Disclaimer. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. Mexico s new tax reform package

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1 Disclaimer This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. The views expressed by the presenters are not necessarily those of Ernst & Young LLP. This presentation is 2013 Ernst & Young LLP. All Rights Reserved. EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms, of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. Page 1

2 Circular 230 disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Mexico s new tax reform package 9 November 2013

4 Today s agenda Current status Analysis of changes Overview and year-end considerations Page 4

5 Current status On 8 September 2013, Mexico s president presented a proposed tax reform package to the Mexican Congress On 31 October 2013, the senate and the lower house of Congress voted and approved a revised version of the reform package The proposed reforms are awaiting presidential approval Enactment expected by 15 November 2013 Effective date will be 1 January 2014 Page 5

7 Income tax: basic system Corporate tax of 30% Elimination of flat rate business tax (IETU) results in no alternative minimum tax Withholding tax on dividends of 10% when paid to nonresident or Mexican resident individual After tax earnings account (CUFIN) rules still apply as a tax on Mexican distributing entity Certain domestic withholding tax rates go up to 35% Capital gains on sale of shares Page 7

8 10% dividend withholding tax Withholding tax imposed on individuals and on nonresidents Definition of dividend includes, among others: Loans to shareholders Transfer pricing adjustments by tax authorities Capital redemptions Treaty benefits may be available to reduce or eliminate the tax Beneficial ownership test Limitation of benefits provisions Tax applies to earnings after 2013 Measured based on CUFIN account at end of 2013 Page 8

9 Mexico s treaty withholding tax rates on dividends Country Rates United States 0%, 5% or 15% Canada 5% or 15% Netherlands 0%, 5% or 15% Spain 5% or 15% Luxembourg 8% or 15% Germany 5% or 15% Japan 0%, 5% or 15% Page 9

10 Treaty considerations Other Filing Requirements Article 32 H of the Federal Tax Code Tax Audit Report Subject to tax Income subject to tax May be requested Requirement to appoint a legal representative Limitation of benefits Beneficial ownership and effective beneficiary Page 10

11 Broadening of income tax base Denial of deduction for payments of interest, royalties or technical assistance to certain related parties when: a) the payment is made to a foreign entity that is fiscally transparent, unless the shareholders or partners are subject to tax on the income of this entity; b) the payment is not deemed to exist for tax purposes in the country or territory where the entity is resident; or c) the foreign entity does not recognize the payment as taxable income under the applicable tax rules. Definition of controlled or controlling related parties Page 11

12 Structures to evaluate Foreign Corp. Issue Sub Parent Is the income subject to tax at the level of Foreign Co. Parent? Mexico Co. Foreign Co. Payment for interest, royalties or technical assistance Page 12

13 Structures to review Parent Issue In some structures, income is exempt in the jurisdiction of TreatyCo for a portion of the income Mexico Treaty Co Payment for interest, royalties or technical assistance Branch Page 13

14 Structures to review Foreign Parent Payment for: Interest Royalties Technical assistance Issue Mex.Co If the payment is disregarded for parent Page 14

15 Broadening of income tax base, continued Payments that are deducted in another jurisdiction would be non-deductible, unless the income of the Mexican taxpayer is also recognized in the foreign jurisdiction in current or subsequent year Elimination of immediate deduction for fixed assets Restriction deduction of payroll related expense considered exempt income to the employees: General rule is 53% not deductible Reduced to 47% non deductible, if the amount of the benefit is not less than the amount from the prior year Page 15

16 Consolidation Elimination of tax consolidation regime (31 December 2013) Deferred tax still should be paid over a five-year period Expanded rules on the calculation of the recapture of the deferred tax New optional regime (80% ownership requirement) recapture effects after three years Page 16

17 Preferential tax regimes and other taxes Modification or elimination of simplified regime for most industries Transition issues Elimination of SIBRAS (real estate investment companies) 2016 payment date Elimination of IETU Subject to transitory rule which attempts to tax collections in 2014 of 2013 revenue Elimination of tax on cash deposits (IDE) Reporting requirement remains for financial institutions Page 17

18 VAT and other indirect taxes VAT Border zone VAT rate of 11% adjusted to 16% to match regular rate Excise tax (IEPS) New excise tax for all flavored beverages containing any type of sugar at MxP$1 per liter Excise tax of 8% on certain high calorie food products New environmental taxes Page 18

19 Mining industry Royalty tax on mining activities at a rate of 7.5% on EBITDA, plus a tax on the gross value of sales of gold, silver and platinum at a rate of 0.5% Deduction allowed for pre-operating costs in year incurred Credit of other mining rights against this tax Exploration and development costs must be capitalized for income tax purposes Eliminated option for deduction during pre-operating period Page 19

20 Other issues Transition rules for CUFIN calculations Reference to calculations for years Negative adjustments Split ups and mergers No reference to calculations prior to 2001 The balance as of 2001? IETU in 2014? Page 20

21 Federal fiscal code (administrative rules) Anti-abuse provision This proposed rule was not included in the final reform Recommendation of lower house committee was to strengthen existing rules Tax audit report Optional for certain taxpayers and not required for others Joint liability for shareholders Effective control Limited instances Electronic filing Tax authorities may make notices and other correspondence with taxpayer through electronic means and taxpayer will have period of time to respond Monthly and annual reporting requirements Filing requirements for accounting Page 21

22 Modifications to maquiladora regime: VAT VAT on temporary imports remains However, immediate credit mechanism allowed (so no cash flow impact) for certified taxpayers Effective date of VAT on temporary imports will be one year following the issuance of the certification process rules Sales between non-residents of temporarily imported goods are exempt from VAT Notably, sales by non-residents to an IMMEX company now subject to VAT Page 22

23 Modifications to maquiladora regime: income tax Permanent Establishment (PE) exemption Consigned inventory must be temporarily imported and subsequently exported by physical or virtual export 100% of a maquiladora s productive income must be derived from maquiladora income Foreign related party must own at least 30% of machinery and equipment (M&E) used in maquiladora operation (grandfathering provision is eliminated) Note: If PE exemption requirements are not met, facts and circumstances analysis under domestic law and treaties would be relevant Shelter maquiladoras are entitled to PE exemption for a maximum period of four years Page 23

24 Modifications to maquiladora regime: transfer pricing Transfer pricing determined using Advanced Pricing Agreement (APA), or Safe harbor which is greater of: Other issues Maquiladora operating costs + 6.5% or 6.9% return on assets (includes non-resident owned inventory and M&E) Fox and Calderon decrees should no longer apply Grandfathering provisions related to the 30% ownership test Page 24

26 Recap: overview of key proposed changes Income tax law 10% withholding tax on dividend distributions Broadening of income tax base: Non-deductibility of certain payments of interest, royalties or technical assistance to related parties Elimination of immediate depreciation; reserve for loan losses for banks Limitation on payroll deduction on benefits to employees and pension fund deduction Extra formalities and subject to tax test to access treaties Preferential regimes and other taxes Flat rate business tax (IETU) eliminated Tax on cash deposits (IDE) eliminated Tax consolidation eliminated Additional taxes New royalty tax for mining companies Excise tax on new items such as flavored beverages and snacks Federal fiscal code Changes to maquiladora regime Tax audit opinion becomes optional Electronic filing requirements VAT on temporary importations with relief for certified companies Permanent establishment exemption subject to local entity only performing maquiladora activities Machinery and equipment (M&E) owned by foreign resident 30% test Maquiladora transfer pricing rules Safe Harbor or Advance Pricing Agreements Page 26

27 Issues to consider before year-end Dividends Differences between CUFIN and retained earnings Balance of CUFIN at subsidiary level versus holding company Shareholder residence and applicable treaty Payment structures for interest, royalties and technical assistance Consolidation Maquiladora Transfer pricing Facts and circumstances Asset values Product activity test Page 27

28 Mexico s new tax reform package