MEXICAN TAX BILL FOR 2016 On September 8, 2015, the President sent to Congress the Tax Bill where some proposals are made to change current Mexican tax legislation. The main proposals are the following: INCOME TAX Tax incentive for the reinvestment of profits There is a new tax incentive applicable to Mexican resident shareholders in connection with dividends and profits generated in fiscal years 2014, 2015 and 2016, provided that such dividends and profits are reinvested, in turn, in the same Company. It is not clear, if this incentive apply to foreign resident shareholders. The tax incentive consists of applying a tax credit against the additional tax on dividends and profits of 10% to be withheld. Such tax credit would be applicable as follows: (i) 1% on dividends or profits distributed in fiscal year 2017; (ii) 2% on dividends or profits distributed in fiscal year 2018; and 5% on dividends or profits distributed in fiscal year 2019 forward. Below please find the following example: o 2017 2018 2019 Dividend distributed 100 100 100 Additional 10% withholding 10 10 10 Percentage Incentive applicable 1% 2% 5% Tax credit vs withholding 1 2 5 Net withholding 9 8 5 The above-mentioned tax credit shall only apply in connection with dividends and profits distributed by companies whose shares are quoted through a stock market holding concession under the Law of the Securities Market. Also, the aforementioned tax incentive will not be regarded as taxable revenue for Mexican resident individuals as their beneficiaries.
MEXICAN TAX BILL FOR 2016 2 Immediate deduction of investments Another new tax incentive may be applied to Mexican resident companies and individuals engaged in business activities that in the immediate prior fiscal year obtained revenues up to 50 million pesos. Such incentive shall be applicable in all the Mexican territory. The tax incentive consists of taking the immediate deduction of investments in new fixed assets in fiscal years 2016 and 2017; and also between September 1 and December 31, 2015. In this case, the maximum percentage of deduction range from 63 % up to 95% with regard to assets that were acquired in fiscal years 2015 and 2016; and such percentages will be decreased for fiscal year 2017. The application of such tax incentive must observe the following: The respective percentage of deduction will be applied to the original amount of investment and will be restated by inflation. It can be subtracted proportionally in the calculation of the monthly provisional payments for determining the taxable income or tax base for the tax year. The tax incentive shall not be exercised in the case of: Furniture and office equipment Automobiles Automobiles armoring equipment Any other fixed asset not individually identifiable Airplanes other than those engaged in crop dusting In case of sale or loss from an act of God or force majeure of the assets, the respective gain or loss must be determined according to the specific established procedure and the table based on the number of years elapsed. Withholding tax rate on interest paid to foreign resident banks The 4.9% withholding income tax rate on interest paid to banks (including investment banks) resident in a country with which Mexico has entered into a double tax treaty continues in effect for fiscal year 2016, provided that such entities are the beneficial owners of such interest income.
MEXICAN TAX BILL FOR 2016 3 Repatriation of capital A temporary procedure is introduced for the repatriation of investments maintained abroad by individuals and companies resident in Mexico up to December 31 2014 who have obtained income directly or indirectly derived from such investments. The exercise of this option by such companies and individuals consists of covering the relevant income tax payable and compliance with the tax liabilities thereof. In addition to meeting the specific tax requirements, the above option shall apply to the extent that the respective investments abroad and the income derived from those investments are returned to Mexico in a period no longer than six months as of January 1, 2016, through transactions made with credit institutions or brokerage houses either in Mexico or abroad. In this case, the repatriated funds must be invested in Mexico in: a) Fixed assets which cannot be sold within a period of three years as of its date of acquisition. b) Research and development of technology. c) Payment of liabilities contracted with unrelated parties. Net tax profits account for renewable energy companies Companies resident in Mexico engaged exclusively in the generation of renewable energy or co-generation systems of electricity whose revenues from these activities (not including those obtained from the sale of fixed assets and/or land of their property used for such activities) represent at least 90% of their aggregate income, may keep a special net tax profit account for investment in renewable energy. The aforementioned account (for the purpose of distributing dividends or profits free of corporate tax) will result in a greater balance of the net tax profit from investment in renewable energy (derived from considering a 5% deduction or depreciation on the assets instead of the applicable 100% on the acquisition of machinery and equipment used for such activities). A cumulative record must be kept for the dividends arising from such account. However, the additional 10% withholding tax on dividends and profits applicable to individuals resident in Mexico and foreign resident entities shall be payable on the distribution of dividends or profits arising from the balance of the net tax profit account for investment in renewable energy.
MEXICAN TAX BILL FOR 2016 4 REITS and Private Equity Investments Trust Brokerage houses may take part in the placement of certificates of participation of real estate investment trusts (aka FIBRAS) as well as in the investments of companies promoted for Private Equity Investments Trusts (aka FICAPS). Also, the ten years duration requirement for the aforementioned trusts is eliminated. Fringe benefits expenses The limitation related to the deductible amount of the fringe benefits granted by a Company to its non-unionized employees upon a general basis requirement has been eliminated. Accordingly, the aforementioned amount may now exceed ten times the annual general minimum wage of the employees geographical area. Thin capitalization rules for the electric power industry For the purpose of applying the thin capitalization rules for income tax purposes, debts contracted with foreign resident related parties by companies engaged in the electric power industry shall not be included in the computation of the amount of debts on which interest exceeds three times the net worth accrue. Thus, there is no limitation on the deduction of interest payable derived from such debts by the aforementioned companies. Countering tax evasion from an international tax standpoint As part of the measures for countering tax evasion and harmful tax practices from an international tax standpoint, derived from BEPS (Base Erosion and Profit Shifting) actions, among the member countries of the OECD, including Mexico, a new standard of documentation and information is to be implemented for the purpose of transfer pricing issues. Accordingly, there is a series of new tax obligations in connection with the preparation and filing of the documentation and information returns in order to comply with the applicable transfer pricing requirements for Multinational Enterprises, and for companies resident in Mexico that carry out transactions with their related parties resident abroad (based on BEPS Action 13: Guidance on Transfer Pricing Documentation and Country by Country Reporting ), as follows: - The Master File ; - The Local File ; and - The Country by Country Report (applicable to companies with consolidated income over 12,000 million pesos in the immediate prior year)
MEXICAN TAX BILL FOR 2016 5 The Mexican tax authorities will set the general rules in order to comply with the filing of the documentation and the information returns on an annual basis, for transfer pricing purposes; compliance with these new tax requirements should enable Mexican resident companies prove that their transactions with national and/or foreign related parties are carried on an arm s length basis. The aforementioned documentation and information for transfer pricing purposes must be submitted to competent tax authorities no later than the 31 of December of the immediate subsequent fiscal year concerned. Tax Consolidation Several rules are introduced with the aim of accelerating and simplifying the end of the exit process of the consolidation tax regime ; for such purpose, the application of tax credits and a calendar of payments are proposed in connection with paying the outstanding deferred tax derived from the tax consolidation, for the following items: a) Tax losses carry forward included in the consolidated tax result b) Tax losses derived from the sale of shares included in the consolidated tax result c) Taxable dividends subject to payment of the deferred tax Furthermore, it is worth noting that in order to obtain the above-mentioned facilities for the application of tax credits, several requirements must be fulfilled; mainly the following: a) During a five year period, the group of companies within the consolidation tax regimen must participate in the verification program in real time that has been implemented by the tax authorities (the General Administration of Great Taxpayers). b) Companies are not allowed to elect the new Integrated Tax Regime. c) Companies must desist from using the applicable legal means against the reforms related to the deferred tax derived from the tax consolidation treatment. Accordingly, each group of companies in the consolidation tax regime must evaluate the aforementioned option in order to adopt the best decision with regard to the payment of the deferred tax derived from the tax consolidation treatment.
MEXICAN TAX BILL FOR 2016 6 TAX FEDERAL CODE New tax obligation of the Special Excise Tax There is a new tax obligation related to breaking down the amount of the special excise tax specified on the supporting tax document (the electronic invoice ) whenever is requested by the buyer of the goods or services as taxpayer of such excise tax. Exchange of information standard It is proposed that a legal framework related to the exchange information agreements should be applied to companies and financial institutions resident in Mexico as well as branches in Mexico of foreign resident financial institutions, according to the applicable standard for the Automatic Exchange of Information on Financial Accounts for Tax Purposes, aimed to effectively implementing such standard and fulfilling with the reporting requirements on each of the relevant accounts. New penalties are introduced regarding failure to comply with obligations of the above-mentioned standard on reporting requirements Penalties on non-compliance with transfer pricing Fines would be imposed on non-compliance with the filing of the new documentation and information returns for pricing transfer purposes as provided for in the Income Tax Law. Such fines would range from PS$140,540 to PS$200,090. FEDERAL REVENUES LAW FOR FISCAL YEAR 2016 TAX INCENTIVES For fiscal year 2016, a series of tax incentives are being renewed for income tax purposes, among others, the following: a) Deduction of the statutory employees profit sharing on a proportional basis in the calculation of the provisional payments for the fiscal year. b) An additional deduction of a 5% of the cost of sales amount related to basic goods for subsistence in matters of food or health given in donation. c) An additional deduction for hiring handicapped persons equivalent to a 25% of salaries effectively paid to such persons. d) A tax credit for contributions made to projects of investment in national film production
MEXICAN TAX BILL FOR 2016 7 Withholding tax rate on interest income earned by individuals For fiscal year 2016, the annual withholding income tax rate on payments of interest made by the financial system entities to Mexican resident individuals is 0.53% on the amount of the investment or capital giving rise to such payment of interest. The calculation of such rate is made on the basis of real interest income obtained by recognizing the effects of the inflation.