Mexico
Carlos Montemayor, David Cuéllar and Francisco José Zamora
PricewaterhouseCoopers
Mexico
Carlos Montemayor, David Cuéllar and Francisco José Zamora of PricewaterhouseCoopers analyse how worldwide recession, inflation, A/H1N1 flu, and other tax amendments affected the Mexico's economy and tax system in 2009
The Mexican corporate income tax rate of 28% is lower than those for other Latin American countries such as Argentina (35%), Colombia (33%), Venezuela (34%) and other countries, including its main commercial partner, the US (35%).
In 2008, the Mexican executive branch and Congress implemented two new taxes; the tax on cash deposits and the flat rate business tax, whose efficiency cannot yet be tested properly due to the worldwide economic recession.
Flat tax
Mexico introduced the flat rate business tax (IETU, Impuesto Empresarial a Tasa Única) in 2008, as a measure to simplify the Mexican tax system and to increase tax collection levels.
| Economy in 2008 and 2009 |
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In 2009, several internal and external developments affected the Mexican economy. Due to its proximity to the US, the Mexican economy was hit by the worldwide recession, which caused the bankruptcy of several financial institutions in America. This event affected all types of industries, specifically, real estate and construction. The Mexican peso-US dollar exchange rate, inflation, employment and foreign investments in Mexico were also affected by this worldwide crisis.
Mexico's GDP fell by 8.2% in the first quarter of 2009 and the inflation rate, which had been stable for many years, became an issue again. The rate for 2008 reached 6.5%, of which 4.35% came in the July to December period. Oil production decreased from 2.8 million barrels per day in May, 2008 to 2.6 million in May 2009 due to the decrease in the oil price and the decadency of the Cantarell oil complex.
The Mexican peso-US dollar exchange rate has become an important issue for the country. From late July 2008, the exchange rate started to increase and in March, 2009 reached M$15 to the dollar; while in September 2008, the exchange rate was about M$10.5 to the dollar. However, in August, 2009, the exchange rate recovered and stood at around M$13.
In addition, the effects of the A/H1N1 flu in late April and May 2009 dealt a terrible blow to the aircraft, tourism, hotel and restaurant sectors, which are now recovering.
But not all news about the Mexican economy has been that bad. During 2009, the Chicontepec oil complex became one of the main projects for Pemex, despite its high costs. This complex has about 39% of the total reserves of oil in Mexico. Some specialists believe Mexico would be positioned as the country with the third largest amount of proven oil reserves worldwide, after Saudi Arabia and Canada and above countries such as Iran and Iraq. Also, the announcement of the construction of a new oil refinery in Hidalgo is good news for the country. Also, certain sectors, such as the mining industry maintained a strong pace, enjoying the strong prices for silver and gold, among other strategic minerals.
The Mexican government is trying to keep the Mexican peso-US dollar exchange rate steady by placing dollar reserves down to the financial sector and the public. In addition, the government has taken measures to control inflation. In the second semester of 2009, lots of programmes to enhance tourism are under way. Tax benefits and certain tax amnesties (for example, repatriation decree) were unveiled to try to allocate more investment and help affected taxpayers. |
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The applicable rate is 17.5%, although transitional rates of 16.5% and 17% will apply in 2008 and 2009, respectively.
The IETU is a minimum alternative tax to income tax. This tax is determined on a cash-flow basis, which means that only cash-flow income and cash-flow expenses are generally considered. The IETU base is equal to the excess of income collected from the sale of assets and inventory, the rendering of independent services and/or the granting of the temporary use or enjoyment of goods (lease/rental income); over deductible amounts paid for the same items.
Taxpayers are required to prepare both income tax and IETU calculations and, economically speaking, they pay the higher of both.
For IETU purposes, certain income and deduction exclusions should be considered. Such exclusions and the fact that the tax is determined on a cash-flow basis, may trigger significant differences as to the income tax calculation.
For example, most interest and related-party royalties for the use of certain assets are not considered as income or as expenses for IETU purposes. Also, expenses for wages and salaries, social security contributions and depreciation are not deductible items.
Additionally, there are certain credits against the IETU, such as the credit on taxable wages and salaries, the credit on social security contributions and a credit applied on fixed assets acquired before September 2007. The annual income tax effectively paid can also be credited against the IETU, in order to pay only the excess of the IETU over income tax.
The resulting IETU liability is considered to be a final payment that cannot be recovered later on, as opposed to what IETU replaced: the former alternative asset tax that was in place in Mexico until December 31 2007.
An important issue regarding IETU is that such tax exclusions seek to eliminate or mitigate the effect of certain tax planning strategies used by taxpayers to shelter or reduce their net taxable income, as well as other structures that were not favourable for tax collections, such as employee compensation schemes based on fringe benefits and other exempt remunerations.
Several sectors were affected by the IETU, such as the Maquila industry (labour intensive entities), software entities (unable to deduct related-party royalty payments) and some other industries incurring tax losses for income tax purposes due to depreciation, which is not deductible for IETU purposes.
Due to the worldwide recession and to mitigate the impact of the IETU in the Mexican economy, the Mexican executive branch issued several decrees granting certain benefits to, for example:
- Taxpayers in the maquiladora industry.
- Taxpayers that held significant amount of inventory as of December 31 2007.
- Taxpayers with net tax operating losses obtained due to lump sum deductions in 2005, 2006 and 2007.
- Real estate developers.
Some of the problems initially envisioned on the introduction of the IETU have been solved during 2008 and 2009, such as its creditability for foreign tax purposes in various countries. In this regard, most of the countries with which Mexico has tax treaties in place have recognised the IETU as a creditable tax, including the US, which issued a temporary provision allowing the IETU creditability during a period that would allow the US government to reach a conclusion on the study of the operation of the IETU and its interaction with the regular income tax.
There are several controversial aspects of this new tax. Taxpayers in Mexico have filed about 33,000 tax injunctions (amparos) against the IETU. By now, the Supreme Court is still analysing the cases and there has been no conclusion or trend to be followed, but it seems that the court may support the constitutionality of the IETU.
Economic analysts have stated that the IETU did not meet the expectations of the federal government. Indeed, in 2008, the Mexican tax authorities reported that IETU tax revenue was 32.8%, or M$22.893 billion ($1.7 billion), lower than expected when the IETU was enacted. However, it indeed increased the overall tax collection in these times of recession.
The IETU collection was also affected by the worldwide recession, due to the reduction of cash income in Mexico's contracting economy.
Contrary to expectations, the new IETU brought a higher administrative burden for taxpayers apart from the technical challenges that are being corrected, especially for small and medium-sized businesses; this administrative cost should be added to the tax burden itself.
Tax on cash deposits
As a measure to reduce the size of the informal economy and redistribute the tax burden among a wider base of the population, the Mexican Congress approved a new tax on cash deposits (IDE, Impuesto a los Depósitos en Efectivo) to be effective from July 1 2008. The IDE tax rate is 2% and is imposed on deposits made in cash (bills and coins) of more than M$25,000 ($1,900) either as a single deposit or as an aggregated amount at the end of a given month, in bank accounts with Mexican financial institutions, as well as on the acquisition in cash of money orders for this amount.
This tax is administered by the federal government and banks are required to withhold the IDE and remit it to the Mexican tax authorities and to certify such withholdings.
Electronic transfers, transfers between different accounts, cheques and credit instruments contracted with the financial system are not subject to the IDE.
This tax can be creditable against corporate income tax, as reduced from the remittance income tax withheld from third parties and/or any other federal taxes.
The tax on cash deposits has not been as successful as expected when it was enacted. It failed to reach its target of M$3 billion ($226 million) in tax, but it is still in place as a measure against the informal economy.
Decree regarding repatriation benefits
Due to the global economy situation, the Mexican tax authorities issued a capital repatriation decree on March 26 2009, granting tax benefits for the yield on investments and deposits repatriated to Mexico. This was a measure implemented by the Mexican executive branch to promote productive investment in Mexico and to generate employment.
In general, this benefit is applicable to income derived from capital kept abroad before January 1 2009, which is repatriated and invested in Mexico (through a deposit in a financial institution), provided that such income is taxable for corporations, individuals or under controlled foreign company rules, pursuant to the Mexican income tax law, excepting those for which a deduction has been claimed by a Mexican resident.
Repatriated amounts should remain invested in Mexico for at least two years as from the repatriation date or the deposit date in a financial institution. According to this decree, the applicable tax rate for such income is either 4% or 7% on the amount repatriated which represents taxable income to be applied by individuals or corporations, respectively. This rate should be applicable to the income that is repatriated and that has not been taxed in Mexico.
Double tax treaties
During 2008 and 2009, the Mexican government has signed or renegotiated several tax treaties, extending the Mexican treaty network, which is the largest in Latin America. Some of these are:
- renegotiated tax treaty with Canada, which is applicable as from January 1 2008.
- tax treaty with Iceland applicable as from January 1 2009.
- tax treaty with Barbados applicable as form January 1 2010.
- renegotiated tax treaty with Germany, expected to be in force as from 2010.
- renegotiated tax treaty protocol with the Netherlands. It is expected to be in force as from 2010, once it is approved by the Dutch Parliament.
- tax treaty with South Africa, which is expected to enter into force as from January 2010.
- tax treaty with Colombia, signed on August 13 2009.
- tax treaty with Uruguay, signed on August 14 2009
A/H1N1 flu tax relief
In April 2008, a new virus – the A/H1N1 flu virus – was detected in Mexico. This disease had a serious effect on the Mexican economy.
Due to the economic environment and its relative volatility, the tax reforms implemented in the past in Mexico cannot yet be tested properly (for example, the flat rate business tax and the tax on cash deposits). Tax authorities are still looking for the best way to improve tax collection and to contribute to sustainable economic development.
From a macroeconomic point of view, problems regarding proper distribution of wealth have not been completely solved for the Mexican population despite historical efforts and more recent development programmes. Tax authorities need to work more to implement a fair tax system to help achieve the goal of distributing the tax burden proportionally among all participants in economic activities, including in the informal economy.
Economic studies show that only 72% of participants in economic activities in Mexico are in the formal economy, whereas the remaining 28% are in the informal economy, which does not contribute to public revenues. During 2009, the local informal economy has grown because of the impact in Mexico of the worldwide recession and a corresponding increase in the unemployment rate.
Additionally, based on OECD studies, Mexico has a tax collection level representing less than 21% of GDP. This statistic is not good, considering that most OECD member countries have tax collection levels representing more than 30%, or even more than 40% of GDP. |
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In response, the tax authorities introduced a series of tax reliefs. There is a benefit granting a credit for the excess IETU derived from the monthly advanced payments against monthly advanced income tax payments.
Also, benefits for social security contributions from wages and salaries were granted to taxpayers and specific taxes on specific sectors such as shipping, and airlines were forgiven. In addition, aids, reliefs and specific benefits for local taxation were granted. for example, for payroll and lodging taxes, as well as for the recreation industry.
For individuals, the deadline to file the annual tax return was moved to June 1 2009 and for corporations the due date for the statutory tax audit report (dictamen fiscal), was also extended.
Reform of administrative appeals of tax assessments
A reform to the administrative appeals process was enacted in 2009, through a reform in the Mexican Federal Tax Code. This reform encourages taxpayers not to go straight to litigation, but instead to go through an administrative appeal process with the tax authority.
The new rules provide additional time to file evidence and arguments and remove the obligation to guarantee the tax assessment, with the intention to pursue administrative rather than judicial solutions to disputes.
Mexican rules on transfer pricing
New transfer pricing rules were published in February 2009, placing a significant burden on taxpayers and independent accountants issuing statutory 2008 tax audit reports filed during 2009.
In this regard, significant information should be disclosed by independent accountants issuing statutory tax audit reports. This disclosure means the auditor has to undertake more responsibility to review transfer-pricing obligations and taxpayers to provide more details regarding related-party transactions. These requirements will help the tax authorities identify potential tax and transfer pricing issues.
However, the result of several meetings between the Mexican Institute of Public Accountants and the tax authorities representatives is that the filing of some of the additional financial, tax and transfer pricing information has been either postponed or is not required in the statutory 2008 tax audit report filed during 2009.
Forecast for 2010
The executive branch is analysing certain topics that may be proposed for discussion in the next sessions of Congress. It is clear that the proposals are aimed increasing tax revenues in the autumn of 2009, even with the worldwide recession.
After several meetings with officers of the executive branch, elected officials and business people, it is understood that the 2010 tax reform package, which may be discussed during the next sessions of Congress between September and December 2009, may include:
- Potential IEPS (Impuesto Especial sobre Produccion y Servicios, excise tax) increases in the sales of beer, alcoholic beverages, tobacco and sodas.
- New green taxes (for example, on PET (Polyethylene terephthalate) water bottles).
- Changes, or even the elimination of the tax consolidation regime.
There are other taxes that are being evaluated by the executive, from an increase in corporate and personal income tax and a rise in gambling tax, up to taxes on, for example, dwellings and phone services as well as changes to the VAT (value added tax) Law.
All those ideas will be discussed by the Congress during its September to December, 2009 session, but the outcome of those discussions cannot be predicted with confidence now.
Carlos Montemayor (carlos.montemayor@mx.pwc.com), David Cuéllar (david.cuellar@mx.pwc.com) and Francisco José Zamora (francisco.zamora@mx.pwc.com) of PricewaterhouseCoopers.