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Mexico Info · Joined: 01 Dec 2006 Posts: 17 Home Country: mexico

DOING BUSINESS IN MEXICO

FORMS OF BUSINESS ORGANISATION

Principal forms of doing business

Mexico has all the usual forms of business organisation, including the stock company (sociedad anónima—SA) and the limited-liability company (sociedad de responsabilidad limitada—SRL). Any of them can be of variable capital (CV).

Requirements of an SA in Mexico
Capital. Minimum Ps50,000, at least 20% of which must be paid in initially. Shares payable in kind must be paid in full immediately and remain on deposit with the corporation for two years; if the assets represented by the shares decline in value by more than 25% during that period, the shareholder must pay in the difference. Firms must place 5% in a legal reserve until the reserve equals 20% of authorised capital.

Shareholders. Minimum two shareholders (one may hold only one share). Board of directors, minimum of two. A minority that holds 25% or more of shares (10% if company shares are traded on Mexico’s stock exchange) has the right to appoint one director. Foreigners may be appointed to the board only in direct proportion to the authorised foreign capital participation in the company. There are no residency requirements for board members.

Management. One individual manager may be appointed. There are no nationality requirements.

Labour. There is no requirement that labour be represented on the board. Firms must distribute 10% of pre-tax profits to employees.

Disclosure. Corporations must be supervised by examiners, who are appointed at a shareholders’ meeting (a 25% minority can name additional examiners). No publication requirements (except for companies listed on the stock exchange).

Taxes and fees on incorporation are minor, but legal fees might be substantial. In accordance with the Mexican Income Tax Law, corporations with gross income exceeding Ps27.4m, assets exceeding Ps54.9m, or more than 300 employees must file a special report prepared by an independent public accountant with the tax authorities.

Types of shares. Only nominative shares are permissible. For purposes of “Mexicanisation”, shares are often classified as “A” or “B”, with “A” shares restricted to Mexican ownership. Foreigners often hold non-voting “N” shares; “T” shares exist for companies that own agricultural land. Special labour shares may be issued. Founders may receive up to 10% of the corporation’s profits every year during the first ten years of existence by means of founder bonds, provided the shareholders have received at least a 5% dividend each year. Shares may be common or preferred. Preferred shares carry limited voting rights (exercisable only during actions to transform, merge, dissolve or make other major changes) and receive a cumulative dividend (usually 5%, sometimes less) before the common shares may participate in the corporation’s profits.

Control. A simple majority of shareholders has control, unless the charter calls for a larger majority (as frequently occurs for major decisions). Annual general meetings are required; representatives of half the corporate capital constitute a quorum. For extraordinary meetings (that is, those undertaking major changes in the corporation), 75% of capital is necessary for a quorum on first call and 50% thereafter. Decision is by a simple majority.

Establishing a branch

Although a few companies have established them, branches are at a disadvantage for several reasons. Mexican authorities do not regard them highly; they may not own real estate; and they may not deduct payments to the parent for royalties, interest, fees or other services. Moreover, establishing a branch takes more time and money than establishing a corporation, and branch charters usually contain more restrictions than corporation charters. Because branch offices are not legally separate from the parent company, parent companies can be held responsible for the liabilities of a branch.

Approval from the Secretariat of Foreign Relations (Secretaría de Relaciones Exteriores) is no longer necessary (since July 1996) for a foreign company to open a branch office in Mexico. Newcomers instead deal exclusively with the Secretariat of the Economy (Secretaría de Economía), thus reducing the time and paperwork involved.

Setting up a company

Mexico has all the usual forms of business organisation, including the stock company (sociedad anónima—SA) and the limited-liability company (sociedad de responsabilidad limitada—SRL). Several other forms of organisation are suitable only for small operations, such as a general partnership (sociedad en nombre colectivo) and a joint-stock company (sociedad en comandita por acciones). Foreign companies are subject to the same laws as local firms. The permit for establishing a company requires inclusion of the Calvo Clause in the byelaws and on share certificates. This clause waives the right to invoke foreign diplomatic intervention and relinquishes any claim to treatment different from that accorded to Mexican nationals.

The SA and the SA de CV are the most frequently used forms of organisation for foreign investors. The SA most closely resembles the public limited company or corporation. Foreign investors with wholly owned subsidiaries that want added flexibility in increasing or decreasing capital have favoured the SA de CV. The only difference between the SA and the SA de CV is the variable portion of an SA de CV’s capital stock, which is usually unlimited.

Organising a local corporation can take two to four weeks or longer, depending on the complexity of the project. A permit must first be secured from the Secretariat of Foreign Affairs. A minimum of two shareholders must then appear before a notary public to sign the deed of incorporation, which must contain the names, nationalities and other particulars of the founders; the name, domicile, purpose and duration of the company; a breakdown of its capital and a statement of the founders’ contributions and their value; a description of the manner of administration; names of directors, managers and supervisors; the manner of liquidation; and all other special agreements that will regulate the operation. Usually, at least 20% of the capital shares must be paid immediately, and the remainder within one year.

BUSINESS TAXATION

Overview

In late 2004 a proposal was introduced to reduce the current applicable tax rates by 3 percentage points, ie 15–12% and 10–7%. Creating a new tax that imposes a 3% levy on the sale of goods and public services would compensate the reductions. This attempt was blocked by the Congress because of the lack of an agreement between the Partido Acción Nacional (PAN) and the Partido Revolucionario Institucional (PRI).

The gradual reduction of the corporate tax rate had already been implemented in 2002, aiming to make Mexico more attractive for foreign investment. It was expected that for 2005 the corporate tax rate would be 32%. However, tax reforms for 2005 made significant changes in domestic tax law. The aforementioned reforms provide for a 30% corporate tax rate applicable in 2005. The gradual reduction of the corporate tax rate—declining by 1 percentage point per year—remains in force from 2005 to 2007, when the corporate tax rate will be 28%. Mexico has made electronic filing mandatory for companies and individuals, except for those conducting business activities with annual revenues of less than Ps1.7m and for individuals with no business activities with annual revenues of less than Ps0.3m. Monthly filing is also mandatory for all taxpayers, except for a special small-taxpayer regimen and a rental-income regimen.

The Finance Secretariat, headed by Francisco Gil Diaz, has vowed to continue the fight to eliminate IVA exemptions, since zero-rate and exempt industries create tax loopholes that hinder revenue collection.

An October 1999 agreement signed by the US and Mexico allows maquiladora owners to avoid being taxed as Mexican companies if they opt for an advance-pricing agreement. This agreement can take the form of a Mexican transfer-pricing or safe-harbour pact, and is described as a miscellaneous (a directive published by the Ministry of Finance that remains in force until the ministry or the government changes it), which allows the maquiladora to remain a non-Mexican establishment for tax purposes. The miscellaneous was extended in 2002 until 2007. However, the maquiladora industry cited tax-status uncertainty as a disincentive for investment in Mexico since the changes are not written into the body of the Income Tax Law (Ley del Impuesto sobre la Renta). As of 2003, the options for maquiladoras to be taxed are included in the Income Tax Law.

Mexico’s tax regime is competitive with those of other North and South American countries; historically, however, Mexico has had low tax compliance and lax enforcement. Between 1921 and 1988 the tax authorities brought charges against only two taxpayers for tax irregularities. The Fox administration has made tax collection one of its highest priorities, following the lead of the Zedillo administration, when there were arrests of high-profile citizens for tax evasion in 1996 and increases in audit levels. Tax revenue is expected to be 11% of GDP in 2005, a figure that tax officials say could increase to 13.7% by 2006 if the IVA is applied to medicines, food and books.

Mexico re-imposed excise tax on new vehicles in 1997. Although the tax was originally to be collected by the states, it was returned to federal jurisdiction after non-compliance by the individual states threatened effectively to eliminate the tax. The vehicles tax may be eliminated in future as a stimulus for the automotive industry. States retain their authority over taxes on real-estate acquisitions, alcoholic beverages and hotel rooms. The increased involvement of the states in revenue collection is part of an effort by the Finance Secretariat to grant increased influence to Mexico’s states and to reduce the historic fiscal primacy of Mexico City.

The government established an appeals office (Ventanilla de Justicia) in February 1996 for businesses and individuals seeking reconsideration of rulings in tax reviews and audits. Those seeking to appeal against a decision must do so within six days of that decision. The office does not adopt formal legal procedures, but it promises a fair review of the Tax Authority’s decisions (Servicio de Administración Tributaria).

Tax-bracket indexation and mandatory independent audits for medium-sized and large firms took effect in January 1991. The audit requirement for 2005 applies to all taxpayers with gross incomes exceeding Ps27.4m, assets exceeding Ps54.9m or having more than 300 employees. This requires that a special report be prepared by an independent public accountant and filed before the Mexican tax authorities. All invoices since mid-1992 have had to be printed by authorised printers, which must maintain records of printed invoices and provide this information to tax authorities. This requirement, designed to crack down on tax evasion, has provoked considerable protest and the tax authorities have indicated that companies using “tamper-proof” computerised invoicing systems may continue to issue their own invoices.

The standard rate for 2005 is 30%. Tax reforms for 2005 include a reduction in the income-tax rate of 1 percentage point per year until it reaches 28% in 2007. Income generated by branches or agencies of foreign firms is subject to the same federal tax as that of corporations. Special reduced rates are available for companies engaged in certain industries: 46.67% in 2005 and 44.83% in 2006 for companies engaged solely in agriculture, livestock, forestry and fishing. The rate for the publishing industry was reduced to 40% for 2002, with the incentive reduced by 10 percentage points per year until it is eliminated in 2006.

Taxable income and rates

Deductions
Mandatory profit-sharing payments used to be non-deductible. Beginning in 2005, 80% of the excess of profit shares over tax-exempt fringe benefits paid to employees may be deducted from taxable profits or increase carryforward losses. Starting in 2006, profit shares paid to employees may be deducted from taxable profits or may increase carryforward losses, without restrictions. Non-deductible items are provisions for employee liability and indemnity reserves. To qualify for a deduction, other expenses must be either essential to the running of the business or constitute a charitable contribution. Deductions require adequate documentation, including the tax registration number of the recipient of payment.

Under the 1997 tax amendments and starting in 1998, companies, individuals and resident foreigners must pay taxes on all earnings from companies or accounts in low-tax jurisdictions. (Under the previous tax code, companies and individuals had to declare and pay taxes only on dividends earned from companies or accounts in these areas.) Failure to report investments in tax havens can result in criminal penalties.

All types of cars may be claimed as deductions in 2005, subject to some value limits (previously, luxury cars were not deductible.) Restaurant expenses were reintroduced as 75% deductible for 2005, if the amount is paid with a credit or debit card.

Dividends are neither deductible by the corporation distributing them nor included in the gross income of the recipient (although they are included in the income base for calculating profit sharing). Company cars must be used solely for business purposes. Deductions are also available for personal retirement and savings accounts and payments for environmental-protection equipment.

Title II of the tax system aims to recognise the “real” reduction in debt that occurs as a result of inflation and the corollary decrease in the return on assets. Under the law, any excess of the inflationary reduction in debt over the amount of interest paid out is taxable as an “inflationary profit”, but any excess of the inflationary increase in the value of assets over the return on assets is tax-deductible. The system treats as interest both foreign-exchange losses and net gains from the sale of financial instruments, such as petro-bonds.

Until 1986, goods could be deducted as of the moment in which they formed part of the cost of sales. As of 1987—and the enactment of the New Basis as a result of inflation—goods could be deducted when purchased; this provision was amended the following year to enable their deduction when acquired. Thus, in terms of the cost of sales, the tax law used to allow immediate deduction of all purchases. According to the government, because inflation was rife in Mexico during these years, in such conditions, the deduction of goods when forming part of the cost of sales would have led to a lower result in real terms. As Mexico currently has single-digit inflation, the deduction of goods acquisitions is no longer justifiable. Therefore, as from January 1st 2005, the cost of goods sold, rather than the cost of acquisition, may be deducted.

Transitional rules have been established for the taxation of the 2004 inventory-ending balance (December 31st 2004), which has already been deducted under the 2004 law. Such rules establish a procedure to determine an average inventory turnover of the taxpayer for the last three fiscal years, and, depending on that, identify whether proportional taxation will need to be made within a range of four to twelve years.

Nonetheless, taxpayers must maintain inventory-control records and must include inventory in the average value of a corporation’s assets for purposes of the 1.8% minimum-asset tax. Small businesses are exempt from the asset tax for 2005. A recent decision of the Mexican Supreme Court declared unconstitutional the practice of denying the deduction of debts incurred with non-resident companies or debts incurred with or through the financial system for purposes of determining the asset taxable base. Congress has now approved an amendment allowing for such deductions.

Capital gains from the sale of real estate, machinery and equipment are included in their entirety in gross income, subject to an adjustment for inflation. Interest income is taxable when earned but is also adjusted for inflation.

Corporate taxpayers may carry losses forward against tax liabilities for ten years. Loss carryback is not available.

Loss relief
Depreciation is calculated on a straight-line basis. The tax system offers the option of a one-time, present-value deduction for newly acquired assets, with the exceptions of investments in cars, lorries, trailers, buses and airplanes. Updated rates were implemented in 2000 for assets used in railway, telecommunications, mining and electricity industries. For the railway industry, rates are stipulated for communications systems (10%), railways (5%), tanks (3%), railway wagons (6%), and other machinery and equipment (7%). Rates for telecommunications are as follows: transmission towers (5%), non-electromechanical call centres (25%), radio systems (8%), transmission equipment (10%), other equipment (10%), ground satellites (10%) and space satellites (8%).

Other rates include assets of telegraph services (16%); mining-industry assets (12%); and electricity generation, conduction, transformation and distribution assets (5%).

The annual rates for machinery and equipment vary by industry; for example, production of metals and natural coal derivatives (6%); pulp and paper manufacturing (7%); manufacture of motor vehicles and parts, metal products, machinery, and professional and scientific instruments and for the processing of beverages and food (8%); production of chemicals, petrochemicals, pharmaceuticals, and rubber and plastic items (9%); electric transport (10%); manufacture of textiles and apparel (11%); airplane construction (12%); air transport companies (16%); in restaurants (20%); and agriculture, livestock raising and fisheries (25%). Rates common to all industries exist for buildings and construction (5%), intangibles (excluding goodwill) and deferred charges (5%), and office equipment (10%).

Special rates apply to some items, such as dies and moulds, pollution-control equipment (100%), computer-manufacturing equipment (50%), equipment used to develop new products and local technology (all 35%), aircraft used for agricultural fumigation (25%), other aircraft (10%), buses (25%), electronic computing equipment (30%) and mechanised equipment for computer systems (30%).

Consolidation
Mexican law allows corporate groups to be taxed on a consolidated basis. The filing of a consolidated return has significant advantages, most notably the fact that the losses of some group companies can be offset against the profits of others. Also, dividends paid among companies of the group are not subject to any tax, notwithstanding that dividends do not originate from the UFIN (net-of-tax profit) account. For tax purposes, a consolidated group consists of the Mexican holding company and the subsidiaries in which it has effective direct or indirect ownership interests in excess of 50% of the voting shares. It is important to note that the consolidation is on a proportional basis, based on the percentage owned directly or indirectly by the controlling company. Only companies residing in Mexico can be treated as holding companies.

Consolidated tax returns must be filed beginning with the year after the authorisation from the Secretaría de Hacienda y Crédito Público (Secretariat of Finance and Public Credit, SHCP) has been granted. Once consolidation for tax purposes has been elected, it must be continued for a period of at least five years.

In order to incorporate a company into the consolidation, the ownership must exceed 50%. In previous years, the “consolidation participation” was equal to 60% of the actual ownership percentage. As from January 1st 2005, the consolidation participation is equal to the actual ownership percentage. Thus earnings or losses must be included in the consolidated tax return to the extent of the average participation held by the holding company in each of the controlled companies. This is one of the most significant changes to the consolidation procedure, as it will increase the competitiveness of the Mexican tax system.

With regard to asset tax in 2005, the holding company will determine the consolidated taxable base considering 100% of the value of the assets owned by controlled companies.

Indirect equity holdings are limited to the percentage maintained through other consolidating group companies.

Changes to consolidated taxable income or tax losses resulting from variations in equity holdings in subsidiaries or from deconsolidation of such subsidiaries, as well as cancellation of tax loss carryforwards of any deconsolidated subsidiaries, must be included using a restatement factor for inflation.

Because of the reforms introduced in 2005, taxpayers must disclose in the tax report issued by an independent public accountant the amount of income tax that has been deferred as a result of electing to file a consolidated tax return. Failure to disclose this information will result in deconsolidation of the group.

Withholding tax on dividends
Dividends paid are non-deductible in computing taxable income, and dividends received are not included in taxable income. According to Mexican legislation, there is no withholding tax on dividends. As from 2005, income tax paid by a non-resident company that distributes dividends to another non-resident company, which, in turn, distributes dividends to a Mexican corporation, may be credited against the Mexican corporation’s income-tax liability provided the following conditions are satisfied:

* The dividend and the income tax are accrued by the Mexican corporation.
* The Mexican corporation owns at least 10% of the first-tier company.
* The first-tier company owns at least 10% of the second-tier company.
* The minimum combined ownership in the second-tier company is 5%.
* The Mexican government has concluded a broad exchange of information agreement with the country where the second-tier company is resident.

Withholding tax on interest
International tax treaties, the Income Tax Law and administrative tax decisions (known as miscellaneous) govern taxes on interest. Miscellaneous are directives published by the Finance Secretariat that remain in effect until the ministry or the government changes them. Taxpayers may choose the most suitable regime but may not interchange them. Under the current Income Tax Law (2005), interest payments to foreign banks resident in tax-treaty countries are taxed at a rate of 4.9%.

Under 1997 tax amendments, interest on loans granted by related parties is considered to be a dividend if (1) the interest is non-deductible because it exceeds market rates; or (2) the interest payment arises from a back-to-back loan. The Income Tax Law defines these as loans of cash, goods or services to an intermediary, who then provides cash, goods or services to a debtor (or alternatively a loan that is secured by cash, goods, services or a deposit made by a related party or the debtor itself).

As from 2005 thin-capitalisation rules have been introduced to prevent companies from using debt as a means to distribute profits to shareholders. Interest paid on loans granted in cash by related parties in excess of three times stockholders’ equity may not be deducted. These rules are, however, not applicable to taxpayers that obtain an advanced pricing agreement from the tax authorities, or to financial institutions.

The restriction on interest deduction applies to interest on debts held by the taxpayer with non-resident independent parties provided the Mexican taxpayer has a related party. Apparently the intention of such rules is to attack back-to-back loans used by Mexican corporations. Nevertheless, it only reflects the fact that the Tax Administration Service has not been able to counteract the use of back-to-back loans with existing rules in the Mexican Income Tax Law. The interest deduction restriction might violate the non-discrimination rules in Mexico’s tax treaties. Under this scenario, the thin-capitalisation rules are not applicable to taxpayers that have obtained an advance pricing agreement that confirms that the taxpayer has obtained an arm’s-length profit, in its dealings with other related parties. The advance pricing agreement must be accompanied by a report issued by a certified public accountant, containing a transfer-pricing methodology as prescribed in the Mexican Income Tax Law.

Under a transition rule, taxpayers that determine that their debt-to-equity ratio exceeds 3:1 in 2005 will have five years from January 1st 2005 to reduce such debts proportionately in equal part in each of the five fiscal years until they reach the 3:1 ratio. If the taxpayer’s debt-to-equity ratio exceeds 3:1 at the end of this period, any interest earned on the debt exceeding the limit as of January 1st 2005 will not be deductible.

As mentioned above, interest paid on negotiable instruments to recipients abroad is subject to withholding tax of 4.9% when the receiver is a resident of a country with which Mexico has signed a tax treaty or 10% if Mexico has no such treaty. Financial leases are taxed at 21%.

Withholding tax on royalties and fees
Payments abroad for technical assistance, know-how, use of models, plans, formulae and similar technology transfer are subject to a 25% withholding tax. Royalties paid to a foreign licenser of patents, trademarks and trade names—without the rendering of technical assistance—are charged a withholding tax of 30%, except where Mexico has a tax treaty with the corresponding country.

Business enterprises that make fee or rental payments to individuals for property must withhold a 25% tax on the interest portion of the lease payments. The tax and a statement including information about the payments made must be filed with tax authorities in February of the following year.

Capital gains taxation

Corporate capital gains or losses arising from the sale of fixed assets are treated as ordinary income or losses, taxable at the normal corporate rates. In calculating the taxable gains arising from the sale of land, buildings, equity shares and other capital interests, companies may apply an official schedule of inflation adjustments to the acquisition cost of the asset. Capital gains from the sale of publicly traded shares by individuals are tax-exempt in certain circumstances.

Foreign income and tax treaties

Derived from changes to the Mexican Income Tax Law for 2005, a new presumption was added to the said Law. This presumption deems income to be Mexican-source income (unless demonstrated otherwise) when a resident in Mexico, or non-resident with a permanent establishment (PE) in Mexico, makes payments to a non-resident related party. Thus the burden of proof is shifted to the payer who is to maintain supporting documentation evidencing that the service was actually rendered outside Mexico.

Moreover, according to said changes, certain income will be deemed to be excluded from the definition of business income. The purpose of this amendment is to tax as Mexican-source income several types of income (eg technical assistance and management fees) that clearly would not be taxed under Mexico’s tax treaties because the income would be categorised as business income subject to taxation only if the non-resident has a permanent establishment in Mexico.

This amendment is part of a series of tax reforms proposed by the Executive Branch and approved by the Mexican Congress to override tax treaties. According to the Mexican constitution, treaties have a higher legal hierarchy than local legislation. In addition, Mexico is part of the Vienna Convention, which requires treaties to be interpreted on a good-faith basis. Therefore a correct interpretation of tax treaties should not result in the withholding of tax for classes of income that cannot be taxed in the source country unless the non-resident has a PE. Nevertheless, it can be expected that the Tax Administration Service will try to impose withholding tax on particular classes of income, such as management fees.

Likewise, the rules governing investments in preferential tax regimes have been amended. Currently, a “black list” of countries is used to determine whether an investment is deemed to be in a low-tax jurisdiction. In addition, if foreign-source income is not subject to tax abroad or, if it is subject to tax, the tax so imposed is less than 75% of the income tax that would result from applying the Mexican tax legislation, the investment will be deemed to be located in a low-tax jurisdiction. It is possible under the new rules that a country not typically classified as a tax haven might fall under the less-than-75% rule.

Passive income (ie dividends, interest, royalties and capital gains) derived directly or indirectly by a Mexican resident through a branch, entity or any other legal entity located in a preferential tax regime, will be subject to taxation in Mexico in the year the income is derived.

Taxpayers earning income from a preferential tax regime must file an informative return in February of each year. Failure to file the return is subject to a penalty that ranges between three months and three years’ imprisonment.

Mexico now has agreements to prevent double taxation with 29 countries and is negotiating treaties with ten others. Four additional treaties have been signed and are awaiting government ratification.

Although the details of the tax treaties differ, all are designed to promote investment by reducing taxes and providing investors with clearer guidelines on how crossborder activities will be taxed.

Transfer pricing

Planning for methods, documentation, penalties and other transfer-pricing issues is a complex undertaking. Legislation passed in December 1998 requiring maquiladoras to be taxed as Mexico-domiciled companies from 2000 was blocked by an agreement in October 1999. The accord, signed by US Treasury officials and Mexico’s finance minister, gives maquiladoras a three-year abstention (2000–02) from permanent-establishment status if companies pick one of two tax options.

The first option, the advance-pricing agreement, is a Mexican form of transfer pricing. Under the scheme, the service provided in Mexico is estimated at fair market value, and the cost of the service less expenses is taxed at the corporate rate of 30% plus an additional 5% if dividends are removed. Under the second, “safe harbour” option, taxable income is the greater of 6.9% of assets or 6.5% of operating costs.

The 1998 tax amendments established a special committee on transfer pricing: the General Office for Technical Issues and International Negotiations. Recent changes in this area were also made to adopt internationally accepted methodologies for showing that operations between subsidiaries and other related companies are conducted at arm’s length—that the price is what independent parties in similar operations would have used. Mexican tax authorities may adjust such prices if they do not reflect market prices. The Secretariat of Finance is also empowered to adjust declared income earned by selling at below-market prices or at cost or less. Damaged, obsolete or similarly affected goods will usually escape transfer-pricing adjustments if the company can show that a lower price is representative of market conditions for that item. Under 1997 amendments, companies must keep documentation of intercompany transactions.

For maquiladoras, the current tax regime includes three options:

* To determine an arm’s-length consideration for the services provided, not including in such calculation the use of assets not owned by the taxpayer, added by 1% of the net value of the assets owned by non-residents;

* The greater taxable income determined by 6.9% of assets or 6.5% of operating costs; or

* The application of the marginal transactional operational margin method to prove that revenues and deductions are arm’s length.

Turnover and other indirect taxes and duties

A value-added tax (impuesto al valor agregado—IVA) applies to both goods and services. The IVA rate was increased to 15% (from 10%) in April 1995 and remains in force. The following are exempt from IVA: land and residential buildings; books and periodicals; share transfers; used chattels; tickets and other evidence permitting participation in lotteries, raffles, games of chance and competitions of every nature, and the respective prizes thereof; national currency, foreign currency and gold and silver pieces; and alienation of goods among non-residents or by a non-resident to a Mexican entity registered in an authorised programme to promote exportation of goods. Food additives and preservatives were made subject to IVA in 2000, on the grounds that they are not used only for medicines and basic foods. Interest on non-business loans and credit-card debt is also subject to IVA.

Exports are exempt from IVA; producers of goods for export and manufacturers of machinery and equipment for agriculture and livestock are eligible for a credit or tax refund in all stages of production. Supplies for maquiladoras are also exempt when special conditions are met. Imports are not subject to IVA, when used in the manufacture of exports. In 2005 value-added tax transferred to the taxpayer and paid on imports is fully creditable if related to expenses incurred in order to acquire goods other than investments, for services or to lease of assets used exclusively to perform taxable activities to which 0% tax rate is applicable. Value-added tax paid by the taxpayer in relation to expenses incurred to acquire goods other than investments, for services or to lease of assets used exclusively to perform non-taxable activities or which are not subject to such tax, are not creditable.

Companies may credit excess IVA payments against income or other tax payments. If the excess cannot be credited in its entirety, the taxpayer may apply for a refund. The Tax Administration Service must grant certificates validating IVA credits.

Companies must settle monthly with the tax authorities, making their IVA payments for the preceding month. IVA payments to the Secretariat of Finance for instalment sales may be made when principal and interest payments are actually received, rather than when the sale is invoiced—provided half the purchase price is paid after six months (35% of the price for final consumer sales). For imports, IVA is based on customs value plus tariffs. All companies should demand that IVA payable on their purchases be separated from deductible expenses.

Sales made to a third party for export are taxed at 0% for the portion that is actually exported; 100% of IVA paid on assets that may be immediately deducted may be credited. IVA is also payable when assets are transferred to financial institutions for paying liabilities or by court order.

Other taxes

A special tax on production and services is charged to manufacturers and wholesalers of certain goods, including soft drinks, alcoholic beverages, tobacco and petrol. The tax varies by product. Changes to the tax code in early 2002 included an increase in the rate for cigarettes and soft drinks (at 20%), and the inclusion of cellular phone, beeper and pay-television service (at 10%).

Mobile homes and certain other types of vehicles are subject to additional sales taxes. The excise tax on new cars (impuesto sobre autos nuevos—ISAN) was applied at its full rate in 1999, resulting in charges of 2–17% depending on the value of the car, and a zero tax rate for low-cost, compact vehicles. Purchases of real estate are taxed at a rate that varies from state to state.

Tax compliance and administration

Corporate taxpayers must make advance income-tax payments on the 17th day of every month. (As a result of the 2002 tax changes, all taxpayers must file on the 17th day of every month. In the past, individuals and small businesses were allowed to file quarterly.) Advance payments are based on the most recent of the five preceding fiscal years in which a profit could be calculated, even if there was a loss in the immediately preceding fiscal period. All corporations must use the calendar year for financial and tax purposes.

Corporations may apply for a reduction in advance payments. Any delay in making advance payments will result in interest charges, with higher charges for unauthorised delays.

Tax returns are filed three months after the end of the tax year. The government may challenge tax returns up to five years and, in certain circumstances, up to ten years after their filing. In practice, however, the tax authorities will generally check returns for the most recent fiscal year and for the subsequent period up to the time of the examination. Additions to the tax law stipulate that authorities may audit a company’s books from the previous ten years in the following circumstances: if errors discovered in any single tax category exceed 5% of the official calculation of tax liability; if there are omissions of profit sharing; if the firm fails to register to pay taxes; or if it provides false information. Taxpayers have ten years to file amended returns when refunds are anticipated. If the refund is not made within four months of filing, it accrues interest.

From January 2005 penalty interest for late payment of taxes is assessed at 0.75% per month if an extension has been granted and at 1.5% on late payments that are not covered by an extension. Penalty rates are adjusted monthly. Penalty interest accrued from January 1st 1992 is deductible for income-tax purposes.

PERSONAL TAXATION

Taxable income and rates

Tax changes for individuals implemented in early 2005 include the lowering of the top income bracket from 33% to 30%. Individuals with income of less than Ps300,000 must pay with a bar-coded taxpayer identification card; individuals with higher incomes must pay electronically via the Internet beginning in August 2002. The tax authority, Servicio de Administración Tributaria, administers the site, www.sat.gob.mx.

Foreign business personnel who do not reside in Mexico but visit more than 183 days a year have a special tax schedule. Otherwise, Mexico offers no special concessions to foreign business personnel. Some states and the Federal District impose separate taxes on wages and salaries. The employer pays this tax in the Federal District.

Annual income tax rates of the tax burden for 2004 are provided in the table below. The employer withholds provisional tax payments. Taxpayers must file personal income tax returns for the preceding year by the end of April.

Personal income tax (impuesto sobre la renta—ISR) applies to salaried employees with investment and other income. The top rate was lowered from 33% to 30% for 2005. Fixed rates apply to salaries below the lower limit; income between the lower and upper limit is taxed at the applicable (excess) rate.

Determination of taxable income
Taxable income includes the following: remuneration for personal services, including salary, bonuses and special allowances (such as housing); benefits rents received; and interest and corporate dividends paid out of gross rather than net income. Pension benefits are tax-exempt up to nine times the legal minimum salary for the region. Severance-payment benefits are exempt up to 90 times the daily base salary of the region multiplied by the number of years employed.

For 2005 taxpayers engaged in business activities are required to file information on transactions worth more than Ps50,000 or on their 50 largest clients. However, the information must be available in the event the government requires an audit. Accounts of donations granted, payments made to Mexican banks abroad and joint-operating agreements must also be kept on record. Moreover, payments made to parties in low-tax jurisdictions must be considered non-deductible unless it can be demonstrated that they were set at market value.

Otherwise, personal deductions include the following: medical and dental fees and hospital expenses incurred by the taxpayer and by the taxpayer’s spouse or other dependants with income no higher than the annual minimum salary; charitable donations; funeral expenses not exceeding the minimum annual salary; and expenses incurred in the use of mandatory school-bus transport of the taxpayer’s dependants. Beginning in January 2003 taxpayers may also deduct health-insurance premiums. Mortgage interest payments and personal pension-account (similar to the US individual retirement arrangement, except that interest earned on the Mexican accounts is taxable at the normal rate) contributions up to Ps152,000 are also deductible through 2003.

Taxpayers whose income consists of professional fees may deduct normal, documented expenses similar to those deductible by a business. A simplified tax system for individual taxpayers that engage in business activities is available when annual income is Ps1.75m or less for 2004. Small companies must file monthly, as is the case for larger companies. The ministry has issued these reforms, known as miscellaneous, which will remain in place until overwritten.

In calculating capital gains for tax purposes, individuals increase the historical cost by a factor to adjust for inflation and reduce the cost by accumulated depreciation at a rate varying with the type of asset. The difference between the result and the selling price constitutes the net gain. Based on the number of years the asset was held, a certain proportion of the net gain is added to other taxable income to determine the top tax rate payable.

The immediately deductible proportion of a capital loss also depends on the number of years the asset was held. This proportion may be deducted from any kind of income declared for the year or from capital gains arising in the following three years. The non-deductible balance of the loss gives rise to a credit against the tax on capital gains earned that year or in the next three years. Capital gains resulting from an individual’s sale of publicly traded shares are tax-exempt in certain circumstances.

Residency

Mexican citizens and resident aliens must pay taxes on all income, regardless of its source (although this is seldom enforced for resident aliens earning foreign income). Foreign nationals residing full time in Mexico enjoy the same rights as citizens (except that they may not vote) and they incur the same responsibilities. Resident (inmigrado) status may be obtained after residing in Mexico for five years. Non-residents (foreigners with the qualified resident status of inmigrante) pay taxes only on their Mexican-source income.

Beginning in June 2001 non-resident foreigners on temporary assignment working for firms or subsidiaries based in Mexico are exempt from income tax on the first Ps125,900 of annual income; they are taxed at 15% for income of Ps125,901–1m. All income exceeding Ps1m is taxed at 30%, with no deductions allowed. Non-residents on temporary assignment paid by non-resident foreign firms are exempt from income tax. Tax rates differ under tax treaties.

Dual citizenship for Mexicans has been possible since March 1996. In principle, this obliges them to file income taxes for both countries of which they are citizens. In practice, however, this is rarely done.

Capital taxes

There are no capital taxes.


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