Comprehensive tax reform is coming in Mexico: key highlights for businesses

by DLA Piper
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Mexico’s President Enrique Peña Nieto has submitted to the Mexican Congress a proposed bill for the comprehensive overhaul of Mexico’s federal tax system. If adopted by the Congress, these reforms would take effect as of January 1, 2014.

The stated purpose of this proposed overhaul is to establish a more socially just tax regime.  Specifically, this reform aims to increase federal tax revenue in order to create economic growth by investing in education and infrastructure (with special focus on the energy sector) and providing social safety nets, such as universal pension benefits to the elderly (those over the age of 65) as well as unemployment insurance for those who qualify.

It is important to note that these two entitlement programs are new to the Mexican political landscape and that the proposed bill includes provisions that define the programs and regulate their scope and function while, at same time, imposing new obligations on employers.

KEY HIGHLIGHTS

The proposed bill includes, among other amendments and additions, the following items of particular relevance to the business community.

Elimination of the Impuesto Empresarial de Tasa Unica or IETU, commonly referred to in English as the Business Flat Tax

Elimination of the Impuesto a Depositos en Efectivo or IDE, commonly referred to in English as the Cash Deposits Tax

A comprehensive overhaul of the Value Added Tax (VAT) Law, which includes, among other items:

  • an increase of the VAT rate from 11 percent to 16 percent in border areas and select tourist destinations
  • the application of the 0 percent VAT rate to medical and basic food items (currently exempt)
  • the application of the 16 percent VAT rate to the sale, rental and construction of housing, as well as on payment of interest on mortgages
  • the application of the 16 percent VAT to the temporary importation of goods and services, which are currently exempt if performed by maquiladoras (IMMEX)
  • the application of VAT, at a 16 percent rate (as opposed to 0 percent) to transfers between maquiladoras and to the supply of goods and services to maquiladoras by domestic suppliers.

Enactment of a new Income Tax Law (ITL), which maintains the corporate tax rate at 30 percent but includes the following deviations from the current ITL:

  • a stronger limitation on the use of foreign tax credits to offset Mexican income tax
  • streamlining of, and certain limitations on, allowable deductions and depreciation on investments
  • elimination of the tax consolidation regime, as well as preferential regimes for specific industries and interest groups
  • taxation of certain gains realized by foreign pension funds on the sale of Mexican real estate, provided that such gains are related to a Mexican trade or business (different from the concept of permanent establishment) and not just mere speculative investment on behalf of the fund
  • clarification and restatement of certain tax provisions applicable to income generated in Mexico by foreign tax residents
  • increase in individual tax rate from 28 percent to 30 percent, with the introduction of a 32 percent individual tax rates for people earning income in excess of MX$500,000 (approximately US$33,000) a year and
  • taxation of capital gains earned by individuals on the sale of publicly traded stock, as well as on dividends received from investments, in each case at a rate of 10 percent (previously exempt from income taxation).

The increase of some current and introduction of new consumption and excise taxes (e.g., for alcoholic beverages and soft drinks)

A new tax regime for PEMEX and the oil and gas industry

The imposition of special use and excise taxes for the mining industry.

A new tax on fossil fuels and other environmentally sensitive substances, such as pesticides.

With respect to procedural or compliance matters, the proposed bill aims to simplify Mexico’s tax reporting system to allow for more transparency and easier compliance while, at the same time, deterring and reducing tax evasion by corporate, as well as individual, taxpayers.

APPROVING AND ENACTING THE REFORMS

The comprehensive reform outlined above was introduced for debate, review, revision and, ultimately, final passage by the Mexican Congress. While vigorous debate and lobbying will take place with respect to some of the more controversial aspects of the proposal, such as  the proposed changes to the VAT regime and the creation of new entitlement programs, the expectation is that a substantial portion of the proposal, will be approved in its current form before the end of the year and will become law as of January 1, 2014.

This is a general overview of the aspects of the proposed reforms that are generally important to those doing business in Mexico.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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