INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 14): MEXICO
By Prof Sergio Guerrero Rosas, Guerrero y Santana, S.C.
The Mexican tax system is one of the most complex and complete tax systems in the developing world, as it’s composed of a diverse set of procedures, rules, and contributions that need to be complied with. The main institution responsible for controlling and supervising the fulfilment of these requirements is called Servicio de Administracion Tributaria (SAT).
Mexico divides its taxing methods in various ways. The first division concerns the type of taxpayer: corporations and individuals. Both corporations and individuals are taxed on their worldwide income; however, anti-deferral rules apply to both for income obtained outside of Mexican territory.
In other words, the way fiscal laws apply to taxpayers varies depending on whether the taxpayer is a legal resident in Mexico or a foreign resident with a source of income in the country according to the Ley del Impuesto Sobre la Renta (income tax law.)
Corporations are considered residents of Mexico when the main management offce of their business, or their place of effective management, is located in Mexican territory. Individuals are considered resident in Mexico when their vital interests reside in Mexico.
Foreign Tax and Financial Reporting requirements for Mexico
1. Main types of business and taxes for each entity
Under Mexican law, the most common entities used by companies are the Sociedad Anónima (SA) and the Sociedad de Responsabilidad Limitada (S de RL); both are recognised as independent legal entities with limited liability. A different type of entity is the Sociedad Anónima Promotora de Inversión (SAPI); this one is used as a vehicle for private-equity investments.
The most relevant taxes in Mexico are the income tax and value added tax. These taxes are collected by the federal government.
According to the Mexican Income Tax Law, there are different fiscal regimes for taxpayers: nine regimes for individuals and three for corporations. Each regime comes with its own set of rights and obligations, such as exemptions
and differing tax calendars.
In all nine fiscal regimes for individuals, income tax is calculated and paid at incremental rates; the minimum marginal rate being 1.92% and the maximum being 35%.
On the other hand, corporations have a fixed rate of 30% on all income, including capital gains.
Non-residents are subject to Mexican tax on their Mexican income, which is in many cases enforced through the withholding of certain taxes.
The value added tax is paid in most products and services and applies to corporations as well as to individuals. The general rate in most of the country is 16% of the cost of products or services and 8% for the northern border region of Mexico.
2. Types of trusts, foundations and tax rates for each structure
Trusts and foundations are very important to have in mind when undertaking international business; the most popular trust used by foreign companies to do business here in Mexico is called fideicomiso, which is a commercial contract governed by Mexico’s General Law of Credit Instruments and Operations (LGTOC in Spanish).
One of the few “strategic activities”, as defined by the Mexican constitution, is that fideicomisos can be used to have ownership of real estate along the coastline, which is prohibited to non-nationals by the constitution.
Mexicans are familiar with the use of both foreign trusts and domestic fideicomisos. In addition to their use in estate planning, both fideicomisos and foreign trusts may be used as tools to protect personal and a company’s assets. Additionally, some tax benefits exist for qualifying real estate investment trusts in Mexico.
a. Administrative trusts
The function of this type of trust is to transfer the entitlement of assets and rights to the fiduciario so that this person can conserve, keep custody of, manage, and transfer them in his favour or in favour of a third party.
b. Investment trusts
In these trusts the fideicomitente grants resources or cash to the fiduciario so that he may use them in economic transactions with the sole objective to obtain a monetary benefit.
c. Guarantee trusts
This is the most common type of trust used. Practically, the fiduciary acquires the rights and assets of the fideicomitente in order to guarantee the fulfilment of an obligation. The main benefit of this trust is that the fideicomitente can keep using and possessing the assets while still using them as a guarantee.
A primary benefit of using trusts is the possibility to defer the income tax payment. All types of trusts follow the same fiscal guidelines and regulations in Mexico. The Ley del Impuesto Sobre la Renta dictates that commercial trusts calculate their fiscal results via the fideicomitente. In other words, the fideicomitente will consider the revenue obtained from the trust, accumulate it with his own revenue, and pay taxes under the rate applicable which is generally 30% over said revenue.
3. Tax compliance requirements for owners of foreign assets such as bank accounts, insurance policies, shares, etc.
Mexican residents are taxed based on all income received, regardless of the origin of the income. Non-Mexican residents are taxed solely on the income that originates from Mexico.
4. Tax compliance requirements for estate and wealth planning matters
Most corporations and individuals have the obligation to present provisional tax statements, and other informative statements, on a monthly basis. In addition, they must file an annual tax return; individuals have until 30 April of the following year and corporations have until 31 March of the following year.
5. Tax compliance requirements on sale of real estate.
Regarding the sale of real estate, Mexican residents must calculate the fiscal profit over the estate, accumulate said profit to their other revenue for income tax purposes, and pay the applicable tax according to their fiscal regime.
Collaboration with Other GGI Members
We’ve supported Japanese, American, and European companies that are clients of other GGI members that initiate operations in Mexico by creating a subsidiary. In addition, we’ve developed various multicountry transfer-pricing studies jointly with South American members. Furthermore, we’ve collaborated with other members in the development of fiscal structures that have aided in the optimisation of the tax burden regarding intercompany operations.
Future Developments, Outlook/ Summary
The executive branch of the Mexican government introduced Mexico’s tax reform for 2020, proposing changes to the Mexican Income Tax Law, Value Added Tax Law, and Federal Tax Code. Companies that will be particularly affected by the reform include those that receive payments from Mexico, such as interest, companies making payments to controlled foreign corporations, and structured companies that use tax-transparent entities. Businesses using digital platforms will also be required to register in the Mexican taxation program and must withhold taxes from users and pay as residents of Mexico.
Foreign companies doing business in Mexico must be aware of this new legislation and should study the current structures to avoid unpleasant surprises.
Prof Sergio Guerrero RosasGGI member firm
Guerrero y Santana, S.C. Advisory, Auditing & Accounting, Corporate Finance, Law Firm Services, Tax
Tijuana, Baja California, Mexico
T: +52 333 120 05 38
Guerrero y Santana, S.C. provides its clients with a wide range of tax, legal, and consulting services. The firm has been helping clients – from individuals and small local businesses to major corporations and multinationals – to achieve their smallest aims and grandest ambitions. They are committed to providing specialised, personalised services to all those seeking reliable and up-to-date tax, legal, and business support.
Prof Sergio Guerrero Rosas, Managing Director at Guerrero y Santana, has over 25 years’ experience advising companies from SMEs to multinationals, as well as individuals, on tax and estate planning. He is also Global Vice Chairperson of the Trust and Estate Planning Practice Group and Latin American Chairperson of the GGI International Taxation Practice Group (ITPG).
Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: Rob - stock.adobe.com