Presentation on theme: "Overview of Mexicos tax system regarding U.S. Business and commercial activities in Mexico."— Presentation transcript:
Overview of Mexicos tax system regarding U.S. Business and commercial activities in Mexico
Agenda Doing business or commercial activities in Mexico. Direct transactions by US resident. Permanent Establishment (Branch). Mexican Subsidiary. Tax Losses. Mandatory Employee Profit Sharing. Profit distribution (Dividends) tax structure. Sale of Shares. Thin Capitalization rules. Asset Tax. Value Added Tax.
Alternatives for Doing Business in Mexico Foreign Co. Branch USCO Inc. MexCo, SA or SRL USA MEX B C Foreign Resident for tax purposes A
Structure of operations for Income Tax in Mexico All individuals and corporations are subject to pay income tax in Mexico, under the following circumstances: –If they are residents in Mexico, obligation to pay income tax includes all revenue, even if sourced out of Mexico.
Structure of operations for Income Tax in Mexico –Foreign residents with Permanent Establishments (PE) in Mexico, are subject to pay for the income that is attributable to that PE. –Foreign residents whose revenue is sourced in Mexico, only if: Do not have a PE in Mexico, or they have a PE but that revenue is not attributable to such PE.
Alternative A Foreign Resident for Mexican tax purposes Foreign residents that have no PE in Mexico will be subject to pay in Mexico for all revenue received in cash, goods or services, as long as those revenues are sourced within Mexico. Payment method and due date. Payment of the Income Tax is ussually aplicable thru a withholding method, and the tax has to be paid either on payment date or on the due date of payment, whichever is first.
Alternative A Foreign Resident for Mexican tax purposes Withholding payment Its ussually done by the Mexican resident who performs the payment, or by the foreign resident if payment is done thru a PE in Mexico. On some cases, payment might be due directly from the foreign resident.
Alternative A Foreign Resident for Mexican tax purposes Type of income for Foreign residents Salaries and professional fees. Lease of goods. Sale of real estate. Sale of shares. Dividends. Interest. Financial Lease. Royalties and Technical Assistance. Construction. Artists and athletes.
Subsidiary vs. PE Mexican Subsidiary Worldwide income is taxable Transfer pricing rules Reduced liability exposure (SA, SRL) Permanent establishment (Branch) Only taxable on attributable income Payments to parent company non-deductible Corporate veil easily broken, liability for USCO. Not for Maquila purposes.
Alternative B Permanent Establishment Any fixed place of business, where full or partial business activities are performed. Among others, the following are usually considered PEs : –Branch, agency, office, factories, workshops,any place for extraction or exploration of metals Foreign Residents that operate thru a person different that an independent agent. –Are considered a PE, especially if this person has power of attorney to act in behalf of the US resident.
When the Non Resident operates thru an independent agent, it will be considered a PE if the agent meets the following criteria: –The agent does not operate under its ordinary scope of activities. –The agent has in existence good and merchandise which he delivers on behalf of the foreign resident. –Assumes risk that belong to the foreign resident. –It is subject to detailed instructions and control from the Foreign resident. –Receives pay, without taking into consideration the end result of the activities Alternative B Permanent Establishment
Construction services –Applies to building, demolition, instalation, instalation, projection and supervision activities. –PE is considered when the Foreign resident operates in Mexico more than 183 days (consecutive or no) in a 12 month period. Alternative B Permanent Establishment
The ITL does not consider a PE under the following circumstances: –The use of facilities with the objective of exhibiting or storing goods or merchandise. –The purchasing of goods or merchandise to send to foreign land. –Preparatory or auxiliary activities –The use of bonded warehouses. Alternative B Permanent Establishment
Alternative C Mexican Subsidiary S.A. de C.V.S.R.L. Partners Minimum 2, unlimited maximum Minimum 2, maximum of 50 EquityMinimum $50,000 Pesos Minimum $3,000 Pesos US Tax benefit NoneUS preferential tax treatment as flow thru structures Type of corporate structure Tax treatment is the same for Mexican purposes
General Mexico Income tax Issues Corporations and Permanent Establishments are taxed by the determination of the net taxable income, which is determined by the income less the deductible expenses for the year. One Federal Corporate Income Tax rate –2006 – 29% –2007 – 28% –No state income tax Previous year losses may be reduced.
Tax Losses Possibility to carry forward for 10 years No carry back. Possibility of adjusting with inflation. First year with Index rate from July to December Following years from December to June of the year of amortization.
Tax loss Inflation Adjustment TAX LOSS 2004 $256,829.00 1st. Adjustment December 2004 July 2004 ADJUSTED TAX LOSS 263,372.00 2nd. Adjustment June 2005 December 2005 ADJUSTED TAX LOSS $267,618.00
Mandatory Profit Sharing Mandatory 10% employee profit sharing. 1 year holiday. No inflation accounting. Dividends received counts as income (not for IT). Tax losses may not be carried forward. Not a tax, which means no FTC in most countries.
Total revenue. (- ) Allowed Deductions. --------------------- Taxable Profit Paid Profit Sharing (*) (- )Paid Profit Sharing (*) (- )Previous Years Tax Losses ----------------------- (= )Net taxable income Mandatory Profit Sharing (2006) (*) Starting in 2006 In 2005 considered a deductible expense if amount paid exceeds exempt taxable employee benefits.
Sale Of Shares US Co Sale of Shares Sale of Shares Mex Co Shares 100% US Co
Sale Of Shares Withholding of 25% over gross sale price ór 29% over profit if foreign resident appoints a legal representative In Mexico, and the transaction is audited by an independent CPA. Cost basis is determined by –Original cost – (+) Inflation adjustment –(-) Tax losses incurred –(+/-) Difference in balance of the NAPTA account
Under Mexican income tax law, profit distributions are only taxed once at the corporate level. Profits distributions include not only dividend payments but also reimbursement of shares due to corporate capital reductions or a companys liquidation. Profit Distribution
Net taxable Income (-) Income tax paid (-) Non deductible expenses (-) Non deductible profit sharing (=)Net After Profit Account Net After Tax Profit Account (NATPA)
Net After Profit Account (+) Received Dividends (-) Distributed Dividends fron NATPA account (=) Accumulative Net After Profit Account Accumulative Net After Tax Profit Account (NATPA)
Profit Distribution If Dividend comes from NAPTA no Income Tax is paid. If payment exceeds NAPTA or there is no balance in this account, corporation pays the Income tax for such distribution in accordance with these factors: Year Factor Rate 2006 1.4085 29% 2007 1.3889 28%
If Income Tax is paid for profit distribution, the amount paid is fully creditable versus the corporate Income Tax of the corporation. This credit is allowed in the year of the profit distribution or the following two years. No inflation adjustment is allowed. Profit Distribution
Example: Company Corona-Tequila,S.A. de C.V. distributed dividends on june 30th 2005, for the amount of $ 650,000.00, at that date NAPTA account had an adjusted balance of $500,000. Total dividend distribution on June 2005:$ 650,000.00 -Adjusted balance of the NAPTA account at the Date of distribution:$ 500,000.00 Distributed Dividends that exceed the NAPTA account:$ 150,000.00 NAPTA balance after distribution:$ 0.00 Profit Distribution-Example
Determination of Income Tax due for the distributed dividends that exceed the NAPTA balance: Dividendss that exceed the balance of NAPTA:$ 150,000.00 (X) Gross up factor: 1.4085 =Result:$ 211,275.00 (X) Income Tax corporate rate: 30% =Income tax payable for profit distribution (*) :$ 63,382.50 Profit Distribution-Example (*) This tax is fully creditable for the Income Tax of the corporation for 2005, 2006 or 2007
Thin Capitalization rules US Co Mex Sub Capital? Debt?
Debt vs. Equity Since 2005, Thin capitalization rules, limit of 3 to 1 ratio for Debt versus equity. Debt. Interest deduction in Mexico Inflationary gain reduces interest deduction Loans denominated in US Dlls and record exchange losses to hopefully offset impact of inflationary gain. 4.9 W/H tax on interest paid to US banking institutions. 15% W/H tax on interest paid to US residents other than banking institutions.
Equity Inflation adjustment on equity added (capital increase) to stock basis. No W/H tax on dividends to the extent of NAPTA (Fiscal Net Income Account). Investment can be repatriated as a reimbursement of investment without any tax implication. Only if original contribution is higher than equity at the time of reimbursement If not deemed a profit distribution.
Debt vs. Equity Equity, treatment of sale Any change of ownership is subject to tax. Election to net gain taxation upon prior consent from Tax Authorities. Stock basis step-up for undistributed earnings and step-down for losses.
Thin Capital Rules Interest paid will not be deductible if company falls under thin capitalization criteria. A company is considered thinly capitalized when the liabilities exceed 3 times the amount of equity. –If any of the liabilities come from a related entity. –If the interest bearing liability comes from non related foreign resident but the company has other related entities in Mexico it has to comply witht he three to one ratio, in order to fully deduct the interest paid.
Thin Capital Rules If debtor is……and loan comes from… …then thin capital rule………. Mexican without RE'sMexican non RE of debtorNon applicable Mexican with RE's Mexican RE of debtor applicable Mexican without RE's Foreign Resident not RE of debtor Non applicable Mexican with RE'sForeign Resident not RE of debtor applicable Mexican with RE'sForeign Resident RE of debtor applicable
Thin Capital Rules Determination of Excess of Liabilities over equity Yearly Average of liabilities ( Equity (Beg. Balance + Ending Balance) x 3 2 ) - Final Monthly balance # of months of the year
Non deductible interest Accrued annual interest Annual debts average Excess of debts Thin Capital Rules x =
Yearly average of accounts payable (ending balance of each month of the year divided by the number of months) 2,500,000$ Minus: Average Equity for the year Beginning equity500,000 Ending equity600,000 / 2 =550,000 Three times the amount of equity550,000 X 3 =1,650,000 Excess of liabilities (3 to 1 ratio) 850,000
Thin Capital Rules Excess of liabilities850,000 Average liabilities2,500,000 Interest rate5.00% Interest that correspond to the year125,000 =0.0500 Average liabilities2,500,000 Factor to apply to excess liabilities 0.0500 Non deductible interest42,500
Thin Capital Rules As a tax reform for 2006, the following account payables are not included in the yearly average: To distribute dividends To reduce the stock To sell assets To engage in new credits To transmit the majority of the shares That allows the loan company to participate in the determination of the best use of funds. - Option for application in 2005 Credit subject to terms that limit the capacity of the debtor
Tax on Assets An alternative minimum tax –3 year carry back, 10 year carry forward 1.8% average assets less certain debts –Since 2005 debt with banks and nonresidents is reduced 4 year holiday –Except for leasing –Interrupted upon mergers, spin offs and transformation
Value Added Tax 15% imposed on Sale of goods Services Leasing Imports 0% on exports (direct & indirect) enabling the tax to be refunded or offset against other taxes. 10% on the border region.
Value Added Tax Service Provider USCO Mex Co Shares Supplier VAT PAYABLE 0 VAT CREDITABLE 150 FAVORABLE BALANCE 150 Export 0% VAT Paid 100 VAT Paid 50 USA MEX