Doing Business in Mexico (Tax Regime). June, 2010

Doing Business in Mexico (Tax Regime).June, 2010

©2008 Galaz, Yamazaki, Ruiz Urquiza, S.C.All rights reserved

Doing Business in Mexico (Choose of business entity)

• The stock company (“Sociedad Anónima” - SA)

– Capital requirement (as minimum 50,000 MXN)

– Shares

• The limited-liability company (“Sociedad de Responsabilidad Limitada” - SRL)

– Capital requirement (as minimum 3,000 MXN)

– Quotas

• Both can be variable capital (CV) and must have 2 shareholders at least

• Incorporation can take four weeks or longer, depending on the complexity of the project. A permit must be secured from the Ministry of Foreign Affairs


Doing Business in Mexico (Investment’s incentives & restrictions)

• The most significant tax incentive is the accelerated depreciation

– The scheme allows same-year deductions for up to 92% of an investment’s value, which may vary by industry or type of assets

– Applies only to new assets. Furniture and cars are not included

– Not applicable in Mexico City, Guadalajara and Monterrey

• Many state governments attract foreign investment through state tax incentives


Doing Business in Mexico (Business taxation)

• Federal: Income tax vs. Flat tax, Value added tax and Cash deposits tax

• Local: Payroll and property tax

• Social security and housing fund contributions

• Mandatory profit sharing (10%)

• Taxpayers will be obligated to file a tax report if during the previous year:

– Obtain taxable income higher than MXN$34,803,950

– The value of the assets is higher than MXN$60,607,920

– During each month had had more than 300 employees


Doing Business in Mexico (Business taxation) (2)

Income Tax :

• Corporate rate 30% on the tax profit (2010, 2011 and 2012)

» 29% for 2013

» 28% for 2014 and subsequent

• Residents taxation on worldwide basis

• Non-residents only for Mexican source of income

• The revenue and expense recognition is on an accrual basis

• Restrictions and requirements on deductions are imposed

• Monthly tax pre-payments are required



Income Tax (Deductions):

• Must be properly recorded and supported

• Should be strictly necessary for the business purposes

• Depreciation: straight line basis & maximum rates imposed by government

• Interest: Thin cap rules (3 to 1)

• Inventories: Cost of goods sold

• Documentation requirements



Transfer pricing:

• Transactions between related parties must be at arm’s length or they may be adjusted by the tax authorities

• Mexico’s transfer pricing rules generally follow the OECD Transfer Pricing Guidelines

• APAs are possible and documentation must be maintained



Non-residents (Withholdings):

• No withholding on Dividends

• Interest:– Foreign banks resident in tax treaty countries 4.9%

– If no tax treaty from 10% to 30% depending on who receive the payment

– Financial leases are taxed at 21%

• Royalties:– Technical assistance, know-how, use of models, plans, formulas and similar technology

transfer 25%

– Patents, trademarks and trade names 30%

• Tax Treaties applicable

• 40% on payments made to “tax havens”



Mexico-China Treaty to Avoid Double Taxation:

• Signed in 2005. Effective as of January 1, 2007

• Benefits similar to other treaties to avoid double taxation

• Tax exemptions (i.e. technical assistance) and reduced withholding rates (i.e. interest and royalties)

• Allows “maquiladora” operations to enjoy Mexican special tax regime that provides tax administrative conveniences

• Tax exemption on interest paid to People’s Bank of China, State Development Bank, Import and Export Bank of China, Agriculture Development Bank of China, China Export & Credit Insurance Corp.


Doing Business in Mexico (Foreign Income &Tax Treaties)

• Foreign tax credit for tax paid on income earned from abroad up to certain limits

• Treaty network with over 35 countries (Treaties for the avoidance of double taxation)

• Over 10 International Free Trade Agreements


Doing Business in Mexico (Business taxation)

Flat Tax :

• In force since January 1st, 2008

• Corporate rate 17.5%

• Residents & Non-residents with a PE are liable for sales, services rendered and lease activities

• The revenue and expense recognition is on a cash flow basis (including Inventories & Fixed Assets)

• Restrictions and requirements on deductions are imposed

• Interest, payroll, royalties are not deductible, but a credit is granted for payroll only

• Monthly tax prepayments are required



Value Added Tax:

• Indirect tax

• General rate 16%, 11% in the border

• Individuals & Corporations that sale, render services, imports and lease activities within Mexico are liable

• The revenue and expense recognition is on a cash flow basis

• Requirements & limitations on VAT creditable

• Monthly tax payments



Cash Deposits Tax Law :

• The objective of the tax is to avoid the informal commerce in Mexico

• Effective as of July 2008

• Taxpayers: Individuals and Companies that received cash deposits in their bank accounts.

– Mexican Pesos or foreign currency

– Considering all cash deposits made in the same bank, regardless if there are different accounts



Cash Deposits Tax Law :

• Basis and rate: 3% rate on the cash deposits which exceed MX$15,000, and only the amount in excess of the latter

– This tax do not apply to transfers between accounts of the taxpayers, wire transfers or check deposits.

• Taxpayers are able to credit the cash deposits tax against other taxes in the next order:

– Annual Income Tax and monthly advanced tax payments

– Income tax withheld to third parties

– Other Federal taxes

– Tax refund through the filing of an opinion of a Certify Public Accountant



Tax compliance:

• Monthly advanced tax payments (IT & FT) must be filed no later than the 17th day of the following month, except for IT during the first year.

• Annual Tax return within the next 3 months after the closing of the FY (calendar year)

• No later than February 15th of the following year informative tax returns must be filed

• Social Security and Housing Fund should be paid no later than 15th day of the following month

• Withholding taxes should be paid no later than 17th day of the following month



Customs:

• Taxpayers should obtain an import register for the importation of goods

• The importer could be a different entity or individual than the real owner of the goods

• IMMEX (“Maquiladora”)

– To have assets in Mexico without create a permanent establishment in the country

– The goods would be under temporary importation

– The entities should obtain small profits (Maquiladora activity)


Doing Business in Mexico (Personal taxation)

• Mexican residents taxed on a worldwide basis

• Non-residents when Mexican source, rates vary depending on the type of revenue

• 30% Maximum income tax rate (2010, 2011 and 2012), certain deductions are allowed

» 29% for 2013

» 28% for 2014 and subsequent

© 2008 Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved.

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/mx/aboutus for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its Member Firms.

Documents

Doing Business in Mexico (Tax Regime). June, 2010