Volume 6, Number 1, Page 2
Mexican Tax Reforms for 1999
By Alejandro Calderón and Charles Bleil
Last December 31, important changes enacted to various Mexican tax laws were published in the Official Daily Gazette. This following article provides a general summary of the most important modifications.
INCOME TAX LAW
1. Permanent Establishment
The new law provides that when residents abroad conduct business activities in Mexico through a trust, the place in which the trust conducts business will be considered the taxpayer’s place of business.
When a person other than an independent agent acts on behalf of the resident abroad, the resident abroad will now be deemed to have a permanent establishment in Mexico.
When operations are conducted for the resident abroad at prices other than what non-related parties would use in similar transactions, it will be deemed that the independent agent is not acting in his ordinary course of business and therefore the resident abroad has a permanent establishment in Mexico.
Also, the law eliminates the presumption that in a joint venture (asociación en participación) a partner (asociado) residing abroad has a permanent establishment in Mexico. Now, the partner will be obligated to pay the joint venture’s tax obligations, and earnings distributed to a partner (asociado) residing abroad will be treated as dividends for tax purposes.
The law repeals the provision that a resident abroad acting in Mexico through a maquiladora will not be considered to have a permanent establishment.
These changes are significant, since a resident abroad with a permanent establishment in Mexico will be
subject to the Income Tax Law for all of the income attributable to the permanent establishment.
2. Tax Treaty Benefits
The reform eases requirements for taking advantage of provisions (available under international trade agreements) that allow double taxation to be avoided.
3. Joint Ventures (Asociaciones en Participación)
A fundamental change was enacted with respect to such joint ventures. Now, the partner will be the only party required to pay the entire tax due by joint venture operations, which are taxed as for-profit corporations. Earnings distributed to the partner (asociado) will be treated as dividends for tax purposes.
4. Rate
The general corporate tax rate was increased from 34 percent to 35 percent. However, when profits are reinvested, the tax rate will be 32 percent in 1999 and 30 percent in 2000 (see below).
5. Reinvested profits
The law creates a new concept called the “reinvested profit account” (CUFIRE). The purpose of this new account is to promote the reinvestment of profits. Reinvested sums will be taxed at a 32 percent rate in 1999 and 30 percent thereafter. The difference between these reduced rates, and the full 35 percent corporate tax, will be deferred until said profits are distributed to shareholders (outlined in point number 6 below). Taxpayers must maintain a reinvested profit account to take advantage of this deferment opportunity.
6. Dividend Tax Owed by the Partner or Shareholder
The law creates a new 5 percent tax on dividends, which must be withheld by the company distributing the dividend. The withholding will be calculated by applying a rate of 5 percent to the result of multiplying the distributed dividends or profits by 1.5385.
When the distribution comes from the reinvested tax profit account, the taxpayer will owe the tax that had been deferred by applying a 5 percent rate (the difference between 30 percent and the usual 35 percent corporate rate) to the result of multiplying the distributed dividends or profits by 1.5385. In 1999, a 3 percent rate will apply instead of the aforementioned 5 percent rate.
7. Residents abroad—Distributed dividends and earnings
Residents abroad that receive distributed earnings or dividends from a permanent establishment in Mexico, must pay an income tax on said earnings. This tax is equal to 5 percent of the amount resulting from multiplying the dividends or profits paid by 1.5385.
8. Interest
The law reduces from 15 percent to 10 percent the tax rate applied to interests paid to residents abroad for the type of credit instruments mentioned in Article 125 of the Income Tax Law. This tax will be withheld by the custodian at the moment the interest is payable.
For 1999, the preferred rates of 4.9 percent and 10 percent respectively will still be in effect for the payment of interest to banks or entities registered before the tax authorities.
R.F.C. Inscription
Partners and shareholders of Mexican companies now have the duty to register in the Federal Taxpayers Registry (“R.F.C.”) and to file certain notices. In addition, Mexican companies must note in the corresponding Partners or Shareholders Registry Book and in the minutes of the coinciding Shareholders Meetings, the Federal Taxpayers Registry number of each partner or shareholder. Notaries Public are required to verify the accuracy of the R.F.C. numbers. These duties will begin in effect on July 1, 1999, and the law imposes fines for their violation.
Value Added Tax
The new law increases the number of situations in which parties must withhold the Value Added Tax (“VAT”) and send it to the Ministry of Finance.
The Mexican taxpayer will have to withhold the VAT created by the resident abroad. Thus, for example, if the resident abroad leases real property located in Mexico creating the necessity to pay VAT, the Mexican taxpayer will have to withhold the VAT and make the payment directly to the tax authorities. Due to this procedure, the resident abroad will not be able to credit the VAT he will have paid relating to the leasing of the real property.
OTHER ISSUES
The 1999 tax reforms were primarily designed to increase revenues, after sluggish oil prices lowered the government’s expected revenues and amid the administration’s commitment to fiscal discipline. Opposition parties primarily focused on defeating a 15 percent tax on telephone service proposed by the president, instead of on substantive reforms to encourage investment and productive activity.
Alejandro Calderón is a partner specializing in tax law in Capín, Calderón, Ramírez y Gutiérrez-Azpe, S.C. in Mexico City (525-280-9193).Charles Bleil is an associate in the same law firm.
