Mexican Tax Reform Proposal – General Overview

On Sept. 8, 2013, Mexican President Peña Nieto submitted a bill to the Mexican Congress to amend several tax statutes as well as to amend Articles 4 and 123 of the Mexican Federal Constitution. Within the statement of intent, the bill describes the objective of increasing the federal tax collections by around 240 billion pesos (0.005 percent of the forecasted federal income) to create a universal social security system, provide unemployment insurance and create a general pension for people over 65 years of age.

In order to achieve the referred increase, the bill proposes to eliminate, increase or decrease the following:

INCOME TAX

Corporations

• Eliminates: (i) the tax consolidation regime; (ii) the accelerated deduction of fixed assets; and (iii) deduction of operations with related parties (if same are also subject of being deducted by another related party in Mexico or abroad; or if such transactions are either exempted or subject to a tax rate of 22.5 percent or less).
• Distribution of dividends will be subject to a new independent tax at a flat rate of 10 percent (currently the payment of dividends by companies are not subject to further taxation). Since the bill targets distribution of dividends, even though it provides a transitory clause exempting prior dividends, it is unclear whether the tax authorities will include profits generated in prior fiscal years that have not yet been distributed.

Individuals

• Increase the federal income tax rate from 30 percent to 32 percent for individuals whose income exceeds 500,000 pesos per year (approximately US$40,000).
• Limit personal tax deductions to the lesser of the equivalent of two years-worth of minimum wages or 10 percent of the gross income of the taxpayer.
• Eliminates the simplified tax regime.
• Creates a new tax to be applied separately at a rate of 10 percent on profits obtained by individuals from stock-trading transactions.

VALUE ADDED TAX

Corporations and Individuals

• Eliminates tax exemption for transactions dealing with temporary importations; thus, applying VAT at a rate of 16 percent upon such transactions.
• Removes preferential 11 percent VAT rate for border states in order to apply a tax rate of 16 percent throughout the country.
• Removes the 0 percent tax rate on the sale of jewelry, metal work, artwork and gold bars (when said bar is made up of at least 80 percent pure gold).
• Public entertainment shows will be taxed but exempting theater and circus performances.

Individuals

• Eliminates the tax exemption for transactions dealing with transfer of title to and lease of individual residences, as well as upon mortgage interests.

OTHER TAXES

• Eliminates the flat tax (IETU) and the cash deposit tax (IDE).
• Taxes on sugary beverages will be increased.
• "Green taxes" to be imposed to fossil fuels with carbon content, as well as on insecticides.
• The fees to operate concessions in the mining and telecommunications sectors as well as the right to use water-ways will be increased.

General Comment

The bill submitted by President Peña Nieto, rather than targeting the untaxed sector of the economy and increasing the base of taxpayers, focuses instead on more stringent taxes on the taxing in a more stringent manner the already captive taxpayers, hence imposing an additional burden on companies as well as on the middle class individuals who will be heavily impacted. As the bill is discussed at the Mexican Congress we will provide further client-alerts addressing potential impact on specific industries.

If you have any questions regarding the status of the referred bills or wish to further discuss the risks involved or potential impact of them to your business, please contact Roberto Arena ([email protected]; +52.55.5.284.8542), Fernando Camarena ([email protected]; +52.55.5.284.8544) or Aldo Mendoza ([email protected]; +52.55.5.201.4521) of Gardere’s Mexico City office or Charlie Meacham ([email protected] 713.276.5633) of Gardere's Houston office.