In late 2013, the Mexican Congress approved the final version of the 2014 tax reform bill. This bill represents a significant change in terms of when and how taxes are paid for individuals living in and companies with operations in Mexico. A key reason for the reform was the need to expand the country’s tax base and reduce the administrative burden that encumbered many companies when dealing tax rules and regulations. The changes which went into effect in 2014 are impacting U.S. taxpayers with Mexican interests. New taxes, reduced deductions and new operating processes have created confusion for many.To keep clients, prospects and others updated Barnes Dennig has provided a brief summary of the key changes ushered by the reform.
Key Tax Changes
Below is a list of the most prominent changes that will impact Americans and U.S. based companies with operations in Mexico.
- Corporate Income Tax – The reform has eliminated the reduction of the effective corporate tax rate and keeps it at 30%. Originally, there was to be a 1% reduction in 2015 and 2016 but this transition has been cancelled.
- Business Flat Tax – Starting in 2014 the business flat tax has been repealed.
- Cash Deposit Tax – The tax on cash deposits will be repealed beginning in 2014. This means that any sales made on credit will be classified as income at the time of the sale.
- Dictamen Fiscal Requirement – The requirement for a company to complete a statutory audit tax report is terminated. However, companies with income of more than $100M Pesos or more than 300 employees are still required to file the Dictamen fiscal in place of a tax information return.
- Deduction Limitations – The reform limits deductions that can be taken for technical assistance, interest or royalty payments when paid to a foreign entity controlled by a Mexican company. In addition, deductions for expenses deducted by a related entity are now prohibited.
- Dividend Withholding Tax – There is now a 10% withholding tax on dividends distributed to domestic or foreign residents (note this also includes foreign companies).
- Fringe Payment Deductions – The amount of deductions a company can take for the payment of fringe benefits is limited to 47% of the cost incurred. If a company pays the same amount or higher in fringe benefits over the prior year they may increase the deduction to 53% of costs incurred.
- Enhanced Communications – A new electronic tax inbox will be implemented that will make it possible for tax authorities to electronically distribute tax notifications. The new process will also make it easier for taxpayers to communicate with authorities regarding notices and other issues.
VAT & Excise Tax
- VAT Adjustments – There will now be a uniform application of the VAT rate at 16%. In years past border regions imposed a lower VAT rate of 11% providing some tax advantages.
- Imported Food Tax – A new excise tax of 8% will be levied on imported foods that contain more than 275 calories per 100 grams.
- Flavored Drink Tax – A new excise tax of 1 Peso per litre will apply to all flavored drinks including sodas and flavored powders.
While the tax reform rules have been in effect for some time it’s important to review the changes to ensure that you are properly positioned. Now may be the time to review your company’s international tax situation to ensure your international operations are properly optimized. A regular assessment of your global tax structure can often lead to new tax savings! For a review of your international tax structure please contact Barnes Dennig at 513-241-8313 or click here to contact us.