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Mexican Tax Reforms Gazetted

by Mike Godfrey, Tax-News.com, Washington

23 December 2013


Mexico's much-anticipated tax reform bill, which includes measures affecting the direct and indirect taxation of corporate taxpayers, has been published in the country's Official Gazette, completing the enactment procedures.

The reforms, passed by Congress in October 2013, cancel a phased cut in corporate income tax, enacted under previous legislation. This would have cut corporate tax by 1 percent to 29 percent in 2014 and by a further 1 percent to 28 percent in 2015. However, as a result of the new bill, corporate tax will remain at 30 percent in 2014 and subsequent years. A 10 percent tax will also apply dividend payments made by Mexican resident companies to non-treaty countries and capital gains realized from the sale of shares listed on the Mexican stock exchange from next year. However, the 17.5 percent alternative minimum tax, also known as the "flat tax," or IETU, has been abolished.

Many of the Government's VAT reform proposals failed to make the final draft. The most significant change that withstood parliamentary debate is to the VAT rate levied in border provinces, which is to rise from 11 percent to equal the headline VAT rate levied in the remainder of the country, 16 percent, from January 1, 2014.

Important changes are also made to Mexico's maquiladora tax regime. Maquiladoras are Mexican companies that process, transform, assemble or repair imported materials, parts and components into finished goods that are subsequently exported out of the country. So long as they meet certain requirements, these companies have been permitted to import the goods needed to carry out their production activities free of customs duty or import value-added tax and pay lower rates of corporate tax. They are also exempt from Mexico's permanent establishment rules.

The changes gazetted this month tighten the qualification criteria for a company to avail of the maquiladora regime. As originally proposed, the tax reform bill would have required that maquiladoras derive 90 percent of their turnover from exports to qualify for the permanent establishment exemption. This was amended in the legislative process to require that a maquiladora's income associated with "productive activities" be derived solely from its maquila activities for the maquiladora to qualify for the permanent establishment exemption, and not include sales of products directly to Mexican customers. There is some uncertainty as to the precise definition of "productive activities," although the Government intends to issue guidance on this change in due course. Additionally, only two transfer pricing methods are available for maquiladoras–a safe harbor method and a possibility of an advance pricing agreement (APA) from the tax administration.

In a last-minute u-turn, it was agreed that goods produced within maquiladoras that are sold to non-residents would remain exempt from VAT. Temporary imports to maquiladoras, used by companies to make taxable supplies, will newly incur input VAT. However, this input VAT will be fully and immediately refunded through a 100 percent tax credit. It had previously been proposed that input VAT be recoverable only after the relevant consignment is exported. Instead, the Government has committed to up oversight of companies based in maquilas.

Proposals to add food and medicines to the VAT base were earlier abandoned. However the Government confirmed that it would proceed with the introduction of VAT on sugary drinks, pet food and chewing gum. A greater number of entertainment services and international transporation services will also be added to the VAT base.

In some other key tax changes affecting businesses: the current consolidation regime will be abolished and replaced by a new version; a new foreign tax credit system will be introduced; foreign residents claiming treaty benefits will have to appoint a Mexican tax resident; there will be no deduction allowed for related-party payments abroad if the payments are subject to an effective rate of less than 75 percent of the Mexican corporation tax rate; the immediate expensing of certain investment will be disallowed, while certain other deductions will also be restricted.

The tax reform package also introduces changes to the mining tax regime, most notably an increase in the mining royalty to 7.5 percent (8 percent for miners of precious metals), and a new 10 percent per year depreciation schedule, which replaces the 100 percent first-year deduction for pre-mining expenses previously in place.

TAGS: tax | business | value added tax (VAT) | tax incentives | mining | corporation tax | Mexico | tax credits | legislation | transfer pricing | advance pricing agreement (APA) | withholding tax | tax reform

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