Within the most relevant proposed changes are: the elimination of the Business Flat Tax (IETU by its Spanish acronym) and the Tax on Cash Deposits (IDE by its Spanish acronym).
Contrary to what was expected, the proposed changes do not include imposing Value Added Tax (VAT) to food and medicines.
On the other hand, a new Income Tax Law (MITL) is being proposed, which in general terms would keep most of the provisions set in the current MITL, but with certain modifications that intend to increase the tax base by eliminating some special regimes and limiting or eliminating certain deductions.
Below you will find what we believe are the most relevant proposed changes, please note that there might be changes to the proposals as part of the Congressional discussion.
It is projected an economic growth for 2014 of 3.9%, with an inflation of 3%.
The price of petroleum has a projection of 81 dollars per barrel and an average interest rate of Mexican Treasury Bonds (CETES) at 28 days of 4%.
It is important to note that a projected budget deficit of 1.5% of the PIB for 2014 is established.
As it was previously stated, a new MITL is being proposed that eliminates several preferential regimens established in the current law, it also limits and eliminates several deductions.
One of the essential proposed changes to the new MITL is to formally adopt the so called tax symmetry principle; in other words when one concept is deducted from a taxpayer taxable base it has to be considered as taxable income for the other taxpayer in the same quantity and at the same time.
Some of the relevant differences vs. the current MITL are:
Corporate Income Tax Rate (CITR)
Such proposed new MITL contains a CITR of 30% and do not longer contemplate a future reduction of such rates as the current tax provisions do (29% for 2014 and 28% for 2015 and on).
Additional CIT on dividends
An additional 10% CIT is proposed on the profits and dividends paid to Mexican individuals and foreign residents.
Therefore Mexican entities or branches that distribute dividends will increase the Mexican tax liability and the effective tax rate. Since the entity that would liable to this tax is the Mexican distributing entity and not the foreign shareholder, income tax treaties would not provide any relief against this tax.
Foreign Tax Credit (FTC)
Several adjustments are being proposed to the FTC system, some of them to adjust the system to the proposed additional 10% CIT on dividends and some others to provide further guidance on how to determine the limits of the creditability, like controlling the foreign tax paid by country (Country Baskets), limiting blending procedures between low and high tax rates, etc.
The tax consolidation regime is eliminated, providing a five year period to pay any deferred tax.
Instead, a new tax regime for entities grouping is proposed, which will allow the groups to defer up to 3 years the income tax, considering for these purposes only the profits and losses of the entities that comprise the group.
More strict requirements are being proposed in order to access to the full Maquila benefits (Transfer Pricing Regimes, no PE, etc.), for instance, it is established that it would only be applicable to such entities which income derives in 90% or more of exportations. Additional potential cuts on the currents IMMEX benefits are being discussed.
Simplified Regime and Primary Activities
It is being proposed to eliminate the so called Simplified Regime; the reduced CITR granted to taxpayers exclusively engaged on agricultural, stockbreeding, fishing or forestry activities; as well as the income exemption currently granted to such taxpayers.
Real Estate Property Companies (SIBRAS by its Spanish acronym)
This tax incentive would be eliminated under the argument of base erosion, establishing that who have applied for such incentive must tax any deferred capital gain no later than December 2016. Please note that such proposal might suffer unconstitutional vices.
- Payments made to related parties residents either in Mexico or abroad for which the income is not taxable, or it is effectible taxable at less than 75% of what would have been paid in Mexico, would not be deductible
- It is proposed to eliminate the immediate/accelerated depreciation of investments; on this regards from 2014 the investments would only be deductible by the straight line depreciation method attending at the standard maximum depreciation rates. It is relevant to point out that this measure includes machinery and equipment used to produce renewable energy
- The contributions to the pension and retirement funds would not be deductible any longer, instead of such deduction actual payments made to the employees for such concepts would be deductible
- The cap of deductibility of Investments/expenses related to automobiles is reduced to an amount of $130,000 as purchase price, and to $200 MXN of daily rental
- In the case of exempted remunerations paid to workers, it would only be deductible the equivalent to 41% of such amount. Examples of such exempted remunerations are: social security, savings funds, liquidation, annual gratuity, overtime, etc.
- Construction and real estate companies may no longer deduct the estimated expenses in relation to the constructions that are ongoing; also it is eliminated the possibility to anticipate the deduction of land at the time of their acquisition
- Banks are currently able to deduct the increases to the overall loss reserve, if they are no bigger than 2.5% of the annual average of the portfolio. In this same way, Insurance companies are currently able to deduct the amount of their risks reserves. Under the proposed legislation, from 2014, Banks and Insurance companies would no longer be able to deduct of reserves, but only of the authorized write-offs.
The maximum rate for individuals would increase to 32% applicable to income from $500,000 MXN annually.
The current exemption on gains on the alienation of shares through the stock exchange would be eliminated and all gains would be taxed at a 10% rate.
The personal deductions are limited to two annual minimum salaries or to 10% of the individuals’ income, whichever is less.
A new tax regime is incorporated to the MITL, named incorporation tax, which enters in substitution of all the actual preferential regimes. This regime would only be applicable to individuals with entrepreneurial activities or rendering services that do not require a professional title and do not have income higher than a million MXN in the fiscal year. The maximum period in this regime would be of 6 years.
Foreign Pension Funds (FPF)
The threshold to access the capital gain exemption is being increase, as follow:
a. The real estate must be leased for at least four years instead of one as currently required.
b. The capital gain should not derive from a trade of business conducted by the FPF.
Please note that this later requirement is unclear on the proposed legislation.
Value Added Tax
The 11% rate applicable in the border region is eliminated, to be applicable the general 16% rate under the argument that in that area resides population with income higher in a 27% to the national average.
Arguing administrative simplification and abuses fund, it is proposed to remove the exemption for the temporary importation of goods, sale of foreign residents to maquiladoras and goods kept in strategic bonded storage, change that would certainly affect the maquiladora industry since tax have to be paid up front, without the possibility to defer it.
In the case of exportation of services, the rate of 0% would no longer be applicable to cases of hospitality services and related services provided as part of conventions to residents abroad.
On international air transportation of goods, the treatment is homologated to the international air transportation of persons, to allow crediting 100% of the value added tax paid to domestic suppliers.
The exemption on the sale and leasing of house is eliminated as well as the exemption on interest paid on mortgages.
Regarding to education services, also the exemption currently provided is eliminated, so the tuition payment would be taxed from 2014.
The inter-state transportation services would be taxed, and only the urban transportation services would remain exempt.
According with Governmental statistics, the higher income population is the one attending a variety of shows (public entertainment); therefore it is proposed that such public entertainment is taxed with the exception of theater and circus.
It is pointed out that chewing gum would not be considered as food, so the 0% rate will not apply to its sale. Likewise, it is established that the rate of 0% shall not apply to processed foods for dogs, cats and small animal species.
Moreover, it is aimed to eliminate the treatment of 0% rate provided by the law in the sale of gold, jewelry, precious metal jewelry, artistic works or ornamental pieces and ingots, which minimum content of the material is 80%, provided that the transfer is not made in retail sales to the general public.
Special Tax on Production and Services
It is proposed to tax $1 MXP per liter for flavoring drinks, concentrates, powders, syrups, essences or flavor extracts, containing any type of added sugars.
On alcoholic beverages it is proposed to keep the transitory rates currently in force that would be decreasing in the following years otherwise.
New taxes are imposed, under the so-called ecological purpose, to the importation and sale of fossil fuels, since when burned, carbon dioxide is released in the atmosphere.
In the case of pesticides, the sale will be taxed at rates that range from 6% to 9%, depending on their level of toxicity.
Federal Tax Code
It is proposed to create an anti-abuse clause, to empower the tax authorities to challenge the tax effects of transactions which under their judgment, has no business reasons.
As always, the Tax & Legal Practice at KPMG in Mexico is at your service to analyze in detail the effects that this reform could have on your business operations.