On October 31, 2013, the Mexican Congress approved the Tax Reform, only pending the countersign by the President of Mexico and its publication in the Federal Official Gazette for its full entry into force.
Below we provide a summary of the most relevant provisions approved by the Mexican Federal Congress:
- The tax rate applicable to individuals is modified. Those individuals with earnings higher than $750,000 pesos will be subject to a 32% tax rate; those with earnings higher than $1 million pesos a year will be subject to a 34% rate, and those with earnings over 3 million pesos, a maximum 35% rate will be applicable.
- A tax incentive to domestic film distribution is also established.
- The current tax consolidation regime is eliminated and the effect of the deconsolidation must be recognized in an amended tax return for fiscal year 2013. It is allowed to pay the deferred Income Tax and Assets Tax liabilities in 5 annual installment payments (2014 through 2018).
- A new optional tax regime of "fiscal integration" is established, applicable to groups of companies, allowing the partial or full deferral of income tax triggered for 3 fiscal years. The tax must be paid in the fourth fiscal year. This regime has important differences with the current fiscal consolidation regime, including for the following, among other reasons:
- It will only "integrate" subsidiary entities whose shares are owned by the "integrating" entity in at least 80%.
- It will not include maquiladoras and entities with net operating losses generated prior to the fiscal integration. For companies with net operating losses generated prior to the fiscal integration, it will be possible to integrate them without considering such previous losses.
- It is not permitted the deferral of dividend tax which does not derive from the net after tax profit account (CUFIN for its Spanish acronym).
- The integrating and the integrated entities will generate a CUFIN in the proportion in which they effectively pay the corresponding tax.
- Entities that consolidated for tax purposes until December 2013, may apply the new tax integration regime, provided that they submit a notice no later than February 15, 2014.
- The term available to conduct maquila operations through a "shelter company" is extended from 3 to 4 years to consider that the foreign resident contracting with the shelter is not deemed to have a permanent establishment in Mexico.
- It is clarified that the maquila regime is only applicable to those maquiladora companies dedicated exclusively to the export of transformed or repaired products, excluding the rendering of services.
- The process of product development is added to the definition of transformation, for purposes of having a maquila operation (except for brands, signs and trade names).
- The option of having a deemed return abroad through the use of virtual pediments is included in the definition of a maquila operation (alternative that was not possible under the terms of the proposed bill as originally submitted to the Mexican Congress).
- The requirement of a minimum exportation amount of at least 90% on the total annual invoicing is eliminated from the definition of a maquila operation, and instead, total operating income is now required to result exclusively from the maquila business.
- A requirement is added regarding that at least the 30% of the value of the machinery and equipment utilized in the manufacturing process shall be property of the foreign resident. However, such machinery and equipment must not have been property of the maquiladora or any other resident in Mexico which is a related party to the maquiladora.
Furthermore it provides that the transformation and repair process can be complemented with the machinery and equipment property of:
- The maquiladora company
- A non-related party that leases it
- A third foreign resident party having manufacturing commercial relationship with the company with which the Maquila has the manufacturing contract.
Notwithstanding, it is provided that in no event the machinery and equipment shall have been property of another company resident in Mexico which is a party related to the maquiladora.
- The elimination of the option for maquiladoras to comply with its transfer pricing obligations with reports reflecting values determined at arm's-length, and subjecting the maquiladoras to the obligation to determine their tax profit according to the rules commonly known as “Safe Harbor” (the higher amount from the 6.9% of the value of assets used in the maquila operation or the 6.5% of the total amount of manufacturing costs and expenses).
- Notwithstanding the above, it remains as an option for the maquiladora companies to request a private resolution in the terms of article 34-A of the Federal Tax Code to confirm the compliance of its obligations regarding transfer pricing (presumably with criteria and threshold according to market conditions, different from the rules corresponding to the “Safe Harbor” method).
- An additional 10% tax rate is imposed on dividend payments to individuals and foreign residents. The tax shall be withheld by the payer company from partners or shareholders; the dividend tax also applies to profits distributed by permanent establishments to their headquarters or other permanent establishments of foreign residents. It is established that dividends originating from profits generated until December 2013 will not be subject to the payment of this dividend tax. The dividend tax can be reduced or even eliminated if the shareholders or partners are residents from a country with which Mexico has signed a treaty for the avoidance of double taxation.
- Eliminates the Simplified Tax Regime. However, new rules are established for legal entities engaged solely in agricultural activities, livestock breeding, forest protection or fishing to continue enjoying the benefits currently applicable to the primary sector, although with certain additional limitations.
- The requirements to be complied with by Mexican Infrastructure and Real Estate Trusts (FIBRA, as per its acronym in Spanish) to enjoy tax benefits include that lease agreements executed on said trusts do not include variable amounts or percentages exceeding 5% of their annual earnings to be received as rent.
- Tax incentives applicable to the Mexican regime of Infrastructure and Real Estate Companies (SIBRA, as per its acronym in Spanish) are eliminated. Furthermore, it is established that the shareholders that contributed real estate as capital on a SIBRA, shall recognize the income derived from the alienations of such real estate no later than December 31, 2016.
- It will be no longer possible to take into account only the portion of price earned in an installment sale and a new mechanism is established to accumulate income.
- Mining companies will no longer be able to deduct in the same tax year exploration investments made in pre-operation periods; therefore, said investments may be deducted over a 10-year period.
- The option to deduct estimated disbursements remains for taxpayers performing construction works which include real estate developments or lot subdivisions, executing real estate development agreements or manufacturing fixed assets of long-term manufacturing processes and timeshare touristic service providers.
- The deductible amount for investments in automobiles was reduced to $130,000.00 pesos per unit without VAT. It also established a new limit of $200.00 pesos per day for car leasing.
- It is further established that exempt payments for workers and employees (i.e. fringe benefits) will only be deductible up to 47%. However, if the fringe benefits paid in a given year are not reduced from the payments made in the immediately previous tax year, they will be tax deductible in 53%. It is also established that the non-deductible portion of such payments shall be further deductible for the purposes of determining the base of the mandatory profit sharing payouts.
- With respect to the contributions made to create or increase reserves for supplementary pension funds to those established in the Social Security Law, and seniority bonus, such contributions will be deductible in up to 47%. However, if the benefit paid in a given year does not decrease from the one paid in the previous fiscal year, such concepts will be deductible in up to 53%.
- Payments which are deductible for Mexican or foreign resident related parties shall not be deductible for the purposes hereof, unless the related party deducting said payment in turn recognizes it is as taxable income.
- A maximum threshold is established for deduction of gifts made to the Federation, federative entities and municipalities, equivalent to 4% of the aggregate after-tax profit, without the total amount to be deducted exceeding 7% of the after-tax profit.
- Foreign residents' income obtained from royalties shall be taxed when subject to a subsequent productivity, use, exercise or disposition of the royalty rights or goods.
- Includes, as passive income for purposes of determining preferential tax regimes, the income deriving from the sale of real estate property, the grant of temporary use or enjoyment of goods and gratuitous increase on net-worth.
- A 5% withholding rate applies on income from foreign residents without a permanent establishment, for the lease of trailers or semi-trailers, imported on a temporary basis, to be used directly by lessee to carry goods.
- Establishes the power of the Tax authorities to request from foreign residents information sustaining the existence of double taxation with respect to operations with related parties located in Mexican territory. It is unclear if this provision pretends to limit the treaty benefits to those cases in which it cannot evidence a double taxation. It should be noted that this authority shall be exercised by whom has territorial jurisdiction.
Value Added Tax (VAT)
- VAT in border regions is increased from 11% to 16% in order to have the same rate at national level.
- The exemption for sales of goods between foreign residents is maintained, provided that the goods have been exported or introduced to Mexican territory under an IMMEX Program and the goods are under the temporary import regime.
- Eliminates the exemption for sales of temporarily imported goods from a foreign resident to a maquiladora company.
- Exemption for sales of goods carried out at strategic bonded warehouses is eliminated.
- Eliminates the VAT exemption on temporary imports; however, it is provided that those companies which secure a certification from the Tax Administration Service, as per the rules to be issued by the tax authority, be granted a 100% tax credit against VAT levied on them for such imports. Those companies not having such certification may guarantee their tax liability by means of a bond, in order not to pay VAT on temporary imports.
- The withholding obligation for the automobile industry and maquiladoras on purchases of Mexican suppliers is eliminated.
- Treatment applicable to international air transport of goods and passengers is harmonized, and 100% of the tax levied upon it may be credited.
- The 0% rate for hotel services and services related to foreign tourists is eliminated.
- A rate of 16% is set forth upon the sale of: (i) chewing or bubble gum, (ii) pets, and (iii) products processed for pet feeding.
- Multiple Purpose Financial Companies (SOFOMES, as per its initials in Spanish) are granted a treatment similar to those entities which form part of the financial system.
Single Tax Rate for Entrepreneurial Activities and Tax on Cash Deposits
- The Law of Single Tax Rate for Entrepreneurial Activities and the Law establishing Tax on Cash Deposits are repealed.
- A transitory provision sets forth that the obligations and rights derived from the IETU Law arisen during the validity thereof shall be complied with according to the amounts, forms, and terms established in such law and other applicable provisions. Therefore, it is important for the companies to correctly plan the closing of the fiscal year 2013, and the possible implications thereof in the fiscal year 2014.
Special Tax on Production and Services (IEPS, as per its initials in Spanish)
- Exemption for sales of goods carried out at strategic bonded warehouses is eliminated.
- It includes the sale and import of flavored beverages with sugar added (soft drinks, powders, syrups, etc.) as a taxable activity. Certain exceptions apply. The tax will be $ 1.00 per liter.
- It includes as a taxable activity the sale and import of certain non-basic food with high caloric values (275 kilocalories per 100 grams). The IEPS Law considers that non-basic foods are the following: snacks, chocolates, ice creams, custards, puddings, fried food, pastry, milk sweets, and cereal based food, among others. The rate approved is 8% of the sale price.
- It increases the rate applicable to the sale and import of beer. The beer with alcohol by volume of up to 14° G.L., will have a rate of 26.5% and up to 20º G.L., the applicable rate would be 53%.
- It establishes that the sale and import of cigars and tobaccos entirely hand-made would not apply the fixed fee according to its weight and it will only by taxed with the preferential rate of 30.4%.
- The temporary import of goods subject to this tax, carried out by maquiladora companies, Automotive Bonded Warehouse, Bonded Warehouse and Strategic bonded Warehouse, is also taxed; however, just like with VAT Law, companies are expected to obtain a certification from the Tax Administration Service stating that a tax credit was granted to be credited against 100% of the IEPS due. Those not having the certification may guarantee their tax liability by means of a bond, in order not to pay IEPS.
- Eliminates the exemption of IEPS Tax on goods exempted to passengers.
- Clarifies the timing when IEPS is levied when there are goods missing in taxpayers' inventories, and in self-consumption.
- The procedure which tax authorities should carry out when closing down premises in which gambling games and raffles are carried out and which do not have an online, real time system to count bets.
- The authority of local State Governments to administer tax upon gambling and raffle games is eliminated.
- It establishes an obligation for cigars and other cultivated tobacco producers to print a security code on each of the cigarette boxes for their sale in Mexico. Furthermore, the Tax Administration Service may seize the cigarette boxes which do not include the security code, and become property of the Federal Treasury.
- It will subject to the IEPS the sale and import of fossil fuels. The applicable Law considers as fossil fuels the Propane, Butane, Gasoline, Avgas, Turbosine, and other Kerosene, Diesel, Fuel Oil, Oil Coke, Coal Coke, Mineral Coal and other fossil fuel includes any other derived from oil and mineral coal destined for a combustion process. This tax can be paid by the delivery of carbon bonus, when these derive from projects developed in Mexico and endorsed by the United Nations. It imposes a tax on pesticides that have a toxicity level of 1-4. The applicable rates are: levels 1 and 2 - 9%, level 3 - 7% and level 4 - 6%.
- The procedure to determine applicable rates on gasoline and diesel is updated.
- The characteristics of fuels and diesel tax for States are amended.
Federal Law on Fees
- A special fee is set forth for holders of mining concessions applying a 7.5% rate to the positive difference resulting from reducing income originated by the sale of the extraction activity, deductions permitted by the Mexican Income Tax Law, except for: (i) investments, excluding exploration and prospecting expenses; (ii) interest accrued during the fiscal year, without any adjustment, and default interest, and (iii) the deductible annual inflation adjustment pursuant to the terms of the law (it established the need for a regional sustainable development fund of mining states and municipalities, allocating 80% of the proceeds of the mining fee to such fund, and the Federal Government will receive only 20% of total revenue).
- An additional fee is included for holders of mining concessions who do not carry out works and exploration or development activities pursuant to Mining Law, during two consecutive years within the first eleven years of the concession. A fee equal to 50% of the amount set forth in fraction VI of section 263 per hectare granted under concession shall be paid on a semiannual basis. For holders of concessions of twelve years or more, the fee shall be equal to 100% of said amount.
- The fees on coalbed gas, related to mineral carbon fields, is modified applying the rate obtained by multiplying the gas price by 2.5%.
- Includes the possibility of crediting final payments made related to fees over mining concessions against any mining fees of the Mining Law, avoiding a double payment of such fees.
- The fee for the issuance of a migration document which certifies the status of "Regional Visitor" stay is eliminated.
- It is established that international air passenger transport companies shall collect the migration services fee that is to be paid by both Mexicans and foreigners boarding international flights. Persons staying as Temporary Residents are exempted from payment of this fee if authorized under a scientific, cultural and educational exchange agreement.
- A new fee is required for the provision of the following services: review, process and, if applicable, issuance or renewal of a technical opinion for currency exchangers, money transmitters and non-regulated multiple purpose financial institutions.
- Tax fees for the use, enjoyment, deployment or operation of Mexican airspace are modified.
- A fee is required for the service of issuing different certificates related to safety measures in aircrafts and their operation, airports, safety management systems in aircrafts, operation, surveillance and monitoring of aircraft manufacturers' providers.
- New fees are imposed in connection with national waters.
- A fee for the service related to amendment (enmienda) regarding the modification of the heading or anchorage of a vessel, which is provided by port authorities is now included.
- A transitory provision is added to the Fedral Law on Fees so that the Federal Government, jointly with the Federal Telecommunications Institute, determines the amount of fees to be charged for the use, enjoyment or exploitation of bands of 698 MHz to 806 MHz and of 2500 MHz to 2690 MHz.
Federal Tax Code (CFF)
- It does not include the Anti-Avoidance Clause that would be applicable to the operations of taxpayers.
- Information requests in applications for refund and in reviews at tax authority offices shall be made electronically through electronic mailbox (also known as tax mailbox).
- It is specified that partners or shareholders' liability is limited to the percentage of their contribution to the capital stock and provides requirements that must be met in order for the tax authorities to be able to assess a joint liability.
- Executors, administrators or personal representatives of an estate are now also jointly liable.
- Limitations are set in order for tax authorities to be able to order precautionary attachment of assets (e.g. freezing of bank accounts).
- The capacity of a "guarantor" is defined and tax violations imposing criminal liability on legal persons, advisors, administrators, professionals, among others, are deleted from the CFF.
The above is a list of the main matters included in the Resolution issued by the Mexican Congress.