© 2015 McGladrey LLP. All Rights Reserved. Mexican Tax Overview U.S. Mexico Chamber of Commerce Mexico as a Global Partner

© 2015 McGladrey LLP. All Rights Reserved. Edgar Lopezlena Mexican Tax Practice Leader  Based in our Chicago / Schaumburg offices, serving clients nation-wide  Native of Mexico City. Mexican CPA (Universidad Iberoamericana) and Mexican Institute of CPAs  Specializes in U.S.-Mexican cross border taxation  20 years of experience providing advise on complex Mexican tax issues to U.S. companies with a footprint or interest in Mexico  Areas of expertise include: Maquiladora taxation, Value-Added Tax, treaty application, transfer pricing, tax aspects of international transactions, international assignments, among other Mexico as a Global Partner – Mexican Tax Overview 1

© 2015 McGladrey LLP. All Rights Reserved. Today’s agenda  Mexican tax environment vs. other OECD Countries  Maquiladora taxation – A brave new world  BEPS  Additional reporting requirements  Dividend taxation  Questions / comments? Mexico as a Global Partner – Mexican Tax Overview 2

© 2015 McGladrey LLP. All Rights Reserved. Mexican tax environment vs. other OECD Countries  Mexico is an OECD member since 1994  Mexican income tax rate – Flat 30% for enterprise taxpayers  Competitive when compared to other OECD members  BUT: Government still struggles to obtain tax dollars Mexico as a Global Partner – Mexican Tax Overview 3

© 2015 McGladrey LLP. All Rights Reserved. Mexico as a Global Partner – Mexican Tax Overview 4

© 2015 McGladrey LLP. All Rights Reserved. Maquiladora taxation – A brave new world  Significant changes in the Maquiladora tax framework came into force in Income tax -Tests to prevent permanent establishment -Transfer pricing -Value-Added Tax Mexico as a Global Partner – Mexican Tax Overview 5

© 2015 McGladrey LLP. All Rights Reserved. Maquiladora taxation – A brave new world  Income tax -Repeal of a long-standing tax stimulus that reduced the Maquiladora’s effective tax rate to approximately 17% (even less in some cases) -All Maquiladoras are now subject to the statutory 30% tax rate -Some Maquiladoras have limitations on the amounts of salaries paid that are not includable in the employee’s taxable income -Possibility of appealing this limitation through legal proceedings  Tests to prevent permanent establishment -More clarity (GOOD) -More stringent rules (BAD) Mexico as a Global Partner – Mexican Tax Overview 6

© 2015 McGladrey LLP. All Rights Reserved. Maquiladora taxation – A brave new world  Tests to prevent permanent establishment (Continued) -Maquiladoras can no longer sell finished product in Mexico -More restrictive measures to source inputs from local vendors -Production assets owned by the foreign related party should represent at least 30% of the aggregate production assets used in the Maquila activity  Failure to comply: Foreign related party will be subject to Mexican taxes on at least a portion of the products manufactured or transformed by the Maquiladora, even if the products are sold outside Mexico  Action item: Re-examine Maquiladora’s structure Mexico as a Global Partner – Mexican Tax Overview 7

© 2015 McGladrey LLP. All Rights Reserved. Maquiladora taxation – A brave new world  Transfer pricing -“Safe Harbor” alternative approach still applicable (determine a minimum amount of profit based on a mechanism established by the law) – Highest between 6.5% cost plus or 6.9% ROI on production assets and other assets -Certain subtle changes in the rules can trigger a large net minimum taxable income under the “Safe Harbor” option -Alternative: Negotiate a transfer pricing policy with the Mexican tax authorities through an “Advanced Pricing Agreement” procedure -Lack of clarity on acceptable methodologies to opt for the APA -A significant portion of Maquiladoras are opting for the APA instead of the “Safe Harbor” Mexico as a Global Partner – Mexican Tax Overview 8

© 2015 McGladrey LLP. All Rights Reserved. Maquiladora taxation – A brave new world  Value-Added Tax -Maquiladoras now have to pay Value-Added Tax upon introducing into Mexico inputs and production assets used in the Maquila activity, unless they obtain a special certification -Additional reporting requirements to maintain the special certification and thus wave paying the Value-Added Tax Changes in maquiladora taxation have caused that some Companies are opting-out or considering opting-out of Maquiladora status for their Mexican manufacturing / transformation activities Mexico as a Global Partner – Mexican Tax Overview 9

© 2015 McGladrey LLP. All Rights Reserved. BEPS  BEPS = Base Erosion and Profit Sharing  OECD Action Plan on BEPS requires OECD member countries (including Mexico) to adopt complex practices and detailed reporting requirements  Transfer pricing compliance becomes more complex and granular  Additional reporting requirements for taxpayers Mexico as a Global Partner – Mexican Tax Overview 10

© 2015 McGladrey LLP. All Rights Reserved. Additional reporting requirements  As a consequence of BEPS, Mexico now has two additional reporting requirements  Monthly electronic filing of accounting books and records to a secure website administered by the Mexican federal tax authorities  Reporting of “Relevant Transactions” as they occur  36 types of Relevant Transactions, including, among other: -Adjustments in transfer pricing -Opting-out of Maquiladora structure -Payments to foreign related parties for certain intangibles -16 complex financial transactions -Reorganizations -Changes in ownership Mexico as a Global Partner – Mexican Tax Overview 11

© 2015 McGladrey LLP. All Rights Reserved. Dividend taxation  Until 2013 dividends paid by a Mexican entity were not subject to any level of Mexican taxation if the amount distributed was up to the CUFIN (Mexican version of “Accumulated Earnings and Profits”)  Excess dividends triggered a tax of 43% on the distributing entity  In 2014, dividends paid from post-2013 retained earnings paid to individuals or foreign resident are subject to a 10% withholding tax in addition to the corporate 43% tax on excess dividends  Under Treaty provisions, the 10% withholding may be reduced to 5% if the beneficial owner is a U.S. Company, and to 0% if the beneficial owner is a more than 80% owner of the Mexican entity  No relief for U.S. individuals that are the beneficial owners of dividends Mexico as a Global Partner – Mexican Tax Overview 12

© 2015 McGladrey LLP. All Rights Reserved. Questions? / Comments? Thank You Mexico as a Global Partner – Mexican Tax Overview 13

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