International tax
Mexico Highlights 2012 Investment basics: Currency – Mexican Peso (MXN) Foreign exchange control – There are no restrictions on domestic or foreign currency held locally by nonresidents, and no official guarantees against inconvertibility. Bank accounts in dollars are permitted for companies, but not for individuals. Accounting principles/financial statements – Mexican companies are required to prepare their financial statements in Spanish and according to Mexican Financial Information Standards (NIF). Accounting registries and books of accounting must be recorded in Spanish. Principal business entities – These are the per se corporation (SA), limited liability company (SRL) and branch of a foreign corporation. Corporate taxation: Residence – An entity is resident if it is managed and controlled in Mexico. Basis – Residents are taxed on worldwide income; nonresidents are taxed on Mexicansource income. Foreign-source income derived by residents is subject to tax in the same way as Mexican-source income. Branches are taxed the same as subsidiaries. Taxable income – Corporate tax is imposed on a company’s profits, which consist of business/trading income, passive income and capital gains. Normal business expenses may be deducted in computing taxable income. Inflationary accounting for tax purposes is applicable to certain concepts of revenue and expenses. Taxation of dividends – Dividends received by a Mexican resident company from another Mexican resident company are exempt from corporate tax. Dividends received from a foreign company are subject to corporate tax in the period the dividends are payable, but a credit for underlying corporate and withholding tax is generally available for foreign tax paid. If dividends are not paid
from the “CUFIN account” (i.e. already taxed profits), the payer is required to pay taxes (30% on a gross-up amount). Capital gains – Mexican entities are not subject to special tax treatment on capital gains and the use of capital losses is restricted in some cases. Losses – A 10-year carryforward is allowed, subject to applicable inflation adjustments. The carryback of losses is not permitted. Rate – A 30% rate is applicable to business profits in general. Surtax – No Alternative minimum tax – A 17.5% flat tax (IETU) taxes profits determined by reducing the major part of revenue with most expenses and costs (excluding in most cases interest earned or paid, royalties paid or received to or from related parties and salaries (although a portion of salaries is subject to a tax credit)). IETU operates under a cash flow method. Foreign tax credit – Foreign tax paid may be credited against Mexican tax on the same profits, but the credit is limited to the amount of Mexican tax payable on the foreign income. Participation exemption – No Holding company regime – No Incentives – Incentives include accelerated depreciation for most investments in fixed assets (some regions may be restricted). Withholding tax: Dividends – Mexico does not impose withholding tax on dividends. Interest – The general withholding tax rate on interest is 30%. Interest payments to foreign banks are subject to a 4.9% withholding tax provided they are registered as banks in Mexico and resident in tax treaty countries; otherwise, the rate is 10%, unless reduced under a tax treaty. Financial leases are taxed at 15%, and business enterprises that make payments must withhold a 15% tax on the interest portion of lease payments.
Royalties – Royalties paid to nonresidents are subject to a withholding tax of 30% (patents and trademarks) or 25% (all other royalties), unless reduced under an applicable tax treaty. Technical service fees – Fees for technical assistance are subject to a withholding tax of 25%, unless reduced under an applicable tax treaty. Branch remittance tax – Mexico does not levy a branch profits tax. Other – Other payments to nonresidents may be subject to withholding. Other taxes on corporations: Capital duty – No Payroll tax – Payroll taxes apply at the state and federal level. Real property tax – The municipal authorities levy “rates” on the ownership of real property. Rates are deductible in calculating corporation tax liability. (See “Transfer tax,” below.) Social security – Employers must contribute an amount equivalent to 2% of payroll to an employee retirement fund and 5% of the total payroll to a housing fund (which will be added to the retirement fund if not used for a housing credit) that, together, constitute a pension fund managed by private financial institutions. Stamp duty – No Transfer tax – A rate between 2% and 5% applies to the transfer of real estate. Other – While not a tax, mandatory profit sharing rules imply that an entity is obliged to actually distribute 10% of taxed profits among its employees no later than May of the year following that in which the profits were generated. A Cash Deposit Tax is levied on cash deposits on any amount exceeding MXN 15,000 at a rate of 3%, which is creditable against other federal taxes. A special excise tax on production and services (IESPyS) is levied on the alienation and rendering of certain goods and services.
Anti-avoidance rules: Transfer pricing – Rules similar to the OECD Guidelines apply. Advanced pricing agreements (APAs) are possible. Thin capitalization – Thin capitalization rules apply with a 3:1 debt-to-equity safe harbor ratio for loans granted from abroad by related parties. However, these rules are not applicable to taxpayers that obtain a favorable APA from the tax authorities, agreeing that the transactions are carried out at market prices, and to financial institutions. Controlled foreign companies – Companies, individuals and resident foreigners must pay tax on all earnings from companies or accounts in low-tax jurisdictions. Foreign-source income is deemed to come from a low-tax jurisdiction if it is not subject to taxation abroad or if it is subject to an income tax that is less than 75% of the income tax computed under Mexican tax legislation. Passive income derived directly or indirectly by a Mexican resident through a branch, entity or any other legal entity located in a preferential tax regime will be subject to taxation in Mexico in the year in which the income is derived. Other – A tax audit is mandatory for taxpayers with more than 300 employees, or gross income exceeding MXN 34.8 million or assets exceeding MXN 69.6 million. Disclosure requirements – External tax auditors have an obligation to disclose on the tax audit report when a taxpayer has entered into a transaction that is not considered viable by the Mexican tax authorities. Also, taxpayers earning income from a preferential tax regime must file an annual information return in February, as must taxpayers generating income from black-list jurisdictions and those conducting transactions through fiscally transparent foreign legal vehicles or entities. Administration and compliance: Tax year – Calendar year Consolidated returns – Tax consolidation is optional for income tax purposes. Deferred income tax under the consolidation regime should be paid after a 5-year period. Filing requirements – Under the selfassessment regime, advance corporate tax is payable in 12 installments. The annual tax return must be filed within the first 3 months
of the following year (no extensions are available). Individuals and legal entities are obligated to have an advanced electronic signature certificate in effect and maintain electronic accounting records, issuing as proof of their transactions digital bills. Penalties – Penalties apply for noncompliance. Rulings – The tax authorities will issue rulings on the tax consequences of actual transactions. Personal taxation: Basis – Mexican nationals are taxed on their worldwide income. Nonresidents are taxed on Mexican-source income. Residence – An individual is considered resident if he/she has a permanent home in Mexico. If an individual has a home in 2 countries, the key factor is the location of his/her center of vital interests. Mexican nationals are, in principle, considered tax resident, subject to the permanent home and/or the center-of-vital-interests test. Filing status – Tax returns are filed individually, regardless of marital status. Taxable income – Income is taxed, in part, under a schedular system, although some revenue can be mixed to determine taxable income. Profits derived from the carrying on by an individual of a trade or profession generally are taxed in the same way as profits derived by companies. An independent regime for interest earned by individuals applies. Capital gains – Capital gains are generally taxed as income, except that gains derived from the sale of publicly traded securities or the transfer of personal property (other than corporate shares, securities and investments) are exempt. Deductions and allowances – Subject to certain restrictions, deductions are granted for medical expenses and medical insurance, retirement annuities, mortgage interest, etc. Personal allowances are available to the taxpayer and his/her spouse, children and dependents. Rates – Rates are progressive to 30% for 2012 (29% for 2013 and 28% for 2014 and forward). Other taxes on individuals: Capital duty – No
Stamp duty – No Capital acquisitions tax – No Real property tax – The municipal authorities levy “rates” on the ownership of real property. Rates are deductible in calculating the individual’s taxable income applicable to leasing of real property. (See “Transfer tax,” above under “Other taxes on corporations.”) Inheritance/estate tax – No Net wealth/net worth tax – No Social security – Employed individuals are required to make social security contributions, with the amount based on the individual’s salary with a ceiling up to 25 times the daily minimum wage salary of the region. Administration and compliance: Tax year – Calendar year Filing and payment – Tax on employment income is withheld by the employer and remitted to the tax authorities; some other types of income, such as income from the provision of services and leasing income, are subject to withholding. Income not subject to withholding is self-assessed; the individual must file a tax return and make prepayments of tax. Final tax is due on 30 April (no extensions are available). See also “Filing requirements” for corporations for electronic requirements in effect. Penalties – Penalties apply for noncompliance. Value added tax: Taxable transactions – VAT is levied on the sale of goods, leasing and the provision of services, as well as on imports. Rates – The general VAT rate is 16%, with an 11% rate applicable at the borders and other designated areas. Exports (including some services) and qualifying imports of IMMEX (Maquila) supplies are subject to a 0% rate. Exemptions apply to some transactions. Registration – All persons must be registered to be able to credit the VAT paid to vendors, suppliers or at the border. Nonresidents that make taxable supplies of goods or services in Mexico also must register. Filing and payment – VAT filing is monthly, within the first 17 days of the following month.
Source of tax law: Income Tax, Value Added Tax, IETU Laws, Federal Tax Code Tax treaties: Mexico has over 40 income tax treaties in effect.
Tax authorities: Servicio de Administración Tributaria (SAT or Tax Administration Service)
International organizations: OECD, WTO Deloitte contact Ricardo Gonzalez Orta E-mail: rgonzalezorta@deloittemx.com
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