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Mexico’s Tax reform impact for the futureLourdes M. Quinn
2Main impact for International Companies
• VAT Sales from a US entity to a Mexican resident
• VAT from a National supplier to a Mexican Manufacturer
• VAT payments in border cities.• VAT in temporary importation
unless a credit is obtained.
VAT - IVA
INCOME TAX - ISR
ERP-MRP/ANNEX 24
• Limitation to sales in Mexico• Limitations in deductions for
payroll.• Incentives for Income Tax
concluded• Increase administrative and
internal control
• Increase administrative and internal control
Value added TaxUnexpected changes
4Top Ten VAT RATES IN THE WORLD
5Why VAT changed for IMMEX?• OCDE VAT/GST GUIDELINES:
Destination. Until 2010 the main rule was to tax the place where the last consumer was located.
Neutrality. Definition of the place of taxation in the case of cross
border trade in services and intangibles between B2B supplies.
There are pending guidelines in the case of B2C supplies for cross border
6VAT
Value Added Tax Rate to 16%
Leveling of VAT tax rate in border cities from 11% to 16%.
Rates of 0% in certain products will remain the same.
Impact and effects
Purchases in Mexico are recommended to be conducted by using “Virtual Pedimentos” (customs declaration without presenting merchandise for customs clearance) When they are related to products that are used for the production process.
Definitive importation will have an impact of 5% more going from 11% to 16% for consumables, spare parts, and other tools that the company is importing under definitive basis. This will have an effect in the importation of tools and other consumables under definitive basis.
Time to go back to temporary importations for tools and spare parts?
7VAT
Mexican Manufacturer’s purchases to Mexican Suppliers - VAT zero effect no longer applicable
IMMEX national companies (Ex Pitex) who were purchasing products from national suppliers will have to pay the VAT and make a credit to recover the VAT.
This change affects Mexican Manufacturers who are exporting more than a 10% of their product.
Also and as in the past, this makes a Mexican Manufacturer to find suppliers abroad since the VAT effect reduces the VAT burden.
SUPPLIERS
CLIENT ABROAD
IMMEX MM RT
VAT 16%
EXPORT VAT 0%
MERCHANDISE MOVING
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS
VAT FOR MEXICAN MANUFACTURERS (MM) WITH IMMEX
CONCEPT 2013 2014SALE 1,000.00$ 1,000.00$ VAT % 16% 16%VAT $ 160.00$ 160.00$ VAT WITHHOLD 160.00$ CASH FLOW 1,000.00$ 1,160.00$
VAT FOR MEXICAN MANUFACTURERS (MM) WITH IMMEX BEFORE AND AFTER
VAT TO RECOVER
OR CREDIT
10VAT
VAT in sales from a Foreign resident to an IMMEX now is subject to VAT, as an incentive the tax can be withheld.
The sale was exempt before, the reform obligates to follow the rule of location of the goods when they are sold (consumer location).
The incentive form the government is to pay and withhold the VAT with the following conditions:
A Virtual Pedimento has to be filed It has to be a sale within the
supply chain for exportationA CFDI (Digital Fiscal Certificate)
complementary should be issued
CLIENT
MEXICAN SUPPLIER
V1
EXPORT OF GOODS
WITHHOLD VAT
SALE 0%
IMMEX MM
V1
CLIENT-SUPPLIERABROAD
VAT TEMPORARY IMPO 16%
MERCHANDISE MOVING
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS
SALE 16%
PARENT COMPANY
PARENT COMPANY
IMMEX MEXICO
V1
RETURN OF GOODS
WITHHOLD VAT
SALE 16%
IMMEX MM
V1IMMEX MEXICO
V1-RT
CLIENT ABROAD
EXPORT
VAT TEMPORARY IMPO 16%
MERCHANDISE MOVING
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS
VAT SALES OF FOREIGN RESIDENT TO MEXICAN MANUFACTURERS (MM) BEFORE AND AFTER
CONCEPT 2013 2014SALE 1,000.00$ 1,000.00$ VAT % Exempt 16%VAT $ 160.00$ VAT WITHHOLD 160.00$ CASH FLOW 1,000.00$ 1,000.00$
14VAT
VAT in sales between foreign residents with transfers by IMMEX in Mexico did not changed.
The sale remains exempt as before, this put in disadvantage the MM operations. Companies are considering
Sales within corporations abroad Virtual Pedimento only in sales between
foreign residents. Sales from a Foreign resident made the
merchandise to be exported to a FTZ Exporting inbond Juarez re-importing it by
Laredo (Article 59 CFF may affect those transactions)
PARENT COMPANY
PARENT COMPANY
IMMEX MEXICO
V1
RETURN OF GOODS
NO VAT
IMMEX MEXICO
V1-RT
VAT TEMPORARY IMPO 2015
EXPORT 0% VAT EXEMPT
MERCHANDISE MOVING
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS
16VAT
VAT for sales from a Mexican Supplier to a Foreign resident remains to 0% using a virtual pedimento.
The sale remains exempt as before, is also a disadvantage for MM.
Virtual pedimento has to be filedThere is two Virtual Pedimentos
A virtual exportation for the supplier.
A virtual importation for the IMMEX
No VAT would be paid or withheld in this transaction except for the VAT related to the temporary importation.
MEXICAN SUPPLIER
V1
MATRIZ O «PARENT COMPANY»
IMMEX V1-RT
IMPORT OF GOODS EXPORT OF
SERVICES
VAT 0% ?
MERCHANDISE MOVING
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS
18VAT
VAT FOR TEMPORARY IMPORTATIONS WILL BE 16% TAXABLE IN 2015.
Option:
Certification levels A, AA and AAA.
Or Bond.
Conflicts on interfaces within ERP-MRP systems Annex 24.
2014 option to obtain the certification.
New type of reports to inform the credit applied and the balances pending to return
Basic requirements: Tax Compliance. Company,
partners, shareholders, legal representatives, suppliers.
More than 10 employees Productive process for exportation Annex 24
SUPPLIERS
IMMEX MMRT &/OR SALE
VAT 16%
MERCHANDISE MOVING
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS
If the merchandise is exported a VAT return can
be claimed, if the merchandise is sold in
Mexico the VAT is credited
PARENT COMPANY
IMMEX MEXICO
V1IMMEX MM
V1IMMEX MEXICO
V1-RT
EXPORT
VAT TEMPORARY IMPO 16%
MERCHANDISE MOVING
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS
VAT TEMPORARY IMPO 16%
EXPORT
PARENT COMPANY
EXPORT 0%
VAT TEMPORARY IMPO 16%
MEXICAN SUPPLIER
V1
MATRIZ O «PARENT COMPANY»
IMMEX V1
IMPORT OF GOODS EXPORT OF
SERVICES
VAT 0% EXPORT
VAT TEMPORARY IMPO 16%
MERCHANDISE MOVING
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS
22
Product customs ValueDuty rate
Duty DTA .008 VAT base VAT 16%Total cost customs
Roller bearings (duty exempt)
$ 100,000.00 0% - 800.00 100,800.00 16,128.00 16,928.00
Roller bearings (duty 5%)
$ 100,000.00 5% 5,000.00 800.00 105,800.00 16,928.00 22,728.00
Roller bearings (NAFTA)
$ 100,000.00 0% - - 100,000.00 16,000.00 16,000.00
Scenario 1: Examples IMPORTATION for consumption
Note that the VAT can be credit against the VAT transferred from the clients in a sale in Mexico. Duty and Processing fee (DTA) will be deductible.
The VAT base include all
customs expenses.
NAFTA products don’t pay processing fee.
23
Product customs ValueDuty rate
Duty DTA .008 VAT baseVAT 2014
EXVAT 2015 EX
Roller bearings (duty exempt)
$ 100,000.00 0% - 800.00 100,800.00 - -
Roller bearings (duty 5%)
$ 100,000.00 5% 5,000.00 250.00 105,250.00 - -
Roller bearings (NAFTA)
$ 100,000.00 0% - - 100,000.00 - -
Scenario 2: Example Bonded warehouse (Tax Deposit)
TEMPORARY IMPORTATION
Entering into the bonded warehouse for general importation will not pay VAT on the temporary importation but the merchandise is subject to the “Carta Cupo”If the company imports the merchandise under quota they will not pay the VAT for temporary importation.
Tax Deposit for general bonded warehouse was not affected by the VAT
reform
24
Note that the VAT is exempted for 2014 and has to be paid in 2015, unless the company obtains a VAT certification (Trusted Taxpayer Certification)
IMMEX do not pay VAT in 2014
IMMEX pay VAT in 2015
Certified IMMEX wont pay VAT
IMMEX pay a reduced DTA
Scenario 3: Example Importation by an IMMEX
company – TEMPORARY IMPORTATION
Product customs ValueDuty rate
Duty DTA .008 VAT baseVAT 2014
EX%VAT 2015
VAT 2015 w VAT credit
Roller bearings (duty exempt)
$ 100,000.00 0% - 800.00 100,800.00 - 16,128.00 -
Roller bearings (duty 5%)
$ 100,000.00 5% 5,000.00 250.00 105,250.00 - 16,840.00 -
Roller bearings (NAFTA)
$ 100,000.00 0% - - 100,000.00 - 16,000.00 -
INCOME TAXLess incentives, increase of regulations
CUSTOMS VALUATIONX
TARIFF RATE
IGI
Ad valorem Tariff classificationOrigin Qualification
VAT
INCOME TAX RELATED TO DEDUCTIONS
26
Income tax – VAT & Customs relations
IMPORTS
COMMERCIAL VALUEX
TARIFF RATE
EXPORT DUTY
USUALLY 0% FOR EXPORTS FROM MEXICO
VATSALE, RENT,
SERVICES USUALLY 0%
INCOME TAXRELATION WITH INCOME
27
Income tax – VAT & Customs relations
EXPORTS
Fear to the Permanent Establishment.
NO TAXATION
LIMITED TAXATION
TAX EVASION/
TAX FRAUD
DOUBLE TAXATION
GOVS SEEK FOR TAXATION DIFFERENCE ON TAXABLE BASE
29INCOME TAX – Permanent establishment
Foreign investment
Export 100% Raw Material,
Machinery and equipment owned by US resident
Transformation process
Unifies Article 33 of the DIMMEX CONTRACT
Maquila Contract Transformation process also
includes packaging, classifying other services
No sales of the finish products Income from sale of scrap or
other sources related to the IMMEX process is accepted but limited to a 10%
Grandparent clause for ownership 30% of machinery is accepted DIEMSE
• 181 LISR .- A new definition for the IMMEX operation definition. :
Requirements for Raw Material
Art. 181 LISR ART.33 DIMMEX
Raw material provided by the RA for transformation shall be imported temporarily and shall be return by direct or indirect exportation, except of waste and scrap. Raw Material can be owned by a third party client of the RA.
SIMILAR
Transformation do not include now developing of products and increasing of quality
SIMILAR
A 100% of total income should come from IMMEX services
It was only 10% or 500K
If a national content of raw material is incorporated it should be exported
SIMILAR
“New definition” of Maquila Operation
Machinery & EquipmentArt. 181 LISR ART.33 DIMMEXM&E should be property of the foreign resident, it cannot be previously owed by the IMMEX or any other related party.
SIMILAR
SimilarPossibility to use M&E from a related party of the Foreign Resident abroad
Not included Possibility to use M&E of the IMMEX or lease from a related party.
Through IMMEX INCENTIVESAt least a 30% of the M&E should be property of a Foreign Resident. Not applicable to IMMEX incorporated and registered before 2009.
“New definition” of Maquila Operation
182 LISR (Anterior 216-bis).- Reduction to two the former methods for IMMEX.
• DIEMSE obligation- June of the next Tax Year.• Safe Harbor – It is considered the total profit even if it is major than the
IMMEX operations.
Transfer Price Method
182 LISR 216-Bis
Mark-up + 1% M&E de RE
Not applicable Applicable
Safe Harbor Applicable Applicable
ROA Not Applicable Applicable
APA´s Optional Optional
Maquila options for Income Tax payment
Limited deduction
• Mexico Received recommendations published in July 2013, related to the BEPS Base erosion and profit shifting)
Payments made by taxpayers to related parties residing in Mexico or foreign residents when such payments are taxable to an income tax rate inferior than 75% of the one caused in Mexico.
It will not be deductible the payments made by a Mexican Taxpayer to a related party in Mexico or in a foreign territory if such company is also making such deduction.
34Other modifications:
Impact on additional taxes:
Tax on employees Limitation in deductions Social security regulations reform Notifications by electronic means Responsibility of Legal representatives,
professionals and managers on tax fraud and tax penalties.
ERP MRP Annex 24The puzzler of international companies
36ERP-MRP/ Annex 24
The control of inventories and its connection to Income Tax and Value Added Tax
Annex 24:
ACCURATE BOM’SCONSTANT UPDATES AND
MODIFICATIONS INCLUDING MATERIALS THAT ARE
USUALLY OUT OF THE BOM’SCORRECT CUSTOMS VALUATIONCONSIDEING ADDED VALUEUNIT MEASURES
37ERP-MRP/ Annex 24
Why is important now?
Why was important before
Annex 24:
Review of Regional Content Value for the qualification of Origin
Review of the value of transactions, assets and movements on international transactions
Source for government review on possible tax evasion in international operations
Statistics and decision making
Recommended ActionsSupporting our clients on Tax Impact
39BE PROACTIVE NOT REACTIVE! Obtain NEEC
Establishment of internal procedures Contracts with related parties Internal regulations and company’s policies
Tax plan for operations in Mexico Seer for Amparo and tax defense on the following
matters Limitation of deductions Limitation on VAT credit Uploading of accounting records
Reviewing procedures and backup of customs valuation
Contracts and suppliers tax compliance Annex 24 update and controls for VAT impact
