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An overview of Mexico's tax system, including federal tax rates, tax treaties, and treatment of publicly traded stocks and bonds.
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Business Unusual Abel Mejia-Cosenza Sánchez Devanny Nassau, Bahamas October 4th , 2017 Mexico´s Tax Future: Riding on Stranger Tides…
Mexico’s Tax Future Tax Overview Federal Tax: • Corporate Income Tax 30%, plus 10% tax on dividends. • Resident individual’s Income Tax, progressive up to 35%. • Preferential 10% tax for qualified capital gains on stock, segregated regime • CFC income, segregated regime. Anti-abuse provisions: • Arm´s length requirement for any related party income. • Back-to-back re-characterization risk. • Inflationary/exchange gain/loss, can result in taxable income or deductions. • Multiple informative tax returns on related party and offshore transactions.
Mexico’s Tax Future Tax treaties • Double Tax treaties in force (56): Australia, Austria, Bahrain, Barbados, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Ecuador, Estonia, Finland, France, Germany, Greece, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Kuwait, Latvia, Lithuania, Luxembourg,Malta, Netherlands, New Zealand, Norway, Panama, Peru, Poland, Portugal, Qatar, Romania, Russia, Singapore, Slovak Republic, South Africa, Spain, Sweden, Switzerland, Turkey, Ukraine, United Arab Emirates, United Kingdom, United States of America, Uruguay and the Convention on Mutual Administrative Assistance in Tax Matters. • Upcoming tax treaties (6): Argentina, Costa Rica, Guatemala, Jamaica, Philippines and Saudi Arabia • Treaties under negotiation (10): Egypt, Iran, Lebanon, Malaysia, Morocco, Nicaragua, Oman, Pakistan, Slovenia and Thailand.
Mexico’s Tax Future Tax treaties • Exchange of information agreements in force: Aruba, Bahamas, Belize, Bermuda, British Virgin Islands, Canada, Costa Rica, Cayman Islands, Cook Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Liechtenstein, Netherlands Antilles - Curacao, Turks & Caicos, Saint Lucia, Samoa and United States of America • FATCA IGA’s exchange on 2014 information 9/15. • Party to the Convention on Mutual Administrative Assistance in Tax Matters
Mexico’s Tax Future Tax treaties • 51 CRS MCAA Agreements activated in 2016. Argentina, Australia, Austria, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mauritius, Montserrat, Netherlands, Norway, Portugal, Romania, Saint Vincent and the Grenadines, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Turks and Caicos Islands, United Kingdom • CRS MCAA Agreement with Switzerland expected for 2019 on 2018 information
Mexico’s Tax Future Publicly traded stocks, preferred capital gain rate • Capital gains from the sale of Mexican or foreign issuer publicly traded stock sold in the Mexican Stock Exchange or Derivatives Market are subject to a 10% rate, but amortization of losses is permitted. The financial intermediary must withhold and pay the tax. However, no tax applies when the seller is a resident of a treaty jurisdiction. • If transaction is undertaken in the Mexican Stock Exchange through foreign financial intermediaries, the 10% rate applies but taxpayer must retain all records and statements to asses and pay tax on its own. • Capital gains from publicly traded stock (foreign issuer) traded in markets other than the Mexican Stock Exchange or registered ADR’s of Mexican publicly traded companies, are subject to tax on net gain at a 35% rate. • Alternate interpretation, foreign stock listed in the Mexican stock exchange traded in markets outside Mexico, entitled to 10% rate for Mexican residents. We do not agree with this interpretation and consider it high risk.
Mexico’s Tax Future Tax Overview • Pre-2014, dividends were not taxed in Mexico. • 10% tax on dividends introduced in the 2014 tax reform. • Compounded effective rate for Mexican resident individuals from corporate, personal and dividend tax 42% • Foreign source dividends paid to Mexican residents taxed as ordinary income (i.e. 35%), plus tax on dividends (i.e. 10%), combined 45%.
Mexico’s Tax Future Tax treatment of publicly traded bonds • According to Mexican Income Tax Law (“MITL”), individuals must accrue real interest to other income. Exchange gains are considered interest. • Interest: Returns of any kind of debt instrument, regardless of the name of the investment, are considered interest. The following are instruments specifically defined by MITL as interest: yield on public debt, bonds, obligations, including discounts, premiums and prices; premiums on repurchase and resale of agreements, and on securities loans; income from the sale of bonds, securities, and other credit instruments that are publicly traded. • Publicly traded debt – The MITL sets forth a special cash basis income recognition rule for interest from publicly traded debt securities paid by companies that are not part of the financial sector.
Mexico’s Tax Future Tax treatment of non-publicly traded instruments & cash • Options for determining the tax applicable to interest. a) The accruable income is equal to the interest accrued, including exchange gain, from: (i) deposits made abroad, (ii) credits or loans granted to foreign residents and (iii) credits or loans granted to Mexican residents. b) Individuals obtaining income from interest and exchange gain generated from deposits or investments made in foreign financial institutions can elect to determine accruable income by applying the factor set forth on a yearly basis by the Tax Administration Service, to the account balance at the beginning of the tax year.
Mexico’s Tax Future Controlled foreign companies regime • Comprehensive CFC regime that requires (i) accelerated income recognition and/or (ii) filing of informative tax return. • CFC regime requires accelerated income recognition if: • Beneficiary of CFC has control over timing of distributions. • Effective tax paid on foreign income is below 75% of the Mexican income tax rate that would be applicable to such income (i.e. 22.5% for corporations and 26.5% for individuals). • Income is generated through pass-through entities • Income is derived from an entity located in a black-list jurisdiction. • CFC attacks passive income deferral, forcing anticipated income recognition taxed @30%.
Mexico’s Tax Future Controlled foreign companies regime • Active trade or business, high-tax and no-control exceptions are available to exempt Mexican taxpayers from the CFC accelerated accrual regime. • Additionally and independently, the CFC rules require the filing of a special informative tax return by Mexican tax residents in the following scenarios: • They obtain income from preferential tax regimes or from entities subject to preferential tax regimes. • They obtain income derived from any of the jurisdictions described in Mexico´s “black-list”. • They carry on transactions through pass-through vehicles. • Failure to file informative return or an incorrect/incomplete filing can give rise to criminal exposure. • The Mexican Supreme Court has sanctioned the CFC regime.
Mexico’s Tax Future Controlled foreign companies regime • Substantial amendments to reporting requirements were put in place in 2016: • Elimination of blanket exceptions to filing informative tax returns based on having the estate planning structure in tax treaty jurisdictions. • Issuance of new form of REFIPRE informative tax return (form 63) with enhanced and broader information requirements. • Information of Form 63: (i) indicate if the amount of CFC income is higher than 50,000,000 pesos; (ii) information of the entity or figure that generated accruable income (name of vehicle, address, transparent entity, tax id, type of income, amount of loses and gains of such vehicle, total income, deductions, maintenance of accounting records)
Mexico’s Tax Future The Making of the Perfect Storm… • Natural Catastrophes and Adverse International Scenario: • Depletion of Treasury Funds and Major Financial Commitments for Rescue and Reconstruction. • Continuing low oil prices. • 2018 National Elections: Disruptive candidates with left-leaning & populist agenda. • Potential major reform of income tax rates and taxable transactions. • Potential introduction of inheritance tax. • Increase in government spending and welfare. • More aggressive tax authorities that narrowly interpret or revise the Repatriation Decree. • Unstable Relations with U.S.A. • Potential renegotiation or termination of NAFTA. • Major inflow of deported immigrants, including “Dreamers”. • Volatility in financial markets and currency exchange rates.
Mexico’s Tax Future The Making of the Perfect Storm… • Exchange of Tax Information under CRS. • Potential major shakedown of trust administration structure and members that may compromise confidentiality and use of tax information. • Audits of reported structures to test legitimate tax deferral mechanisms. • High-profile Corruption Scandals. • Misuse of government educational funds to redirect monies towards political allies and campaigns. • Active prosecution of state governors found guilty of extreme acts of corruption. • Banks requesting enhanced KYC and AML, including certifications by domestic tax attorneys. • Why are all of these factors relevant to us?? IT’S THE MONEY, STUPID…
Mexico’s Tax Future Options for Self-Correction Mechanisms • 2017 Repatriation Decree (currently in force). • Ordinary Statutory Mechanisms still available.
Mexico’s Tax Future The 2017 Tax Amnesty: Overview For whom? MX individuals, legal entities and PE’s of foreign principals, with unreported income from direct or indirect investments held offshore as of December 31, 2016. Requirements: • Resources have to be repatriated to MX on or before 06/19/2017; • Tax payment within 15 days from repatriation; • Tax is paid at a fixed 8% rate on the resources repatriated (not on the amount of offshore income potentially subject to tax in Mexico); • Direct foreign tax credits are allowed; Indirect foreign tax credits currently only allowed for legal entities;
Mexico’s Tax Future The 2017 Tax Amnesty: Overview • Requirements (continued): • Decree not applicable to income that derived from a payment that generated a tax deduction in MX; • Decree not applicable to resources derived from illegal activities or when such resources have been used to carry on illegal activities; • Taxpayer must not have been subject to an audit related to offshore income; taxpayer must not have filed a legal challenge against a tax assessment related to offshore income or must have desisted from the corresponding legal action; • Taxpayers who correctly apply the Decree will be deemed compliant with all their payment and reporting obligations; the names of the taxpayers applying the Decree should not be publicly disclosed as the program is not based on the forgiveness of taxes but the creation of a special tax base.
Mexico’s Tax Future The 2017 Tax Amnesty: Overview • Requirements (continued): • Prove that the principal, from which the offshore income derived, paid the appropriate MX tax at inception, if subject to MX tax. • If evidence of tax payment cannot be produced, taxpayer can only apply the Decree if they also opt to pay the 8% tax on the principal. • Application of the Decree without having and being able to evidence tax compliance on the principal, makes the Decree and its benefits inapplicable. Thus taxpayers who make inadequate use of the Decree’s preferred rate can be liable omitted taxes; • No specific reference to the treatment of foreign currency exchange gain or to whether it needs to be computed in the income that must be repatriated to carry on a correct regularization;
Mexico’s Tax Future The 2017 Tax Amnesty: Overview • Requirements (continued): • Resources must be repatriated through transactions carried on between (i) Mexican financial institutions, including brokerage firms, incorporated in Mexico and (ii) foreign entities that provide financial services. The beneficiary of record of the foreign entity and the beneficiary of record of the Mexican financial institution must be a match or they must be related parties. • The MX tax must be paid within the 15 calendar days immediately following the date on which the resources are repatriated. Resources will be considered repatriated on the date on which the funds are deposited with a Mexican financial institution or brokerage firm. • The MX tax to be paid will be computed considering the foreign currency exchange rate applicable on the date in which payment is made.
Mexico’s Tax Future The 2017 Tax Amnesty: Overview • Requirements (continued): • In the case of legal entities, resources will be deemed invested in Mexico in the following situations: • Acquisition of fixed assets used in the entity’s business in MX and that are deductible under Mexican tax rules; said assets must be kept for a minimum of 2 years; • Acquisition of real estate located in Mexico and used by the relevant taxpayer to carry on its business activities; said assets must be kept for a minimum of 2years • R&D of technology for products, materials or production processes that represent a scientific or technological advancement; • Payment of pre-existing debt with independent third parties, including payment of taxes and employee wages; all such payments must be made through Mexican financial institutions or brokerage firms. • Investments made in Mexico through Mexican financial institutions or brokerage firms.
Mexico’s Tax Future The 2017 Tax Amnesty: Overview • Requirements (continued): • In the case of individuals, resources will be deemed invested in Mexico in the following situations: • Acquisition of fixed assets used in the entity’s business in MX and that are deductible under Mexican tax rules; said assets must be kept for a minimum of 2 years; • Acquisition of real estate located in Mexico and used by the relevant taxpayer to carry on its business activities; said assets must be kept for a minimum of 2years; • R&D of technology for products, materials or production processes that represent a scientific or technological advancement; • Investments made through Mexican financial institutions in financial instruments; or • Stock issued by Mexican entities.
Mexico’s Tax Future The 2017 Tax Amnesty: Overview • Requirements (continued): • Both legal entities and individuals applying the Decree must prove that repatriated assets, income and, principal if applicable, increased their overall MX investments. Resources repatriated for investment in Mexico must not be reduced for two years. • Taxpayers must keep, for 5 years following the date of payment of the MX tax, documentation that proves the following: • That the repatriated resources were located and repatriated from outside of Mexico. • That the tax paid was computed following the guidelines of the Decree. • That the Resources were invested in Mexico. • That the corresponding tax return was filed. • Tax authorities (SAT) may issue operative rules for the better implementation of the Decree.
Mexico’s Tax Future Complementary rules – Tax Amnesty • Definitive rules have not been issued even though term for applying decree is expiring. Four draft versions have been published in the SAT website, but official publication is pending. • Uncertainty as to methodology and documentation required to demonstrate that the principal from which the repatriated earnings and profits paid taxes. • Prohibition for individuals applying the decree to acquire stock from foreign issuers through the International Trading System of the Mexican Stock Market (i.e. “SIC”).
Mexico’s Tax Future Statutory self-correction • Statute of limitations is generally 5 years, in limited cases it can extend to 10 years. • Computing the tax owed and filing amended returns for the past 5 years still open to audit by statute of limitations and payment of the owed tax. • Inflation adjustments and interests surcharge are not avoided. • Statutory relief of fines due to self correction to avoid fines in amounts of 50% to 100% of tax owed! • No criminal liability, self-correction corrects failure to make the payment of taxes and failure to comply with formal obligations.
Mexico’s Tax Future Take away’s • No burdensome restrictions or investment requirements, contrary to the limitations of the 2017 amnesty program. • Self correction allows elimination of penalties. • Filing amended returns extends the statute of limitations for the corresponding year.
Mexico’s Tax Future What to do now?NO MAGIC SOLUTIONS • The new normal for Mexican taxpayers may be acknowledging their international structures will be eventually reported and thus focusing in making sure those structures will be tax compliant and obtain the most tax advantages possible. • Option A: No deferral but with specific benefits like: (i) protection from foreign currency exchange, (ii) protection from foreign estate taxes –particularly U.S.-, (iii) availability of preferential tax rates like 30% CFC rate and the 10% capital gains rate. • Option B: Legitimate deferral under specific Mexican law exceptions that allows tax-free preferential capital reimbursements. • A tendency to shift towards U.S. based solutions??? • It is essential for Mexican taxpayers to understand the tax regime applicable in the U.S. • Although the U.S. is not currently a participating jurisdiction in CRS and the information exchange obligations to Mexico under FATCA are substantially more limited than the CRS standards, taxpayers must be aware of the privileged relationship that exists between the IRS and the Mexican SAT.
Contact our tax team Abel Mejia Cosenza Partner amejia@sanchezdevanny.com +52(55) 5029-8509 Sánchez Devanny refers to Sánchez-Devanny Eseverri, S.C., a leading Mexican law firm that provides full-service legal advice both to Mexican and international clients. This publication contains general information only and is just for informative purposes. Sánchez Devanny is not rendering legal advice or services by means of this publication. To obtain legal advice or services you should consult a qualified professional advisor before making any decision or taking any action that may affect your business. Sánchez Devanny provides legal services in the areas of Corporate and M&A; Corporate and Project Finance; International Trade and Customs; Real Estate, Infrastructure and Hospitality; Tax; Labor, Social Security and Immigration; Corporate Governance and Regulatory Compliance; Energy, Natural Resources and Environmental; Life Sciences; Intellectual Property, Entertainment and Sports Law; Litigation and Alternative Dispute Resolution; Antitrust; Financial Institutions and Services; Private Wealth Management and Estate Planning and Data Privacy and Information Technology to both public and private clients, especially in the automotive, retail, pharmaceutical, manufacturing, real estate and energy industries.
