Mexican Tax Reform Could Have Major Impacts for U.S. Manufacturers

Tim Finerty

How will Mexico’s new tax laws impact your company?

The Mexican government recently made significant changes to the tax laws that govern the country. The Mexican Tax Reform, approved October 31, 2013, includes changes considered relevant to increase tax revenue for the country. The following changes became effective January 1, 2014.

New Dividend Tax

A withholding income tax of 10 percent will apply to dividends distributed to resident individuals or foreign residents (including foreign corporations). This new withholding tax will apply beginning in 2014, but not to distribution of profits (also referred to as cufin) subject to corporate level tax prior to 2014.

Corporate Tax Rate

The corporate income tax rate of 30 perecent was scheduled to be reduced to 28 percent. This reduction has been repealed as part of the tax reform legislation. As a result the corporate income tax rate will remain at 30%.

Individual Taxation

The individual income tax rates for individuals are now as follows:

• 31 percent for individuals earning more than $500,000 pesos annually
• 32 percent for individuals earning more than $750,000 pesos annually
• 35 percent for individuals earning more than $3,000,000 pesos annually

The Flat Tax (or IETU) and Tax on Cash Deposit

The new law repeals the IETU and tax on cash deposits in its entirety.

Value Added Tax (VAT)

The 11 percent VAT rate for border zones has been eliminated; the general 16 percent rate is now applied nationwide

The 0 percent VAT rate that applied to the temporary importation of materials and equipment by IMMEX or maquiladora operations has been eliminated. Instead, a tax credit or certification will be required by such companies to avoid tax payments. This change may not apply until 2015 to allow the tax administration to prepare for the certification changes.

Other Expense Related Changes

Employers are allowed to deduct 47 percent of salaries and fringe benefits that are exempt income for the employee (i.e., retirement funds, vacation premium, termination payments, etc.). Social Security contributions of employees paid by the employer are no longer deductible.

The immediate depreciation option for business assets is repealed, limiting deductions to the gradual depreciation rates foreseen under current law.

The deduction for expenses paid to related parties where the applicable tax rate is below a certain threshold (75 percent of the corporate tax rate in Mexico) is prohibited.

• Car purchase deductions are limited to $130,000 pesos per year
• Car rental deductions are limited to $200 per day

The items listed above are not inclusive of all the changes that went into effect January 1, 2014, as a result of the tax reform legislation. Any US business currently doing business within Mexico should review the newly exacted law with the advisors to properly determine the impact it will have on their operations.