Mexico’s 2013 tax reform, one of the most comprehensive in years, went into effect on January 1, 2014. The new law limits corporate tax deductions, repeals single-rate business tax, places new rules for treaty benefit claims, and completely reforms the special tax treatment for maquiladoras. The new law reverses a planned reduction of corporate tax rates to 28%, leaving the rate at 30%. In addition, the law calls for more enforcement powers and tightening compliance, intended to increase collection rates, since Mexico currently has one of the lowest tax collection rates as a proportion of GDP among OECD countries. A part of the law that has caused much uproar among those living in the U.S. border region is the elimination of the preferential VAT rate, which now goes up to the 16% general rate.
For corporations, the tax rate remains at 30%. Tax consolidation is eliminated and replaced by an “integration regime.” Tax-free fringe benefits are deductible only up to 47%. The taxable base for computing the profit-sharing payment to employees (mandatory under Mexico law) is no longer “adjusted” down from taxable income, as the profit sharing paid during the year is no longer deductible for purposes of the profit-sharing calculations.
The new law also impacts individuals and investments. The individual tax rate increases to a highest marginal rate of 35%, while itemized deductions are further limited. Gains in the Mexican stock exchange market are now taxable, and dividends paid by Mexican companies are subject to a 10% tax in addition to the regular tax.
International provisions include a 10% withholding tax on dividends (previously zero); however, tax treaties may apply to reduce this rate. The foreign tax credit system will change to a per-country system. Additional procedural requirements are necessary in order to claim tax treaty benefits, including a sworn statement by the legal representative of the entity.
Most of the previous benefits to using a Mexican maquiladora have been removed by the new law. The maquiladora regime was designed to promote exports and encourage foreign investment and allow the importation of material and machinery and equipment free of duty and value-added taxes. In addition to indirect tax benefits, there were partial income tax exemptions and protections from exposure to permanent establishment by the foreign principal company. The new law provides for regular VAT to apply to the temporary importations, such VAT to be recovered upon export or through a certification process to obtain a credit. All income must be derived from the provision of services by the maquiladora. The partial income tax exemption has been eliminated, and the special transfer pricing methods used to obtain protection from permanent establishment have been replaced by only a safe harbor method or by obtaining an advanced pricing agreement (APA) with the Mexican tax authorities.
The Mexican tax reform impacts any persons doing business in Mexico. A thorough review of how the law will impact your operations would be advised.
Article written with assistance from Juan I. Rivero of Rivero & Olivares.
© 2014 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.