• Service: Tax, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 4/8/2014

Mexico - Limitation on deductibility of employee benefits found unconstitutional 

April 8:  A trial court in Mexico recently concluded that employee benefits-related expenditures of employers / corporations have a business purpose (i.e., are necessary to achieve business goals) and therefore are deductible—despite a limitation on the deductibility of such expenses under recent tax reform.

The court’s findings were in response to an amparo (injunction) action brought after the tax reform measures were effective beginning 1 January 2014.

The disputed provision limits an employer’s ability to deduct employee benefits-related expenses if the value of the benefits generally would be exempt from income tax of the workers / individuals who receive such benefits.

In general, the district court concluded that the provisions limiting the deductibility of employment benefits were unconstitutional because they violated a constitutional principle in Mexico of the “proportionality of tax.”

KPMG observation

Under Mexico’s legal system, decisions declaring a tax law as “unconstitutional” do not have the effect of invalidating the measure. Rather, the reach of the court’s injunctive relief—amparo—is limited to those taxpayers who petitioned the court and obtained a favorable ruling. All other taxpayers must comply with the law as written—even though the law may be unconstitutional—until each taxpayer obtains an amparo and invokes the protection of the federal courts.

Tax professionals have noted that the judgment of this specific district court may not be followed by other district courts throughout Mexico and that the matter may ultimately be decided by the Supreme Court of Justice (Suprema Corte de Justicia de la Nación).

Read an April 2014 report (Spanish) prepared by the KPMG member firm in Mexico: Sentencia de amparo contra Reforma Fiscal 2014

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