Below you will find what we believe are the most relevant proposed changes that may affect foreign investment and payments to related parties and applicable to corporations.
A new Mexican Income Tax Law (MITL) is being proposed that eliminates several preferential regimes established in the current law, it also limits and eliminates several deductions.
Application of Benefits of Tax Treaties
As previously provided, in order to apply benefits of treaties to avoid double taxation, taxpayers must provide proof of residence in the country concerned and comply with the provisions of the treaty itself and other procedural provisions contained in the MITL, including to appoint legal representative, where applicable. This would include the information filing regarding the tax position in terms of Article 32-H of the Federal Tax Code.
The main addition in this respect is that in the case of transactions between related parties, the tax authorities may request that the taxpayer residing abroad prove the existence of legal double taxation through a statement under oath signed by its legal representative, which expressly indicate that income taxed in Mexico and for which it is planned to apply the benefits of the treaty to avoid double taxation, are also taxed in the country of residence, for which the legal representative shall indicate the applicable legal provisions, as well as documentation that the taxpayer considers necessary for that purpose.
This may affect the application of tax treaty benefits, mainly the reduced withholding tax rates, where the income is not taxed in the other country.
- 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.
This would affect, in first instance, any payments made to a foreign related party country with an income tax rate of less than 22.5%.
In addition, the type of income must be reviewed and if special deductions may be applied in the other country to determine the tax payable. For example, if notional interest deductions are applicable, there may be an issue with the deductibility. Countries that do not tax royalty income, the royalty paid would not be deductible.
- Payments made by the taxpayer when they also are deductible to a related party resident in Mexico or abroad.
The issue here is that the provision is so broad that it affects permanent establishments and limited liability company (SRL) where the foreign entity also recognizes the deductions.
Additional CIT on dividends
The proposal for tax reform for next year includes an additional 10% CIT that must be paid for the total distribution of dividends (without gross-up) to foreign shareholders by the distributing Mexican entity (regardless of the CUFIN balance, and in addition to the 30% CIT on the grossed-up excess amount).
The additional 10% CIT will be applicable to all distributions starting 2014, even to earnings that were obtained in previous years.
This additional 10% CIT is payable by the Mexican entity and is not a withholding tax; hence, tax treaties cannot apply to reduce the rate.
Consideration may be given to a possible distribution of dividends out of CUFIN before the end of the current year to avoid the application of the additional 10%.
At KPMG we believe there are several options that could be assessed by taxpayers prior to the entry into force of this Act, so as always, our Tax & Legal Practice at KPMG in Mexico professionals are at your disposal to analyze in detail the effects the implementation of the above as is could have on your company.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
Please consider that this is the tax reform package that was presented for discussion and hence, some modifications may occur in the following weeks.