Mexico has gone to great lengths to tout reforms but a new tax law could slow foreign business investment
Mexico tax reform
Mexico’s tax reform, along with other reforms such as labor, energy, telecommunications, etc. — that were enacted late last year has received extensive news coverage in the past few months. Further, the Mexican government has been adamant in promoting these reforms as the cornerstone for placing Mexico at the forefront of investment destinations. Likewise, many tax practitioners have written extensively about the technicalities of this reform and how it might be dealt with. In spite of all this information, a key question remains in the minds of business people: what are the The mexican System is complex. So, it is absolutely advisable to seek local counsel to invest efficiently, tax-wise, in Mexico. In spite of all this information, a key question remains in the minds of business people: what are the main elements to keep in mind about this reform when planning to invest in Mexico? First, the good news: the single rate business tax, which was a form of alternative minimum tax and troubled a lot of taxpayers due to its intricacies is now repealed. Similarly, the cash deposits tax, which presented cash flow issues for industries whose operations are mostly settled in cash, like fast food restaurants, is now gone. Now, the not-so-good news: a new income tax law was introduced. The corporate tax rate remained the same at 30 percent, but the basis upon how the rate is applied has increased by limiting or eliminating deductions previously available. For example, the deduction of certain payments to employees is now capped at between 43 percent or 57 percent, depending on certain factors and the accelerated depreciation on new investments that was previously available as well is now gone. In addition, payments to non-Mexican residents may now be subject to higher withholding rates (up to 35 percent), unless a tax treaty applies. In this regard it is particu- larly important to note that a new 10 percent tax on dividend or profit distributions to non-Mexican residents was introduced. Finally, new levies were introduced for certain industries. In particular, the mining industry is subject to two new levies: a 7.5 percent levy of net income from extractive activities and a 0.5 percent levy on gross sales of gold, silver and platinum. So, when a business intends to invest in Mexico, some of the issues that need to be kept in mind are the following: ■ Corporate profits will be subject to 30 per- cent income tax when earned.
- An additional 10 percent tax will be levied upon such profits when distributed to for- eign shareholders. However, this tax may be reduced or lowered by tax treaties.
- Hiring labor may be expensive from a tax perspective, since some of the costs associated with employment will have to be borne entirely by the company as they are not deductible.
- It is important to make sure that tax treaty protection is available to items such as royalties, interests, capital gains, etc.
- Certain industries, like mining, may be subject to higher tax burdens than others.
Of course, the Mexican System is complex. So, it is absolutely advisable to seek local counsel to invest efficiently, tax-wise, in Mexico.
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