Tax reform in Mexico for 2014
Congress approves final changes
Prepared by:
Edgar Lopezlena, Director, Schaumburg, Ill., McGladrey LLP
[email protected]
Ramon Camacho, Principal, Washington National Tax, McGladrey LLP
[email protected]
December 2013
On Oct. 30, 2013, the Mexican Congress approved the final 2014 tax reform bill (the bill). This legislation is the
final product of the legislative process that began with the tax reform bill the secretary of finance submitted on
Oct. 8. The president is likely to sign the bill into law with no further changes.
The following discussion summarizes the provisions of the bill that are relevant for U.S. persons with Mexican
business or investment interests. The bill may adversely affect U.S. companies with Maquiladora interests in
Mexico. In addition, the bill substantially increases the scope of items subject to Mexican value-added tax
(VAT). Accordingly, taxpayers with Mexican business interests should immediately review the bill, and assess its
potential impact on their activities.
Unless otherwise specified, the bill will apply for tax years beginning on or after Jan. 1, 2014. Mexican tax
returns for the tax year ended Dec. 31, 2013, will not be affected by the bill, and should be prepared based on
the current law.
Mexico’s principal federal taxing authority is the Tax Administration Service (Servicio de Administracion
Tributaria, or SAT).
Key changes
Some of the key changes included in the bill are:
yy The repeal and replacement of the current income tax law with a new income tax law with a slightly
different structure.
yy The imposition of strict requirements that severely limit payments to foreign related parties, especially
payments made by Mexican companies treated as fiscally transparent in the resident county of the payee.
This item is discussed in further detail below.
yy A tax of 10 percent on dividends paid by a Mexican company to Mexican resident individuals and foreign
owners (individuals or entities). Currently, dividends paid by a Mexican company are not subject to tax
provided the amount of the dividend does not exceed the cuenta de utilidad fiscal neta (CUFIN) balance
(the accumulated earnings and profits calculated under Mexican tax law). The bill imposes a tax of 10
percent on dividends paid to foreign shareholders or owners, regardless of whether the dividend is in
excess of the CUFIN. The 10 percent tax will apply to dividends paid out of the retained earnings and
CUFIN balance as of Dec. 31, 2014. Dividends paid out of the retained earnings and CUFIN balance as of
Dec. 31, 2013, will not be subject to the 10 percent tax. U.S. companies should therefore assess whether
their Mexican subsidiaries have sufficient CUFIN, cash and retained earnings as of Dec. 31, 2013, to pay a
tax-free dividend out of Mexico out of the retained earnings and CUFIN as of that date. Note that the U.S.Mexico Tax Treaty establishes a maximum rate of 5 percent on dividends if the beneficial owner is a U.S.
corporation that owns at least 10 percent of the distributing Mexican company. Thus, U.S. corporations that
receive dividends from their Mexican companies may be entitled to the reduced 5 percent rate set forth in
the treaty.
In Mexico, any distribution of profit is considered a dividend for tax purposes, regardless of the treatment
of such a distribution in the United States. For example, a distribution paid out of a Mexican company
that is treated as a pass-through entity for U.S. tax purposes is generally a nontaxable event in the United
States. However, in Mexico, such a distribution would be considered a dividend subject to the tax treatment
mentioned above.
yy Changes to various rules affecting Maquiladoras. This item is discussed in further detail below.
yy The statutory audit is no longer mandatory and, rather, is optional for certain qualifying taxpayers. This
item is discussed in further detail below.
yy The repeal of the flat-rate tax (Impuesto Empresarial a Tasa Unica, or IETU). This tax functions as an
alternative tax in Mexico, and taxpayers that have little or no income tax payable may still have to pay IETU.
The repeal of the IETU eliminates this dual-taxation system. This creates an opportunity for taxpayers to
not only reduce the administrative burden of simultaneously calculating two tax liabilities under entirely
different sets of rules, but also to reduce their Mexican tax liability, as taxpayers will be subject only to the
income tax.
yy The repeal of the cash deposits tax (Impuesto a Depositos en Efectivo, or IDE). The IDE is 3 percent of
gross receipts, with no deductions, collected by business enterprises in the form of actual cash instead
of a traceable means of payment (checks, credit cards, wire transfers, money orders, etc.). While this tax is
creditable against the income tax or the IETU, it can represent a considerable cost for certain taxpayers,
such as gas station operators, bus operators, retailers and farmers, among others, that still commonly
receive significant amounts of cash in the ordinary course of their business.
Some other changes of importance for U.S. companies doing business in Mexico are described herein below.
Income tax law
Foreign tax credit for Mexican taxpayers
The bill includes a comprehensive package of foreign tax credit rules for Mexican taxpayers to allow them to
take a credit for foreign income taxes paid on foreign-sourced income. Currently, taxpayers largely rely on their
own interpretations and the views of the SAT to determine the amount of foreign taxes eligible for a foreign
tax credit in their Mexican tax return.
2
Provisions affecting foreign (non-Mexican) related parties
The bill authorizes the issuance of regulations that will allow the SAT to request from Mexican taxpayers
information on their foreign-related parties. The purpose of these regulations will be to combat treaty shopping.
The bill includes provisions that severely limit the deduction of payments (mainly royalties, interest and fees for
management and technical assistance) paid to foreign-related parties, especially if the Mexican company that
makes such payments, or the foreign-related party, is treated as a pass-through entity in the latter’s country of
residence. In the United States, these provisions primarily will affect partnerships and S corporations that own
a Mexican entity that is treated as a pass-through entity for U.S. tax purposes.
For purposes of the above, if the foreign recipient exerts control over, or is controlled by, the Mexican taxpayer
making the payment, it will be considered to be a related party of the Mexican taxpayer. Control for these
purposes includes the ability to make strategic and material decisions, including, but not limited to, the ability
to decide when distributions are to be made. The wording in the provisions related to the above is unclear, and
additional guidance is expected to be published through regulations.
Accelerated depreciation tax stimulus
The bill repeals the optional accelerated depreciation tax provisions under current law, and provides transition
rules for those taxpayers that applied the stimulus in 2013.
Limitations on certain expenses for enterprise taxpayers
The deduction by an employer for salaries and compensation that are not includable in an employee’s taxable
income (such as payments for profit sharing, overtime, vacation premiums and holiday pay, among others)
will be capped at 47 percent. (The package originally proposed by the secretary of finance included a cap of
41 percent.) Current law establishes no cap, even on compensation that is not includable in the employee’s
taxable income. The remaining 53 percent will be a permanent, nondeductible expense in the employer’s tax
return. This limitation does not apply to compensation that is includable in the employee’s taxable income
(such as base salary, performance bonuses, and nonmandatory bonuses, among others). However, under the
bill, the nondeductible portion will be deductible for purposes of calculating the mandatory employees’ profit
sharing payments.
The bill originally proposed by the secretary of finance would have eliminated the deduction for qualified
contributions made by employers into a properly established pension fund. The bill re-enacts the current law
rule under which qualified contributions to pension funds may be deducted in the year a contribution to the
plan is actually made and certain other requirements are met.
The cap on the depreciable cost of cars purchased on or after Jan. 1, 2014, is now MX$130,000 (US$10,0001),
down from the current MX$175,000 (US$13,461).
The cost of meals eaten outside a radius of 50 kilometers (31 miles) from the taxpayer’s main place of business
is 100 percent nondeductible for tax purposes, unless the taxpayer proves that the meal is related to businessrelated travel outside the 50-kilometer (31-mile) radius. Current law caps this deduction at 12.5 percent of meal
costs. Effective Jan. 1, 2014, meals eaten within the radius will be capped at 8.5 percent.
1 All conversions to US$ are from the original Mexican peso figures and are presented for the reader’s convenience only.
A market-prevailing rate of MX$13.00 per US$1.00 was used.
3
Certain tax regimes
The bill repeals current consolidated tax return rules and replaces them with an “Optional Regime for Groups
of Companies.” Regulations will be published regarding the transition from the current consolidation regime to
the new simplified approach.
Mexico’s simplified tax regimes (i.e., those largely based on a cash flow system of accounting) for small
taxpayers are repealed. This will affect taxpayers in certain key economic sectors, such as transportation
and farming.
The “percentage of completion” method of accounting for real estate developers (which was expected to be
repealed, based on the proposed bill from the secretary of finance) remains in effect with certain changes.
The “installment sale” method commonly used by real estate developers (which was expected to be repealed,
per the proposed bill from the secretary of finance) also remains in effect, with certain changes effective
for 2013.
The bill repeals the special tax regime that applies to real estate investment trusts (REITs) and companies
operating as REITS. Persons or entities that at any time in the past contributed real estate property to a REIT or
a company operating as a REIT must recognize the gain or loss on contributions by no later than Dec. 31, 2016.
Sole proprietors and self-employed taxpayers will be subject to a special tax regime, which is largely based on
a cash flow system of accounting.
Individuals
Four additional statutory tax rates are added above the current 30 percent tax rate. These new rates apply to
the following income brackets:
Annual taxable income equal to
or greater than:
Up to annual taxable income of:
Statutory
tax rate
MX$500,001 (US$38,461)
MX$750,000 (US$57,692)
31%
MX$750,001
MX$1,000,000 (US$76,923)
32%
MX$1,000,001
MX$3,000,000 (US$230,769)
34%
MX$3,000,001
And above
35%
Under the bill, the limitation for itemized deductions is 10 percent of the individual’s taxable income or four
times the annualized minimum wage prevailing in Mexico City. As well, the bill disallows itemized deductions
that are not paid by traceable means (i.e., credit cards, debit cards, checks, electronic transfers, etc.), even if
they are within the above caps.
The bill exempts from taxation capital gains on the sale of an individual taxpayer’s home, provided that
the sales proceeds do not exceed a certain cap. Under the bill, the cap is set at the equivalent of 700,000
“Investment Units” as of the date of the sale. At the current Investment Units index, the cap is MX$3,500,315
(US$269,255).
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Maquiladora taxation (income tax and value-added tax)
Test to qualify for income tax benefits
The bill sets forth the following tests that a Maquiladora must meet in order to qualify for the income tax
benefits available for such types of companies:2
yy The Maquiladora must perform manufacturing, assembly, transformation, repair or refurbishing activities
for a foreign-related party, and the product subject to any of these processes must be exported out
of Mexico.
yy The materials, components and parts used by the Maquiladora must generally be furnished by a foreignrelated party. If any materials are sourced from domestic vendors, those materials should also be exported
out of Mexico.
yy In performing its activities, the Maquiladora may use self-owned machinery and equipment, as well as
machinery and equipment owned by the foreign-related party. However, the net value (calculated under
Mexican tax rules) of the machinery and equipment owned by the foreign-related party has to represent at
least 30 percent of the aggregate net value of all the machinery and equipment used by the Maquiladora.
Maquiladoras that began operations prior to Dec. 31, 2009, and that do not meet the 30 percent test, are
expected to be grandfathered under future regulations.
yy The Maquiladora may not earn revenue from any other activities.
yy Based on these rules, Maquiladoras that generate revenue from other activities (local sales, distribution,
services, etc.) may be affected adversely. U.S. companies that have Maquiladoras with different types of
activities should consider restructuring their operations in Mexico to segregate export activities from other
activities. Taxpayers may wish to consider a spin-off or other corporate restructuring to separate the export
and non-export lines of business. With proper planning, it may be possible to restructure the Maquiladora’s
operations without triggering Mexican taxes on the restructuring transaction.
Transfer pricing
Under the bill, the only acceptable transfer pricing methods for Maquiladoras are:
yy The “safe harbor” method; (Maquiladora net taxable income must be the higher of (a) 6.5 percent of all
costs and expenses incurred in the Maquiladora’s activities, or (b) 6.9 percent of the net value of all assets
used in the Maquiladora’s activities)
yy Transfer pricing methods specified in an Advance Pricing Agreement (APA) entered into with the SAT.
Taxpayers may no longer prepare a transfer pricing study and simply keep it as part of their records.
“Shelter Maquiladoras”
Under the bill, foreign companies that operate in Mexico through a “Shelter Maquiladora” (an unrelated
contractor) will continue to have protection against permanent establishment status in Mexico for a period
of four tax years beginning in the year in which they commence operations through the Shelter Maquiladora,
provided that the Shelter Maquiladora meets all its Mexican filing requirements. After that period, foreign
companies utilizing a Shelter Maquiladora may be deemed to have a permanent establishment in Mexico.
Of note, the U.S.-Mexico tax treaty offers no relief in the event that under Mexican law, a U.S. company
has a permanent establishment in the country by virtue of using a Shelter Maquiladora. In light of this,
2 The three basic income tax benefits available for qualifying maquiladoras are: (1) permanent establishment protection
for its foreign-related parties, (2) simplified transfer pricing compliance and (3) the potential to reduce the effective
Mexican income tax rate to approximately 17 percent.
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U.S. companies that use a Shelter Maquiladora should make sure that the Maquiladora meets its tax filing
requirements. In addition, these U.S. companies should consider revising their contracts with Shelter
Maquiladoras to include indemnity clauses in the event that the Maquiladora fails to meet these requirements
and, as a result, the U.S. company is deemed to have a permanent establishment in Mexico.
Value-added tax for Maquiladoras
Imports made by Maquiladoras (as well as by Shelter Maquiladoras) will be subject to a 16 percent VAT rate,
payable at the point and time of entry. At the present time, these imports are subject to a zero percent
VAT rate.
Currently, there is no VAT on sales of goods between foreign residents, or between a Maquiladora and a foreign
resident, if the goods are physically located in Mexico and in the possession or custody of a Maquiladora at the
time of the sale. Under the bill, these sales will be subject to a 16 percent VAT rate.
Even though Maquiladoras may ultimately recoup the VAT, the above provisions will have a considerable
impact on cash flow, since VAT is refunded or credited some time after payment. Taxpayers seeking a cash
refund of VAT may wait several months, because the SAT commonly delays VAT cash refunds as long
as possible.
There are, however, certain relief provisions in the bill whereby Maquiladoras that obtain a special certification
form from the SAT may be exempt from paying the VAT on the above transactions. In addition, those
Maquiladoras that choose not to, or cannot, obtain the certification may be required to make a deposit equal
to the amount of the VAT in an escrow account managed by the SAT. Once the Maquiladora exports the
finished or processed products out of Mexico, it will receive a refund in full of the amounts in escrow.
Non-Maquiladora provisions (value-added tax)
General rate of 16 percent
The VAT rate of 11 percent currently applicable to certain transactions effected in certain areas (which include
the northern and southern international boundaries of Mexico, among other areas) is replaced by the 16
percent rate that applies throughout Mexico.
Transactions previously exempt from tax
The transactions listed below are no longer exempt, but instead, are subject to the VAT at the general 16
percent rate:
yy Purchase of certain consumer goods (gum, pet food, jewelry)
yy Bus tickets for trips between destinations located outside urban areas
The end consumer cannot recoup the VAT it pays when acquiring goods or services. Thus, the VAT
automatically results in an increase of 16 percent in the cost of these items, which are an important part of
many Mexican household budgets.
The original proposed bill would have imposed the 16 percent VAT on certain other transactions that are
currently exempt from tax, such as the sale or rent of real property used exclusively for housing purposes,
tuition paid to private schools and mortgage interest. The final bill, however, did not adopt these changes.
Accordingly, these transactions continue to be exempt from the VAT under the bill.
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Sales of goods located in “in-bond” warehouses will also be subject to the 16 percent VAT rate. Currently, these
types of sales are exempt from VAT, but the bill ends this tax-exempt status.
Services provided by hotels, restaurants, tours and event organizations associated with fairs, expositions
and similar events held in Mexico by foreign residents will no longer be exempt from VAT, but will instead be
subject to the general 16 percent rate. This could affect the tourism industry in Mexico, as foreign companies
may be less likely to hold events in the country.
Mining operations
An additional tax is imposed on mining operations. The tax is 7.5 percent of the mining operation’s net taxable
income for income tax purposes (determined under Mexican tax law). This tax will be enforced and collected
by the state in which the mine is located.
Amendments to the Federal Tax Code (Código Fiscal de la Federación, or CFF)
The CFF sets forth rules related to procedure, determination of interest, penalties and fines, and the
relationship between taxpayers and the taxing authorities. It also provides statutory definitions to certain
concepts found throughout the Mexican tax regulatory framework and defines tax evasion and its
related penalties.
Statutory audit
Under the amendments to the CFF, the statutory audit for certain qualifying taxpayers is no longer mandatory.
Instead, it is optional for those taxpayers that exceed any of the following thresholds in the prior tax year:
yy Gross receipts and other elements of taxable income in excess of MX$100 million (approximately
US$7.4 million)
yy Net assets (per Mexican tax depreciation rules) in excess of MX$79 million (approximately US$5.85 million)
yy An average of 300 or more employees during the year
The first year in which the statutory audit will become optional is 2014. Thus, a taxpayer must look at its
2013 tax return and head count to determine if it may opt to have an audit. If any of the above thresholds is
exceeded in 2013, then that taxpayer may opt (but is not required) to have a statutory audit for 2014. The due
date to file the corresponding audit report with the SAT is June 30, 2015.
2013 qualifications for a statutory audit
Under the current CFF provisions, however, for 2013, taxpayers are required to obtain a statutory audit if
during the 2012 calendar year, any of the following thresholds are met:
yy Gross receipts and other elements of taxable income over MX$39 million (approximately US$3.1 million)
yy Net assets (per Mexican tax depreciation rules) over MX$78 million approximately US$3.1 million)
yy Taxpayer has an average of 300 or more employees during the year
Accordingly, a taxpayer that during 2012 exceeded one or more of these thresholds is required to have a
statutory audit for 2013, and the corresponding audit report has to be filed with the SAT by June 30, 2014.
Benefits of the statutory audit
A statutory audit, which is performed by a private independent auditor, can be advantageous to the
taxpayer, in particular, because the statutory audit includes an examination of the tax return and results in
the filing of a report with the SAT by an independent auditor. Preparing a statutory report may produce the
following benefits:
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yy Reduces the risk of direct audits conducted by SAT agents; the SAT typically relies on independent auditor
reports in determining whether to initiate direct audits of taxpayers
yy Expedites, in many instances, the process of obtaining tax refunds from the SAT
yy Starting in 2014, eliminates the requirement to file the “Information Return on the Taxpayer’s Tax Situation”
(additional details on this return follow below)
yy Expedites the process of obtaining and renewing Maquiladora program authorizations
yy Reduces the risk of having the SAT cancel a Maquiladora program because of material tax misstatements
yy Expedites the process of entering bids to provide goods or services to governmental agencies at all levels
of government (federal, state, municipal)
yy Increases the probability of obtaining from the SAT favorable resolutions on letter ruling requests on
items such as advance pricing agreements (APAs), tax-free corporate reorganizations, and reductions of
estimated tax payments, among others
Now that the statutory audit will be optional (and not mandatory), taxpayers should weigh the factors set forth
against the potential cost savings before deciding to waive the statutory audit.
Information return on the taxpayer’s tax situation
The amended CFF requires the following taxpayers to file by June 30 of the following year an “Information
Return on the Taxpayer’s Tax Situation,” in which taxpayers must disclose whether their tax return positions are
consistent with the tax law:
yy Enterprise taxpayers that during the prior tax year had gross receipts and other elements of taxable income
in excess of MX$644.6 million (approximately US$47 million at current exchange rates)
yy Publicly traded companies
yy Companies that file an income tax return under the “Optional Regime for Groups of Companies” included in
the new income tax law for 2014
yy Government-owned companies
yy Permanent establishments of non-Mexican residents
yy Any Mexican taxpayer that carries out transactions with residents in a foreign tax jurisdiction
The SAT will publish the official form for this information return, along with any necessary guidance or
regulations. The first information return will cover the 2014 tax year and will be due June 30, 2015.
Taxpayers that opt to have the statutory audit are not required to file this information return.
Changes regarding joint tax liability
The amended CFF includes additional provisions to determine the extent of the joint liability that an owner
or shareholder of a Mexican enterprise has with respect to any tax omissions, underpayments, interest and
penalties that the SAT assesses on the enterprise.
Under the new rules, joint liability can only apply to the owners or shareholders that individually or collectively
have control of the enterprise on the date on which the circumstances that gave rise to the tax omission
or underpayment take place. Control for these purposes generally means the ability by the owners or
shareholders to force the Mexican enterprise’s board of directors to make important decisions, and to exercise
the strategic management of the enterprise, or the holding of 50 percent or more voting shares or quotas.
The maximum amount of tax underpayment, interest and penalties that a controlling shareholder or owner
can have with respect to the enterprise is determined by applying the following formula:
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Amount of the tax underpayment, interest and penalties
that the enterprise cannot cover with its own assets
(X)
Percent of interest or equity participation in the enterprise that the
shareholder or owner had on the date on which the circumstances
that gave rise to the tax omission or underpayment took place
Dedicated electronic mailbox
The amended CFF establishes that the SAT will assign to each registered taxpayer a dedicated electronic
mailbox. The mailbox will be the electronic means through which the SAT will communicate with each
taxpayer. All official tax correspondence between the SAT and the taxpayer will be exchanged through the
electronic mailbox, except the filing of tax returns and payment of taxes.
Taxpayers will be responsible for checking their dedicated mailbox at least every three business days.
Taxpayer information from banks and other financial institutions
The CFF now grants the SAT the power to request directly from Mexican banks and other Mexican financial
institutions information regarding Mexican and foreign individuals and legal entities for which they maintain
accounts and financial instruments. This is designed to coordinate with the “Agreement for Exchange of
Financial Information Regarding FATCA” that the United States and Mexico recently signed.
Electronic invoices
The bill requires the uniform creation of electronic invoices. Under these new rules, all invoices produced
to document transactions carried out by or between Mexican enterprise taxpayers have to be electronic
and made available through the Internet. Only certain small taxpayers are allowed to continue producing
paper invoices.
New rules regarding responsibilities for tax professionals
New rules have been added to the CFF under which professionals that (1) provide solicited or unsolicited
advice, or (2) perform or cause to be performed activities for or on behalf of taxpayers with no purpose other
than tax reduction can be deemed accessories to tax evasion offenses.
Additions to the list of tax evasion transactions and situations
The CFF now includes in its list of tax evasion transactions and situations the following:
yy Issuance of documentation (invoices) to support a transaction when the issuer does not have the necessary
property, infrastructure and material and human resources to carry out said transaction.
yy Failure to timely remit taxes withheld from employees and other parties where the taxpayer has the
responsibility as a withholding agent.
yy Reporting of overstated net operating losses in the tax return. Note that the “reporting” is sufficient
to construe a tax evasion act, regardless of whether the taxpayer uses those losses against net
taxable income.
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Agreements for the exchange of information with foreign tax authorities
The amendments to the CFF contain new procedures that the SAT must follow in order to enter into
agreements for the exchange of information with foreign tax authorities (e.g., the “Agreement for Exchange of
Financial Information Regarding FATCA” that the United States and Mexico recently signed). These provisions
authorize the president of the SAT to enter into such agreements without the need to depend on provisions
established in international treaties, as is the case at the present time.
Conclusive settlements
The CFF now contains an innovative mechanism to settle tax controversies between the SAT and the taxpayer.
If a taxpayer is in disagreement with the adjustment proposed by a SAT agent, the taxpayer can request
resolution through use of a “conclusive settlement” process, where a final, reasonable position on such items is
reached. The conclusive settlement process will be mediated by the Taxpayers’ Advocacy Agency (Procuraduría
de la Defensa del Contribuyente). Rules regarding the procedure to establish and reach a conclusive
settlement, as well as how to determine the tax bill resulting therefrom, are included in the amended CFF.
Taxpayers that reach a conclusive settlement may be able to abate up to 100 percent of the penalties imposed
by the SAT on the settled tax bill.
Excise tax (IESPS)
The following are some of the changes included in the Impuesto Especial Sobre Productos y Servicios
(IESPS) law:
yy Excise tax will apply to fuels and pesticides.
yy Excise tax on certain liquors will be 53 percent of the sale price.
yy A tax of MX$1.00 per liter of sodas and soft drinks will be imposed on the sale of these products. This is a
measure proposed to combat obesity.
Conclusion
The bill includes provisions that generally will result in additional taxes for most Mexican taxpayers. U.S.
companies with interests in Mexico should seek the advice of their U.S. and Mexican tax advisors to identify
potential strategies to minimize the additional Mexican taxes arising from the bill and any associated U.S.
tax consequences.
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