the tax code, income tax and VAT. The main changes are summarized below.

Tax code

Tax inspections and the procedure for disputes would be simplified. Inspections and audits would be limited to 6 months (currently 9 months). As a rule, accounting records will have to be kept for 5 years (currently 10 years).

The changes also affect certain provisions relating to fines:

  • fines which are a fixed percentage or an amount with a minimum and maximum and which involve taxpayers whose gross revenue in the preceding year did not exceed MXN 1 million will be automatically reduced by 50%;
  • failure to file a return and pay the tax due will be treated as fraud when the offense persists for a period of 12 months (currently 6 months);
  • the intentional element is added in order to treat some offenses as fraud; and
  • the amount of some other fines will be modified.

Certain procedural aspects have also been changed. For example, temporary seizures would be allowed even with respect to unassessed liabilities.

In addition, nonresidents will be allowed to register as taxpayers in the Mexican taxpayer register, but the registration would not entitle them to claim tax refunds.

Income tax

The definition of permanent establishment would be broadened to include:

  • exploitation activities (currently, only exploration and extraction activities are mentioned); and
  • the activities of insurance companies carried out by dependent agents where the premiums are paid in Mexico or the risks are situated there.

The changes also affect the regime of controlled foreign companies (CFCs). The CFC regime will apply even when investments are made through an entity located in a nonlisted country if the entity is merely used as a conduit for investments in a tax haven. This rule will not apply if:

  • the conduit is situated in a country which has enacted CFC anti-avoidance rules; or
  • more than 80% of the conduit's income is other than passive income from direct or indirect investments in a tax haven.

A single unified list (instead of two lists) of tax havens is provided for all tax purposes. The single list reduces the number of tax havens to 72; it excludes many countries (e.g. Bolivia, Botswana, Guam, Paraguay, Senegal, Venezuela and Zaire) and includes some new ones (e.g. Bahrain, Mauritius, the Canary Islands Special Zone (ZEC) and Trinidad & Tobago).

With regard to deductions, voluntary social security contributions paid by employers for all their employees will be deductible with a maximum of 2% of the relevant base salary, which cannot exceed 25 times the minimum monthly salary for the Federal District. The voluntary contributions would also be deducted from the employee's gross salary for calculating the taxable base for the withholding tax on monthly salaries. The deduction will also be limited to the same 2% ceiling.

The regimes for small individual taxpayers will be reduced to two: (a) the current simplified regime, which will apply to farmers (including stockbreeders) and artisans, and (b) a new regime for taxpayers whose annual income does not exceed MXN 2,233,824. The new regime consists of two annual tax payments equal to 2.5% of turnover, reduced by three minimum monthly salaries.

New rules would be introduced to further regulate derivative transactions. A new provision would be added according to which income derived from such transactions is deemed to be Mexican-source income if one of the parties is a Mexican resident or a nonresident with a permanent establishment in Mexico. Such income would be subject to a 30% withholding tax if the nonresident is situated in a tax haven.

Finally, the reduced 4.9% tax rate on interest paid to foreign banks and financial institutions resident in a country with which Mexico has a tax treaty would be abolished.

Value added tax

New exemptions are granted, including exemptions for:

  • individual retailers generally and individuals who are not 100% retailers but are involved in farming and fishing activities, provided their income does not exceed MXN 1,000,000;
  • interest paid or received by certain special saving institutions; and
  • import of certain vehicles.

In addition, new rules are provided for specifying the due date for taxes in case involving installment sales. As a rule, income form such sales and the related interest on each payment must be declared when each installment is due. It is now provided, however, that, if the debtor has failed to pay three monthly installments, the taxpayer (creditor) may postpone payment of the tax on the fourth and subsequent installments until the outstanding amounts are paid.

In addition, water supply services for residential purposes will be zero-rates during 1998.

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 Rodolfo Calvo, Galaz, Gomez, Morfin, Chavero, Yamazaki, Mexico City, Mexico on Fax: +52 5 281 5184

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