Tax - Mexico Commentary 1-2014

1. Background

On September 8, 2013, the executive branch of the Mexican federal government submitted to the Mexican Congress an economic reform package making sweeping changes to Mexico’s tax system. The raft of proposed reforms amended myriad tax laws, notably including the Federal Tax Code and the Value Added Tax Law, created a new Income Tax Law, and repealed the Flat Business Tax Law.

The executive branch’s proposal was widely debated and ultimately underwent several changes in the legislative process, some highly significant, and among them the following are worth mentioning which were ultimately not accepted:

(i) The inclusion of an anti-avoidance provision in the Mexican tax system, under which the tax authorities would have been authorized to re-characterize the transactions performed by taxpayers where there was no valid business reason for the transaction;

(ii) The elimination of the 100% depreciation rate applicable to investments in machinery and equipment for the generation of renewable energy; and

(iii) Charging VAT at the standard rate on private education services as well as on interest on mortgages on properties used for residential housing (which today remain untaxed).

Lastly, following a dynamic negotiation process between the country’s main parliamentary groups, on October 31, 2013, the Congress approved the final version of the draft decree. Among its key points are:

(i) An additional 10% tax applicable to dividends distributed by Mexican companies to individuals foreign residents;

(ii) The repeal of the tax consolidation regime, and its resulting replacement with the tax integration regime;

(iii) The elimination of the reduced 11%, VAT rate in the border areas to apply the standard 16% rate; and

(iv) The ceiling on the deduction of up to 53% or 47%, as appropriate, of payments made by employers which qualify as exempt income for workers.

The aim of this commentary is to provide a brief but concise overview of the Mexican tax legislation applicable in and after fiscal year 2014, while also taking a look at the legal provisions contained in the new Federation Tax Code Regulations published on April 2, 2014, the administrative provisions contained in the Miscellaneous Tax Decision for 2014 published on December 30, 2013 and its First Amendment Decision published in March this year, as well as the “Decree compiling various tax relief measures and administrative facilities for fiscal year 2014” published in the Official Federal Gazette on December 26, 2013 (“the Decree”).

2. The Federal Tax Code(CFF)

3. New Income Tax Law

4. Value added tax

5. Production and Services Excise Tax Law

6. Conclusions