By Benjamin Glick
The period of time between 2013 and 2014 saw the tax structure in Mexico change dramatically. Seen as a shift away from reliance on U.S. investment and manufacturing to its own industrial base, Mexico exerted many new tax increases and reforms – such as increasing taxes on foreign residents from 30 to 35 percent, eliminating the scheduled reduction of corporate tax rate, and a general increase in most taxes such as VAT from 11 to 16 percent.
Foreign investment has been integral to the development of the Mexican economy, and will no doubt play a significant role in the future.
Any further reforms are likely to target and regulate burdensome practices by foreign companies claimed by the government of Mexico as the country transitions to a developed economy.
Despite increased regulation, Mexico remains fertile ground for growth, but knowing how to take advantage of the country’s still hospitable tax system is key to success.
Corporate and Resident Taxes
In Mexico, companies are subject to a 30 percent corporate tax.
In addition to preventing tax cuts for corporations, the 2014 tax reform also introduced for the first time a capital gains tax.
Arising from the sale of fixed assets, shares and real estate, capital gains in Mexico are subject to a standard tax rate.
For companies looking to expand into Mexico, it is not uncommon for foreign businesses to send personnel to supervise the development.
These foreign nationals in Mexico, for the time they reside in the country, are thus responsible for payment of residence taxes.
Residence, broadly defined, is determined if the individual in question has a permanent address in Mexico.
Residents, regardless of their nationality, are also subject to Mexican income tax on their income, regardless of where it came from. Income tax is progressive, and can reach up to 35 percent. Nonresidents are taxed on Mexican-source income. However, there is no net wealth or inheritance tax in Mexico. The return due date for taxes in Mexico is in April.
Residents of Mexico selling shares of a Mexican company are taxed at a rate of 10 percent, while nonresidents are subject to 25 percent, or 35 percent if the nonresident has a representative in the country.
Nonresidents are also subject to an additional 10 percent withholding tax on the net gain of publicly traded shares sold in Mexico. A sale must also be filed and a dictamen fiscal obtained from Ministry of Finance and Public Credit to ensure the reported tax has been calculated correctly.
Value Added Tax
Value added tax (VAT) is a consumption tax placed on goods, services or other transactions applied to the difference between seller price and resale price.
The standard VAT in Mexico is 16 percent on imports and zero percent on exports. VAT on imports is determined by the customs value of the import and the import duty.
A zero rate applies to exports used abroad, and under the current tax regime exporting companies can attain a favorable VAT balance that can be subject to refund.
VAT must be submitted in a monthly return, and must include information on main clients, service providers, and suppliers.
While not a tax per se, transfer pricing is a non-avoidance measure meant to prevent transactions between subsidiaries and their parent company that governments deem are tax dodging or exploitative of current tax regimes.
As a result, transfer pricing fixes the value of products and services so that even between affiliated companies, they operate at a level that would be expected of unrelated parties – referred to as the arm’s length principle.
For many medium to large companies, transfer pricing is a familiar practice when engaged in business through subsidiary companies in the U.S. and/or abroad.
There are six transfer pricing methods recognized in Mexico. They are the comparable uncontrolled price method (CUP), resale price method (RPM), cost plus method (CPM), profit split method (PSM), residual profit split method (RPSM), and transactional operating margin method (TOPMM).
Other Indirect Taxes
Other taxes and fees applicable to imports are General Import Tax (which is determined according to tariff classification number of the goods), Customs Processing Fee for using customs facilities and its personnel, and the Special Tax on Production and Services.
The Special Tax on Production and Services draws from the environmental and social impact certain goods brought into the country such as alcoholic beverages, tobacco products, and junk food.
These were implemented via a 2014 tax reform which introduced new environmental regulations to tax the import, sale and use of all fossil fuels except natural gas. The tax on carbon-dioxide emissions is USD $3.50 per ton of CO2.
The environmental tax also applies to the import and sale of pesticides ranging between 6 and 9 percent, depending on toxicity.
Tax Incentives – Maquiladoras
The 2014 tax reform removed most tax incentives, such as ones for fixed assets, land deductions, and real estate.
However, to continue promoting investment in Mexico and prevent manufacturers from shifting operations to other countries, incentives continue to exist for companies that produce goods or deliver services in Mexico.
As long as their materials are processed, transformed, assembled or repaired and then exported out of the country, foreign companies called maquiladoras have been allowed to import materials, machinery and equipment without duty payments and VAT.
Naturally, a maquiladora will acquire permanent establishment (PE) status, which would expose foreign principal to Mexican income tax, however, this can be avoided if the company adopts safe harbor rules and obtains an advance pricing agreement.
Under safe harbor, a maquiladora must report taxable income corresponding to either 6.9 percent of the value of its assets or 6.5 percent of its costs and expenses, whichever is higher.
Special Addendum – 2016 Reforms
Perhaps as a corrective move from the 2014 reforms, 2016 brings additional tax breaks and incentives to counterbalance the addition of increased taxation and regulation.
As of January 2016, multinational companies investing in Mexico will be offered lump sum depreciation deductions for fixed asset investments.
These include investments made by companies with revenues of less than USD $6 million per year, investments used to construct and expand transportation infrastructure, and investments in energy sector equipment.
Energy seems to be a running theme among the new incentives coming into effect. Companies willing to invest in renewable energy are eligible to apply a 100 percent depreciation rate to assets used to upgrade their businesses.
As the country takes firmer positions on long-term development, it is likely that more incentives encouraging companies to invest in the country’s energy and transportation infrastructure are to expand in the near future.
Doing Business in Mexico
If Mexico sounds like the next market you or your company has an interest in entering, consider attending the “Doing Business in Mexico” seminar hosted by the Van Andel Global Trade Center on Aug. 30th at Grand Valley State University’s L. William Seidman Center.
Bring questions regarding Mexico’s tax system for a panel of legal and business professionals, all with ties and experience to Mexico.
Disclaimer: The materials prepared in this article include general information on legal and tax issues and are not intended for the purpose of providing legal and/or tax advice. You should contact a licensed legal or tax professional to obtain advice with respect to any particular topic or issue.
About the Contributor
Benjamin Glick is a student assistant at the Van Andel Global Trade Center. He has written for the Grand Valley State University student newspaper, The Lanthorn, and is double-majoring in English literature and journalism.