This country-specific Q&A provides an overview to tax laws and regulations that may occur in Mexico.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-2/
How often is tax law amended and what are the processes for such amendments?
Tax laws in Mexico are subject to constant amendments. Any and all dispositions concerning the essential elements of tax law (subject, object, taxable base, tax rate or tariff and time of payment) must be set forth by tax laws issued by the Mexican Congress in order for them to be valid. Moreover, and in terms of the Mexican Constitution, tax laws have to be initially discussed at the House of Representatives.
In this regard, initiatives and amendment proposals must be discussed and approved both by the House of Representatives and the Senate. Once the relevant amendment has been authorised, the executive branch orders its issuance and publishing in the Federal Official Gazette.
Even though bar associations are consulted on some occasions concerning tax law amendments or proposals, it is not deemed as a formal practice, much less, a legal requirement in order for such proposals to be valid.
Notwithstanding the foregoing, it should be noted that the executive branch is entitled to issue provisions or regulations relating to the applicability, construction or enforcement of tax laws without having abide by the amendment procedure for tax laws.
On a different subject, tax laws are often contested by means of the amparo figure (an extraordinary trial that can be initiated once ordinary recourses have been used or directly, in cases where a constitutional violation is claimed). As consequence thereof, tax laws are subject to the interpretation and constitutional review by the competent courts.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Individuals and legal entities deemed as Mexican residents for tax purposes are required to register under the Federal Registry of Taxpayers, specifying a tax domicile within national territory.
Additionally, Mexican residents for tax purposes are bound to maintain accounting records that in general terms consist of books, ledger entries, account statements, inventories, notices to the Federal Registry of Taxpayers, tax returns, financial statements, information concerning shares or securities held, customs documentation and documentation supporting the materiality thereof.
Accounting records ought to be duly kept for a period of five years (some exceptions could apply) and digitally filed before tax authorities on a monthly basis.
Generally speaking, taxpayers are also required to file provisional income tax returns on a monthly basis and a definitive annual tax return. Concerning value added tax, taxpayers ought to file monthly returns, same that are considered as definitive.
Depending on the taxpayers’ activities or corporate structure, the filing of informative tax returns regarding their participation in offshore legal entities or income perceived in jurisdictions considered to be subject to preferential tax regimes in terms of Mexican law could be mandatory.
It is of paramount importance to point out that failing to comply with the above-mentioned formal obligations, whether it be the registry under the Federal Registry of Taxpayers, properly maintaining accounting records or filing the corresponding returns, could result in infractions or even in the commission of tax crimes sanctioned with prison.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
Most tax related matters are dealt with the Tax Administration Service. In recent years, stringent criterions relating even to ´standard´ issues have been adopted, making it hard for taxpayers to comply with the authorities’ interpretation of the applicable tax laws. In this sense, procedures such as tax devolutions (particularly concerning value added tax), or the annulment of tax liabilities determined by the authorities often require strenuous efforts and, considering the several stages of proceedings available both for authorities and taxpayers, such procedures could take several months.
It should be kept in mind that other local taxes such as property taxes, payroll taxes or taxes on the acquisition of real estate ought to be dealt with local tax administrations or treasuries. In addition, other administrative authorities such as the Mexican Social Security Institute are also entitled to initiate audit procedures concerning employer contributions.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
In terms of the applicable laws, taxpayers have the option of contesting tax liabilities before a different organ of the Tax Administration Service than the one that determined it. Nevertheless, taxpayers are not required to do so in order to have access to different stages of proceedings.
In this regard, taxpayers are entitled to challenge and request the annulment of resolutions issued by tax authorities directly before the Local or Federal Court of Administrative Justice. Likewise, in cases were taxpayers decide to challenge the relevant tax liability before the Tax Administration Service, they still have the option of filing an annulment lawsuit against the administrative resolution that validates the tax liability that was initially determined.
Furthermore, in cases where constitutional violations are claimed to have occurred as consequence of a tax dispute, or the administrative or judicial rulings related thereto, taxpayers could be entitled to file an amparo lawsuit.
Most tax disputes could take an average of one to four years in order to be fully concluded, considering the stages of proceedings available both for authorities and taxpayers.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Depending on the tax at hand, different set dates for payment could apply. For instance, income tax is generally paid by means of an annual tax return that must be filed within the first three months following the end of the fiscal year for which it is being filed. However, taxpayers are also required to file estimated monthly returns relating to income tax due. Concerning value added tax, taxpayers ought to file their corresponding returns on a monthly basis.
In pursuance of the Federal Tax Code, whenever the applicable law does not indicate the relevant tax’s date of payment, it ought to be paid by means of a tax return filed (i) within the first seventeen days of the subsequent month for which the corresponding tax is being paid, in cases where the taxpayer is required to withhold; or (ii) within the next five days after the corresponding tax has been caused for all other cases.
In cases where taxpayers challenge a tax liability before the Tax Administration Service, the payment in dispute is postponed until the corresponding administrative resolution is issued and served to the taxpayer.
Notwithstanding the foregoing, whenever taxpayers challenge a tax liability before the Local or Federal Court of Administrative Justice or any court of the judicial branch, the disputed amount ought to be guaranteed by the taxpayer in order for it not be collected by tax authorities.
In any case, once the tax dispute has been resolved, the winning party is entitled to receive the disputed amount updated to present value as well as interests accrued in connection therewith (interests are accruable for up to five years).
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
In terms of the Federal Tax Code, information provided by taxpayers to the competent authorities is considered as confidential and it is duly protected from disclosure to third parties. In this sense, such information could only be provided to other governmental authorities in cases sanctioned by law and assuming that due process has been abided by.
Nonetheless, it should be noted that certain information could be required from tax authorities on an international scale, in pursuance of broad exchange of information agreements or other relevant instruments such as FATCA or CRS.
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
As a member of the G20, Mexico has subscribed to the Common Reporting Standards (CRS), and even has adapted the local set of laws, in order to meet the standards set forth by the OECD.
Additionally, Mexico has executed the Model Agreement for Competent Authorities on the CRS, along with other 81 jurisdictions. As consequence thereof, parties engaged as or with Mexican taxpayers could be required to submit country-by-country reports describing the operations in which they are involved.
What is more, as of 2017 Mexico intends to have the names, accounts and balances of Mexican taxpayers that have opened accounts outside of the country.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
Mexico participated actively in the development of the Base Erosion and Profit Shifting (BEPS) Action Plan. Consequently, since the tax reform of 2014, the local set of laws have been amended in order to abide by the standards set forth therein. In this regard, more stringent conditions and requirements have been established relating to hybrid mismatches (Action 2), controlled foreign corporation rules (Action 3), treaty abuse (Action 6), transfer pricing rules (Actions 8 through 10) and reporting obligations (Action 13).
Is there a GAAR and, if so, how is it applied?
The Mexican tax system contemplates transfer-pricing, thin capitalisation, CFC, back-to-back and tax re-characterisations as general anti-avoidance rules. Additionally, is should be noted that Mexico has been actively participating in the development and implementation of OECD guidelines and adapting the local set of laws in order to comply with the standards set forth by the BEPS action plans. In this sense, for the past few years, tax authorities have adopted more stringent requirements and standards in order to determine that anti-avoidance rules have been complied with.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
In general terms, Mexican tax laws adhere to the recognised OECD Model, even to the extent that in some cases the content of local laws is given by the OECD guidelines.
With respect to the taxes listed in question 10, the following are regulated by the Mexican tax system:
a. Taxation of business profits. Legal entities deemed as Mexican residents for tax purposes are subject to income tax on a worldwide basis. That is, any and all income perceived by such entities would be subject to taxation in Mexico.
Concerning foreign residents, in cases where they have a permanent establishment within national territory all income attributable thereto could be subject to taxation. Likewise, income perceived by foreign residents that is deemed to have its source in Mexico could be subject to taxation.
The current corporate tax rate is of 30 per cent.
b. Taxation of employment and pensions. In pursuance of the Mexican Income Tax Law, employers are required to withhold income tax due over the salary or wages of their employees. The applicable withholding rate varies depending on the relevant employee’s income, ranging from 1.92 up to 35 per cent.
In general terms, social security pensions and state workers’ social security pensions are not subject to taxation.
In cases where a foreign resident perceives a salary or wage as consideration for subordinate personal services, the source of income would be deemed to be located in Mexico when the foreign resident services are rendered in national territory. Should this be the case, depending on the amount of the remuneration, the foreign resident could be exempted (for the first $125,900 Mexican pesos perceived during the corresponding calendar year), or subject to a tax rate of 15 per cent (when the remuneration is somewhere in between $125,900 and $1’000,000 Mexican pesos) or a tax rate of 30 per cent (when the remuneration exceeds the amount of $1’000,000 Mexican pesos).
Concerning pensions received by foreign residents, their source of income would be deed to be located in Mexico whenever the party that makes the corresponding payments is a Mexican resident for tax purposes or a foreign resident with a permanent establishment in Mexico, or whenever the contributions to the relevant pension are linked to a subordinate personal service rendered by the foreign resident within national territory. Income tax due would be calculated based on the same parameter as in the case of salaries or wages perceived by foreign residents.
It should be noted that aside from income tax, employers could be subject to a state tax on payrolls. Depending on the relevant state, the corresponding tax rate could range from an approximate of 1.90 to 3 per cent.
c. Value added tax. Both individuals and legal entities that, within national territory, sell goods, render independent services, lease goods or import goods or services, would be subject to value added tax in Mexico. The general tax rate is of 16 per cent.
Nonetheless, depending on the nature of the goods or services that are being sold, rendered or imported, the relevant operation could be exempted from value added tax or subject to a tax rate of cero per cent.
It is of paramount importance to distinguish between goods or services exempted from value added tax and those subject to a tax rate of cero per cent, given that only the latter could be credited by taxpayers.
d. Taxation of savings income and royalties. Income perceived by Mexican individuals by means of savings funds could be exempted from income tax as long as they meet the requirements set for by the Mexican Income Tax Law in order to be deemed as deductible. Additionally, interests paid to them by financial institutions or cooperatives over chequing accounts, accounts for the deposit of pensions, retirement or savings could be exempted from income tax as long as the average daily balance of the investment does not exceed an amount equivalent to five minimal wages to the year (approximately $26,659.6 Mexican pesos).
In cases where the aforesaid conditioned are not met, the Mexican individual should pay income tax at the corresponding tax rate (ranging from 1.92 to 35 per cent).
Concerning royalty payments made to a foreign tax resident, the applicable tax rate could range from 5 to 35 per cent, depending on the concept for which royalties are being paid.
e. Taxation on income from land. Two state taxes should be considered on the subject. Depending on the state, the acquisition of land could trigger taxation. The applicable tax rates could range from an approximate of 1 to 5 per cent. Additionally, land could be subject to a state property tax.
It is worth mentioning that both taxes should be paid to the corresponding local treasuries instead of the Tax Administration Service.
On a federal scale, income perceived by taxpayers as consequence of the exploitation of land could trigger income tax. Likewise, the transfer of land is generally considered as exempted from value added tax.
f. Taxation of capital gains. Generally speaking, Mexican tax residents (individuals and legal entities) are required to pay income tax on a worldwide basis. In this sense, capital gains ought to be added to their accruable income for the relevant fiscal year.
Income resulting from the disposal of stock issued by a Mexican resident company could be subject to taxation at a rate of 25 per cent over the gross amount of the corresponding consideration, when in the hands of a foreign tax resident seller.
Nonetheless, provided that certain requirements are met, foreign tax residents could opt to calculate income tax due at a rate of 35 per cent over the capital gain in question (with the possibility to deduct the cost of the shares).
It is important to point out that in order for the latter alternative to be available, foreign tax residents are required to designate a representative in the country in charge of complying with several obligations, such as remitting the corresponding tax.
Additionally, the disposal of stock listed on the Mexican Stock Exchange, as well as other recognised markets, could be subject to a 10 per cent tax rate.
g. Stamp and/or capital duties. The Mexican tax system does not foresee any stamp or capital duties.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Mexican resident legal entities are subject to income tax on a worldwide basis. Concerning foreign tax residents, they could be subject to taxation in cases where they have a permanent establishment within national territory or perceive income whose source of wealth is located therein.
Unless otherwise provided by the applicable law, and depending on the activity that triggers income tax, income could be considered to have been perceived by a taxpayer (and should therefore be accrued) when the corresponding invoice is issued, when the good or services is materially delivered or rendered, respectively, or when the consideration is paid or is entirely or partially due and payable. However, it should be noted that income tax is generally paid by means of an annual tax return.
In general terms, the taxable base on which a Mexican resident legal entity is required to pay is determined as follows: The entity’s profits are reduced with the relevant fiscal year’s authorised deductions and the workers’ participation in the entity’s profits. Additionally, net operating losses from past fiscal years could be reduced.
Regardless of the fact that legal entities are usually required to pay income tax by means of an annual tax return, monthly estimated returns (whose amount is determined taking into account the past fiscal year’s results) ought to be filed.
Concerning foreign tax residents, taxes due on their operations within Mexican territory (or that are Mexican-sourced) are generally withheld by the entity that made the corresponding payment.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities?
According to article 7 of the Mexican Income Tax Law, the concept of legal entity comprises, amongst other, business corporations or companies, decentralised agencies whenever they primarily carry out business activities, financial institutions, partnerships and joint ventures.
Nevertheless, different tax treatments could be applicable depending on the nature of the relevant legal entity. For instance, certain trusts could be deemed as tax transparent and consequently the corresponding income tax would be due on a pass-through basis. That is, the corresponding tax consequences would arise at the beneficiaries’ level.
Is liability to business taxation based upon a concepts of fiscal residence or registration?
As mentioned above, the Mexican income tax system is mainly built around the concepts of residence and source. In this regard, whilst Mexican resident legal entities are required to pay income tax on a worldwide basis, foreign tax residents could be required to pay income tax on all income attributable to permanent establishments located in Mexico, or any and all income perceived by them that is deemed to be Mexican-sourced in terms of the applicable laws.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Up until the tax reform that came into force as of January 1, 2014, Mexican border regions could benefit from a reduced value added tax rate of 11 per cent. Nonetheless, said benefit was repealed.
Notwithstanding the foregoing, Mexican tax laws do provide a favourable tax regime relating to financial institutions. In this sense, interest payments deriving from loans between said institutions could be exempted from value added tax. Moreover, financial institutions could be subject to reduced income tax rates.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
No special tax regimes concerning intellectual property are considered by Mexican tax laws.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
An optional regime for groups of companies was incorporated under the Mexican Income Tax Law that entered into force as of January 1, 2014. This regime is composed of two types of companies: an integrating company and the integrated companies.
In general terms, this optional regime enables the integrating company to determine income tax due by the group on a consolidated basis and to defer a portion thereof for up to three fiscal years.
It should be noted that in order for a legal entity to be eligible as an integrating company, the following conditions ought to be met: (i) it must be a Mexican tax resident; (ii) it must hold more than 80 per cent of the integrated companies’ voting shares (even if said shares are indirectly held by the integrating company by means of another integrated company of the group); (iii) no more than 80 per cent of the integrating company’s voting shares ought to be held by one or more companies, unless they are tax residents of a jurisdiction that has entered into a broad exchange of information agreement with Mexico.
Concerning integrated companies, in order for a corporation to be eligible as such, more than 80 per cent of its voting shares must be directly or indirectly (or both) held by an integrating company.
Additionally, the following legal entities are expressly prohibited from being considered either as integrating or integrated companies under the optional regime at hand: (a) non-profit legal entities; (b) legal entities that are considered to be part of the Mexican financial system, such as the Mexican Central Bank, financial, insurance or bonding institutions, hedge funds and stockbrokers, amongst others; (c) foreign tax residents even in cases where they have a permanent establishment in Mexico; (d) civil partnerships and cooperatives; (e) legal entities that operate under a coordinate regime set forth by articles 72 and 73 of the Mexican Income Tax Law; (f) joint ventures in terms of article 17-B of the Federal Tax Code; (g) maquila companies (a special regime of twin or manufacturing plants in Mexico); and (g) legal entities that have pending net operating losses that were generated before the relevant entity met the necessary requirements in order for it to be eligible as an integrating or integrated company.
Is there a CFC or Thin Cap regime?
Concerning CFC rules, the Mexican Income Tax Law establishes that Mexican residents for tax purposes and foreign residents with a permanent establishment in Mexico could be deemed to perceive income from jurisdictions considered as preferential tax regimes whenever: (i) income deriving therefrom is not subject to taxation in the relevant jurisdiction; or (ii) the income tax to which said income is subject to in the relevant jurisdiction is less than 75% of the income tax that would be due in Mexico.
In this regard, Mexican residents for tax purposes or foreign residents with a permanent establishment within national territory could be required to pay income tax in terms of Title VI of the Mexican Income Tax Law (Preferential tax regimes and multinationals) over income perceived through foreign legal entities in which they participate, directly or indirectly (in proportion to their participation therein), as well as over income perceived by means of foreign legal entities deemed as tax transparent.
In general terms, taxpayers that receive income considered as subject to a preferential tax regimes are required to keep specific accounting records concerning each of the legal entities through which they perceive income, and to pay income tax due separating it from the rest of their accruable income.
Additionally, thin capitalisation rules are considered in terms of the Mexican tax laws. In this sense, Mexican resident legal entities are only entitled to deduct interest payments as long as the total amount of debt contracted (for which such payments are due) does not exceed three times the company’s net worth. Should the relevant entity fail to abide by the allowed debt-to-net equity ratio, the corresponding interest payments would be considered as non-deductible for income tax purposes.
Nonetheless, legal entities considered as part of specific industries, such as the financial system or other national strategic sectors, could obtain an authorisation from the relevant tax authorities in order to be permitted to have a higher debt-to-net equity ratio.
Furthermore, it is of paramount importance to point out that Mexico, as part of the G20, has been actively participating in the development and implementation of OECD guidelines in several subjects including CFC and thin capitalisation rules, to the extent of amending the local set of laws. Therefore, for the past recent years, more stringent requirements have gradually been incorporated to the Mexican tax system.
Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Generally speaking, Mexican transfer pricing rules have been adapted to the OECD guidelines on the subject. In this regard, transfer pricing rules would be applicable concerning transactions between related parties. That is, the corresponding transaction should abide by the arm’s-length principle.
Moreover, concerning transactions between a Mexican tax resident and a non-related foreign tax resident, the first would be required to determine its accruable income and authorised deductions bearing in mind that the price and compensation for the relevant transaction should be equal to that which would have been paid to an independent party (arm’s-length principle).
It is worth mentioning that in terms of the applicable Mexican laws, it is possible to obtain an advanced pricing agreement. Nevertheless, the issuance of the corresponding resolution could take from two to three years.
Are there any withholding taxes?
Generally speaking, under certain circumstances both income and value added taxes could be subject to withholding. For instance, the Mexican Income Tax Law provides that employers ought to withhold income taxes due on their employees’ salary. Additionally, income tax due by a foreign tax resident that carried out a transaction with a Mexican tax resident is often required to be withheld by the latter.
Concerning value added tax, the following parties could be required to withhold taxes due:
- financial institutions that receive payments in kind or obtain goods by judicial or fiduciary allocation or awarding;
- legal entities that: (a) receive personal independent services from or use goods leased to them by individuals; (b) acquire industrial waste used as consumables for their activities; (c) receive transportation services from individuals or other legal entities; (d) receive services from commission agents that are individuals;
- individuals or legal entities that acquire, temporarily use, sell or lease to foreign tax residents without permanent establishments, tangible assets.
Are there any recognised environmental taxes payable by businesses?
No environmental taxes are recognised under the applicable Mexican tax laws. However, businesses could be required to pay for specific carbon credits or certificates depending on the amount of tons of carbon dioxide produced by them.
What is more, taxpayers that have invested on renewable energy project could be entitled to accelerated deductions related thereto.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
Dividends paid by Mexican tax resident legal entities are not subject to further taxation when they are paid out of the after-tax earnings and profits account that has already been subject to taxation. If that is not the case, the entity paying dividends would be required to pay tax on the distribution of untaxed profits.
Dividends paid to foreign tax residents, whether individuals or legal entities, as well as to Mexican resident individuals, would be subject to an additional 10 per cent withholding tax.