Mexico has passed a comprehensive tax reform. Most of these changes are expected to become effective on January 1, 2014. Companies doing business in Mexico must be aware of these changes because they may have a substantial impact on their Mexico operations. This article contains a general overview of the changes. We are also publishing a few more articles discussing how the changes affect some particular industries (maquiladoras and mining companies) or areas (foreign trade/customs and labor and employment/benefits).

  1. New Laws; Laws Repealed; Laws Amended

A new income tax law (the New LISR) will replace the existing income tax law (the Old LISR). Taxpayers that have obtained favorable court rulings against provisions of the Old LISR may need to file new legal actions if the New LISR contains similar provisions to obtain protection against the new similar provisions. Common examples of these rulings include determinations that (i) limitations to deduct certain contributions to the Mexican Institute of Social Security (IMSS) that are the employees’ responsibility but paid by the employer are unconstitutional and (ii) bank statements do not form part of the taxpayers accounting records.

The tax reform includes the creation of a universal pension program to provide pensions to people over 65 years old. Congress will enact the universal pension law. The changes also create unemployment insurance. The universal pension will be funded by the federal government. The unemployment insurance will be funded by contributions made by employers and employees. None of this should increase the employment related costs to employers or employees because the contributions to the housing fund will be reduced in the same proportion as the contributions for the unemployment insurance. Employees will have the ability to use part of the contributions made by the employer for the unemployment insurance to obtain loans for housing.

The flat tax law (IETU) and the tax on cash deposits law will be repealed. Banks will have the obligation to inform to government of cash deposits from taxpayers when the cumulative amount exceeds 15,000 pesos per month.

Multiple laws are also being amended, including the federal tax code, value added tax law, special tax on production and services law, social security law, federal labor law, customs law, among several others.

  1. Income Tax Rates

The corporate tax rate will remain at 30 percent. Some practitioners argue that because of the new tax on dividends (see below), the actual corporate rate will be 37 percent. Under the Old LISR the corporate tax rates were scheduled to be reduced to 29 percent in 2014 and 28 percent beginning on 2015.

Individual income tax rates for higher earners will increase according to the following:

Click here to view the chart.

  1. Value Added Tax

The reduced value added tax (VAT) rate of 11 percent for certain parts of Mexico is eliminated; the general 16 percent VAT rate will apply throughout the country. One of the more relevant changes for maquiladora (IMMEX) companies is the elimination of the exemption of paying VAT on the goods imported on a temporary basis. This issue, the possible forms to avoid paying VAT on these importations, and other changes relevant to the maquiladora industry are discussed in a separate article.

  1. Other Taxes and Payments

The tax reform creates a new 10 percent tax on (i) dividends paid by Mexican companies to foreign residents or to individuals residing in Mexico; (ii) remittances paid by permanent establishments in Mexico to their main office or other offices abroad; or (iii) dividends paid by foreign companies to individual Mexican residents. If the payor is a Mexican company or permanent establishment, the payor will withhold and enter the tax. If the dividend is paid by a foreign company, the Mexican individual payee will have to pay the tax by the 17th of the month after the payment is received.

The dividend tax from entities resident of Mexico will apply to gains generated commencing in 2014. These companies must maintain a net taxable earnings account (CUFIN) for profits generated until December 31, 2013, and a separate CUFIN for profits generated after January 1, 2014. If the profits are not maintained in separate accounts, the authorities may presume they were earned commencing in 2014.

Gains on the sale of stock by individuals in Mexico’s stock exchange will be subject to a 10 percent tax. Gains may be offset against losses of the same kind. Stock exchange intermediaries (brokers) will have the obligation to calculate the gain or loss and to deliver such information to the taxpayer. The taxpayer will include these calculations in his/her tax return. If the seller is a foreign resident, the broker will withhold the tax without deducting any losses, unless the seller delivers to the broker a written sworn statement that the seller resides in a country with a tax treaty with Mexico. Sales of stock outside of the stock exchange and certain sales within the stock exchange will not be subject to this 10 percent tax but rather will be considered ordinary income subject to the general income tax rate applicable to the taxpayer.

Mining companies will be subject to new excise taxes. These taxes and other changes applicable to the mining industry are discussed in a separate article.

There is a new tax on fossil fuels, including gasoline, diesel, propane, among others, but excluding natural gas. The amount of the tax varies depending on the fuel.

  1. Invoices

With narrow exceptions, all invoices will be digital invoices issued over the internet. No other form of invoices or receipts will be accepted. Expenses incurred by taxpayers that lack the required electronic invoice will not be deductible.

The language in the tax reform seems to suggest that salaries paid to employees will have to be covered by an electronic invoice. This is a major difference. Up to now very few employers collected any kind of invoice for salary payments; most of them were using form 37 (which will no longer be required). Employers will need to implement very rapid changes in their systems to comply with the new requirements and be able to deduct payments made to its employees. This and other changes related to labor and employment/benefits practices are addressed in more detail in a separate article.

  1. Deductions, Credits and Exemptions

The New LISR eliminates the possibility of taking an immediate 100 percent deduction for certain fixed assets and linear deduction for machinery and equipment.

Payments for interests, royalties or technical assistance made to certain affiliated foreign entities might not be deductible if the payee is a pass-through entity (except if its equity holders income tax and the transaction is at market value), the payment is considered non-existent in the foreign jurisdiction or if the payment is not taxable to the payee.

The limits of the deductions for vehicles are reduced to a daily rent of 200 pesos per vehicle and an investment of 130,000 pesos.

There are multiple changes related to deductions for payments or benefits to employees that are covered under a separate article (labor and employment/benefits).

Total personal deductions for individuals are limited to the lower of: four times the yearly minimum wage or 10 percent of total income. This includes contributions made to retirement accounts. The limit on deduction of mortgage interests was reduced in half.

The tax exemption on income received from the sale of a personal residence was reduced from 1,500,000 units of investment (UDIS) to 700,000 UDIS (3,535,429.10 pesos as of December 19, 2013). Also, to use this exemption the taxpayer may not have sold a personal residency in the five years prior. The New LISR also eliminates the possibility of increasing the cap by proving that the seller had been residing at the home for more than five years. More and more foreigners that have bought real estate in Mexico have been relying on this exemption and the possibility of increasing the cap; they will be affected by these changes together with all other Mexican residents.

  1.  Consolidation

The tax reform eliminates the possibility of consolidating tax returns. The New LISR includes a somewhat similar mechanism for company groups. However, the requirements and benefits are different. For example, tax payers will only be able to avail themselves of some tax deferrals for up to three years. Furthermore, taxpayers that were filing consolidated tax returns must familiarize with the options provided by the New LISR to transition out of consolidation.

  1.  PTU

The formulas under the Old LISR to determine the bases to calculate the employees’ profit sharing (PTU) were eliminated. Under the New LSIR, the bases to calculate the PTU will be, for the most part, the same as those to calculate the employer’s taxable income.

  1. Tax Box

The tax reform creates the tax box. All taxpayers registered in the federal registry of taxpayers will be assigned a tax box in the SAT website. Taxpayers will access their tax box using their electronic signatures. The authority will send notices, documents and requests to the taxpayers through the tax box and taxpayers may file petitions, requests (including refunds), notices, consultations, answers and appeals. Notices from the authority via the tax box will be preceded by an electronic notification by the means elected by the taxpayer and they will be considered received the fourth day after the electronic notification is sent. Altering or removing information in the tax box for the taxpayer’s own benefit may be a crime.

The authority will also have the ability to perform audits through the tax box by requesting information and documentation from the taxpayer. These audits may last up to three months.

The provisions regarding the tax box will become effective on June 30, 2014, for entities and January 1, 2015, for individuals.

  1. Joint Liability for Equity Holders

In certain circumstances, equity holders that have control of a taxpayer entity may be jointly liable for the entity’s tax obligations. The liability will be limited up to the percentage ownership they had in the entity at the time the tax liability arises. It is not entirely clear how these provisions will be interpreted, but they may create substantial liability. The Old LISR limited the liability to the amount of the equity holder’s contribution, whereas the New LISR limits the liability to the percentage of equity ownership.

  1. Accounting

Taxpayers will have the obligation to provide their accounting records monthly to SAT via internet. The definition of accounting is very broad, including bank statements.

  1.  Other Provisions

  • One hundred percent of the income for sales on terms will be recognized at the time of the sale, not at the time the payments are received.

  • Financial institutions will have the obligation to inform SAT about credits granted to taxpayers.

  • The authority will have the ability to publish lists with the names and tax id numbers of taxpayers with whom it is risky to celebrate transactions because they are not in compliance with their tax obligations. Taxpayers should monitor these lists because invoices issued by taxpayers on these lists might not be deductible.

  • If a taxpayer cannot be located, the authority may freeze its bank accounts. Taxpayers must notify the authorities when they move to avoid these situations.