HSBC Doing business in Mexico

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18 Taxation in Mexico Corporation Income Tax Income Tax Income Tax is a federal obligation. The corporate tax rate is 30%, which will remain in place for another two years. Taxpayers must file monthly estimated payments no later than the 17th of the month following that day in which income is received. Payment must be made at a bank or internet. The full tax return must be filed by the 30th of April in the following year. Tax legislation deems the following persons to be residents abroad: 1. Nationals and foreign individuals not resident in Mexico. However, if they reside in Mexico, they are deemed to be residents abroad if their primary centre of interest is not located in Mexico; i.e. when more than 50% of their annual income arises from a source of wealth located outside Mexico, or, when the centre of their professional activities is not located in Mexico, among other cases; and 2. Entities (companies, associations or partnerships, among others) not incorporated under Mexican law, as well as those that have not established their main place of business or their management centre in Mexico, but maintain one or more permanent establishments in Mexico. Individuals or entities resident abroad in the foregoing terms must pay taxes in Mexico in any of the following cases: • When they obtain income from any source of wealth located in Mexico. • When they have a permanent establishment in Mexico, in which case, tax is payable on the income attributable to such an establishment. Based on the above, individuals and entities must pay taxes in Mexico when they obtain income derived from the following: • Salaries; • Professional fees; • Compensation paid to board members, administrators, statutory auditors and managers; • Leasing of real estate; • Leasing of goods; • Time share tourist service agreements; • Sale of shares; • Financial leases; • Royalties, technical assistance and advertising; • Interest; • Prizes; • Artistic and sports activities, as well as public shows; • Distributable surplus of nonprofit entities; • Dividends, profits, remittances and earnings distributed by entities; • The sale of real estate; • Building site construction, installation, maintenance or placement, inspection or supervision of real estate; or • Other income from a source of wealth located in Mexico. Deductions Business expenses are deductible if they are properly documented and supported. The following deductions are permitted: • Returns received or discounts or rebates made in the tax year; • Cost of goods sold; • Expenses, net of discounts, rebates and returns; • Investments (depreciation by the straight-line method, adjusted for inflation); • Bad debt credits and losses resulting from acts of God; • Profit sharing paid to employees; • Contributions for the creation or increase of employee pension or retirement funds; and • Accrued interest, subject to the thin capitalisation rule. Calculation of Income Tax It is first necessary to calculate taxable income, on which the corporate income tax rate is then applied. Taxable income is the difference between taxable revenue and expenses. Revenue and expense recognition is on an accrual basis. Lastly, the accrual basis is multiplied by the income tax rate. Tax incentives Tax reductions are available to corporations engaged in agriculture, stock-breeding, forestry or fishing activities. Accelerated depreciation is available for certain types of capital investments, such as machinery and equipment, starting the year in which the investment is made. Additionally, in the last 25 years, Mexico has signed agreements to avoid double taxation in order to standardise tax concepts with those of the tax jurisdictions of the countries involved in the negotiation. This promotes the exchange of tax information, allowing the contracting parties to follow the tax laws effectively and therefore counteract tax evasion and avoidance. Likewise, the agreements provide for the elimination of double taxation. Both countries must see that the other’s tax obligations are complied with and taxpayers must calculate the tax according to the country where they reside, and accept that there are maximum tax withholding rates in the country in which the source of wealth of dividends, interest and profits is located. Tax withholding is the amount that individuals or entities making payments to parties' resident abroad must subtract for income tax purposes. Although the parties required to withhold the tax are not constituents, they are required to pay taxes owed by the taxpayer. When the person from whom foreign nationals obtain income does not fall under the foregoing assumptions, and consequently does not withhold tax, the taxpayers themselves must make the payment directly to the Tax Administration Service. When the party making the payment withholds taxes, he/ she/it must pay such taxes on a monthly basis no later than the 17th of the month following the date in which the tax is withheld. Payment must be made at a bank or via the internet. When payment is made by the taxpayer receiving the income, he/she/it must do so at the authorised office within 15 days following receipt of said income.
20 Transfer Pricing Mexican transfer pricing legislation did not comply with international standards until 1997. However, in December 1996, the Mexican Congress enacted significant tax reform introducing transfer pricing rules consistent with guidelines issued by the Organisation for Economic Co-operation and Development (OECD), controlled foreign company legislation, and other antiavoidance measures. These changes represented a critical stride in bringing Mexico’s tax rules closer to the international regimes of more developed countries. To date, several minor reforms regarding transfer pricing have been enacted, although the bulk of the Mexican rules are mainly incorporated by reference in the Mexican Income Tax Law (MILT) which requires the application of the OECD Transfer Pricing Guidelines to the extent consistent with the MILT. Most of the transfer pricing rules are included in Articles 86 (Sections XII, XIII and XV) 215, 216 and 216 BIS of the MILT. Under these rules, taxpayers are required to produce and maintain documentation demonstrating that gross receipts and allowable deductions for each fiscal year (FY), arising from international companies´ transactions are consistent with the amounts that would have resulted if these transactions had taken place with unrelated parties under similar conditions. Moreover, documentation of inter-company transactions should be based on a transactional basis. All inter-company transactions between related parties must be reported at arm’s length prices for income tax purposes. This general rule makes the arm’s length principle the cornerstone of the income tax system since it covers transfers of tangible and intangible property, services, domestic and cross-border transactions, transfers of shares whether publicity traded or not, entered into by individual and corporate taxpayers. Article 216 specifies the following six Transfer Pricing methods: • Comparable uncontrolled price method (CUP); • Resale price method (RPM); • Cost plus method (CPM); • Profit split method (PSM); • Residual profit split method (RPSM); and • Transactional net margin method (TNMM). Taxpayers have the obligation to pay income tax in accordance with the arm’s length principle. Additionally, taxpayers have three important transfer pricingrelated obligations: • To prepare and maintain transfer pricing documentation; • To file an information return on transactions with non-residents related parties with the timely filing of their income tax return for the previous fiscal year; and • The transfer of shares and quotas in Mexican companies between related parties is subject to special reporting requirements. Personal Income Tax Scope Resident individuals are taxed on worldwide income. Non-residents are taxed on Mexican-source income only (see above). Individuals who establish their home in Mexico are considered residents if their principal centre of interest is located in Mexico. An individual’s centre of vital interest is considered to be located in Mexico when: • More than 50% of the individual’s income in a calendar year is derived from Mexican sources; or • The centre of the individual’s professional activities is located in Mexico. A taxpayer may be a salaried employee or self-employed with business income. The first kind of income includes salaries, wages, director’s fees, bonuses, gratuities, allowances, certain fringe benefits in kind and statutory employees’ profit sharing distributions. The second kind, i.e. parties earning income from business activities or professional services, including real estate rental activities, is subject to tax at the rates established in the law and published by the tax authorities. The individual tax rate is graduated with a maximum rate of 30% for the next two years (2011 and 2012). For individuals, the fiscal year in Mexico is the calendar year. Tax returns must be filed in April (no later than 30 April) of the following year. Selfemployed individuals and those with rental or business income must file monthly returns no later than the 17th of the month following the one in which the income is received. Payment must be made at a bank or via the Internet, as applicable. Employees of foreign companies who work in Mexico must make monthly estimated tax payments if their companies do not have permanent establishments in Mexico. Parties receiving salary and interest income exceeding Mex$400,000 are not required to file annual tax returns. However, if the real amount of interest exceeds Mex$100,000 and tax is withheld on that interest, the individual must file an annual tax return. Personal income taxes of resident and non-resident employees are frequently withheld. An individual resident taxpayer may elect to pay the remaining tax due either when the annual return is filed or in instalments with interest over a six-month period. Resident individuals must include all information with their annual income tax return, including exempt and nontaxable income. In addition, resident individuals must include information regarding their income from donations, prizes and loans received during the calendar year, when it exceeds separately or in the aggregate. The employer must pay Social Security feeds and Workers’ Housing Fund feeds, as well as the mandatory pension plan, according to Mexican Legislation.
Page 1 and 2: This publication is a joint project
Page 3 and 4: 4 Executive summary Mexico offers a
Page 5 and 6: 8 Introduction Doing business in Me
Page 7 and 8: 12 Conducting business in Mexico Fo
Page 9: 16 5% of a corporation’s annual n
Page 13 and 14: 24 Audit and accountancy Companies
Page 15 and 16: 28 Maximum working hours The maximu
Page 17 and 18: 32 Banking in Mexico The National B
Page 19 and 20: 36 Country overview Capital city Ar

HSBC Doing business in Mexico

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