Economic Package for 2020 submitted by the Mexican President to the Congress
By Mauricio Escandon - ITTS Manager EY Latin America Business Center NY & Enrique Perez Grovas - ITTS Partner EY Latin America Business Center NY
On September 8th, 2019 the Mexican President submitted to the Congress the proposal of the Economic Package for 2020. Within such package, proposed amendments to several Tax Laws were included aiming to strengthen compliance with tax provisions and combatting tax evasion. The proposed Tax Reform is mainly driven by several recommendations derived from the Action Plans arising from the Base Erosion and Profit Shifting (BEPS) project of the Organization for Economic Co-operation and Development (OECD).
The proposed bill shall be debated in the Congress and shall be approved by October 31st, 2019 at the latest and most of the amendments would be in force starting on January 1st, 2020, if approved. Note that no new taxes are being proposed nor an increase to the current existing taxes in Mexico.
Below is a summary highlighting the main tax measures with greater impacts on international investors and cross-border transactions:
- Permanent Establishment (PE)
Derived from Action Plan 7 of BEPS, the PE concept contained in the Mexican Income Tax Law (MITL) would be expanded. The intention is to capture specific situations in which taxpayers have dealt with certain transactions/arrangements that have allowed them to avoid creating a PE in Mexico.
- Payments to Low Tax Jurisdictions (LTJs) and Anti-Hybrid rules
There would be new tax provisions for considering a payment made to LTJs (subject to a lower effective tax rate of 22.5%) as non-deductible for tax purposes in Mexico as also to arrangements called “anti-hybrid” mechanisms when paying directly to those or when the payment is made through a “structured agreement” (entered by the taxpayer or related parties to manage its tax basis).
- No recognition of tax transparency
Foreign legal entities and legal vehicles (no legal personality) shall not be considered as tax transparent. Beneficiaries behind such legal entities/figures would not be able to apply Tax Treaty benefits unless their tax transparency is allowed under a Tax Treaty celebrated by Mexico (i.e. the US).
- Interest expense limitation rule
Limited to 30% of Adjusted Taxable Base similar to EBITDA. This will include related or nonrelated debt and shall be granted with an exemption for the first MXN $20M of net interest to members of a Group. Certain exemptions may apply such as debt acquired for infrastructure projects, construction of real estate, hydrocarbons as also to water and electricity industry.
- Anti-elusion clause (GAAR)
MTA may re-characterize, for tax purposes, transactions that lack business reasons and generate a tax benefit. Upon a tax audit, the burden of proof will rely on the taxpayer.
- Reportable transactions
Mandatory reporting obligation for advisors that provide advice on a wide range of transactions deriving a tax benefit in Mexico.
Please consider that other important amendments to the Mexican tax system are being proposed in terms of Digital Economy, Shelter Maquilas, Jointly Tax Liability, General Offset of Favorable Tax Balances, among others.
Tax Considerations for Maintaining A Green-Card or U.S. Citizenship Status for Mexican Citizens and Residents
By James M. Cassidy, CPA - Principal / Treasurer of The United States - Mexico Chamber of Commerce, Northeast Chapter
As an international tax advisor, I am often asked by individuals who are planning to relocate to Mexico whether they should give up their green-cards or renounce their US citizenship in order to avoid being “double taxed” or having to pay higher taxes.
Although the tax implications appear costly and complex, quite often they are not! Giving up your green-card or renouncing US citizenship for tax concerns is not a good reason if living in Mexico. Why? Because the overall income tax costs may not be significantly higher if living in Mexico and there is no double taxation. In addition, there may be a tax savings depending upon where you are relocating from in the United States. Also, US tax rules allow an individual who resides abroad to claim deductions and credits for foreign taxes that result in no US tax liability.
Green-card holders who are planning to, or who are living in Mexico should seek professional immigration advice in addition to tax advice.
US Tax Rules
Under US tax rules, US citizens and green-card holders are subject to US tax on worldwide income no matter where they reside. Generally, all US citizens and green card holders with worldwide income over $12,200 a year, or just $400 of self-employment income, are required to file an annual US tax return.
Various business, investment and personal deductions are permitted to reduce taxable income including mortgage interest on homes in the US and Mexico as well as donations made to Mexican charities.
US tax rates are graduated and the top US tax rate of 37% is applicable to taxable income (after deductions) of $510,300 for single individuals and $612,350 for married couples (2019).
US citizens and green-card holders are required to report their ownership of foreign bank accounts and foreign
US State Tax Issues
Most states such as New York and California impose income tax on individuals who reside or are considered domiciled in the state. If residing in Mexico, you may not be subject to state income tax.
Mexican Tax Rules
Under Mexican tax rules residents are subject to worldwide taxation and may be required to file an annual tax return. An individual is considered a resident if a permanent home is maintained in Mexico.
Mexican individual tax rates are graduated and a rate of 30% is applicable to income of 458,132 pesos (US$ 23,493) and the top Mexican tax rate of 35% is applicable to taxable income (after deductions) of 3,498,600 pesos (US$ 179,415). Although the US has a higher maximum tax rate, Mexican tax rates are imposed upon significantly lower levels of taxable income. In many cases the individual tax cost may be higher in Mexico than in the United States.
No Double Taxation
Although many citizens and green-card holders living in Mexico have to file two tax returns and report the same income, tax credits are permitted to avoid double taxation.
To avoid double taxation on income arising in Mexico, US citizens and green-card holders can claim tax credits for Mexican income taxes that have already been paid or are accrued. Most US citizens and green-card holders living in Mexico won’t end up owing any US income tax. For income arising in the United States, a credit for any US tax can also be claimed to reduce the Mexican tax liability.
Alternatively, US citizens and green-card holders can claim another benefit known as the Foreign Earned Income Exclusion which allows an exclusion of $105,900 (2019) of earned income from US taxation. It is also possible to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income. The determine whether the exclusion or tax credit is most beneficial, depends on each individual’s circumstances.
US-Mexico Tax Treaty
The United States – Mexico Tax Treaty covers taxation of income and double taxation and ensures that no one will pay more income tax than the higher of the two tax systems. The Treaty also defines where taxes should be paid, which normally depends on where the income arises.
There are several tax planning strategies that can be implemented to reduce tax liabilities and accumulate more wealth. There are tax benefits for US and Mexican real estate ownership and rental activities as well as retirement savings opportunities.
Estate Tax Issues
Currently Mexico does not impose an estate tax on Mexican citizens and residents. US citizens and green-card holders are subject to US tax estate and gift tax. The US estate and gift tax exemption is $11.4 million per individual (for 2019). A green-card holder residing in Mexico may be exempt from US estate tax if not considered domiciled in the United States. US estate tax issues should be addressed by US citizens and green-card holders to ensure that life insurance and other estate tax planning strategies can be implemented to avoid US estate tax.
Maintaining U.S. Permanent Residency (“Green-Card”) Status
Generally, if you hold a green card and know in advance that you must be outside the United States for more than one year, it's worth applying to for a reentry permit. This lets you reside abroad for up to two years. Also, continuing to file your US tax returns and staying in compliance with US reporting rules are important factors for maintaining US permanent resident status.
Applying for U.S. Citizenship
Generally, in order to become a naturalized citizen of the United States, an individual must fulfill several criteria, including requirements concerning your residence and physical presence in the United States. For naturalization purposes, lengthy trips outside the U.S. may serve to "break" the continuity of the US residence period. From a tax perspective maintaining residence in a US state for tax purposes as well as claiming only a credit for Mexican tax may be beneficial.
Renouncing Citizenship and Terminating US Permanent Resident Status
The US has an expatriation tax regime for US citizens who renounce their citizenship, and for green-card holders who have been permanent residents for 8 years. Generally, if certain net-worth thresholds are met, an individual is deemed to have sold all of their assets the day before terminating their US residency or citizenship and capital gains tax may be due. Therefore, professional tax advice must be obtained to evaluate the tax implications of terminating US residency.
US tax and immigration rules are complex. Professional advice must be obtained ensure that you have a good understand of the issues to make the best decision.
Overall the income tax implications and filing requirements for US citizens and green-card holders residing in Mexico usually do not outweigh the additional costs and loss of economic mobility that may be associated with the loss of permanent resident status or US citizenship. Many of my clients maintain their green-cards and remain US citizens while living in Mexico.
Advertisement Expenses Are Not Deductible For Licensees of a Trademark - New Ruling Of The Tax Court
By Carlos Pérez-Chow Martínez - Partner, Tax, Energy, Project Finance, and Administrative Litigation
The Superior Chamber of the Tax Court (the “Tax Court”) recently ruled that advertisement expenses for trademarks are not deductible for taxpayers that do not own the publicized trademarks and that only have the use of such trademark by a non-exclusive license agreement. The rationale of the Tax Court was that publicity or advertisement expenses aim to bolster the value of a trademark owned by the licensor and not the licensee. Therefore, the licensor is the one who should incur in publicity expenses of its brand and not the licensee who does not own it. Consequently, if a licensee incurs in such expenses, they would not be strictly indispensable and therefore not deductible under the income tax law as they are not directed for promoting a brand of its property.
This decision may severely impact franchise agreements, as franchisees may not be able to deduct the expenses incurred in promoting the trademark of the franchise. This will most likely make it more difficult to meet the agreed expansion goals in the master franchise agreement and have an unfair disadvantage with non-franchise commercial establishments as they will be able to deduct their advertisement expenses of their brands. Additionally, the value of international trademarks in Mexico may diminish as advertisement of them may be severely reduced.
As background of the case it is important to note that the trademark in hand was created in Mexico and was originally owned by a licensee (the “Licensee”), a Mexican taxpayer that sold beers mostly in Mexico. The Licensee went through a spin off, leaving the ownership of the trademark to the newly created company (“NewCo”), a Mexican resident for tax purposes and a related party of the Licensee. To keep using the trademark the Licensee entered into a non-exclusive license agreement with NewCo (also the “Licensor”), obliging to pay NewCo royalties for the use of the trademark.
After a complex international corporate restructure of which NewCo was part, the ownership of the trademark and thus the benefits of the non-exclusive license agreement were passed to another company, a Swiss resident for tax purposes and also a related party to the Licensee.
When analyzing the restructure, the Tax Court saw that the sole purpose of carrying it out was to erode the tax base in Mexico by (i) allocating the profits of the royalties for the non-exclusive use of a trademark created originally in Mexico to another country (Switzerland); (ii) by keeping the deduction of the payment of such royalties in Mexico; and (iii) by creating a new deduction in Mexico for the expenses incurred by the Licensee in advertising the same beer trademark he originally created and for which he know pays royalties abroad for its non-exclusive use to the Licensor.
But instead of just nullifying the deduction of the publicity expenses for their base eroding purposes, the Tax Court went into another direction to forbid the deduction and remedy the base erosion. It stated that publicity expenses incurred by the Licensee only boosted the value of a beer trademark owned by the Licensor without any positive impact on the value of the beers owned and sold by the Licensee under the licensed trademark. Based on this statement, the Tax Court held that the publicity expenses incurred by the Licensee did not met the requirements for deducibility of the income tax law as such expenses were irrelevant to its beer commercializing activities and therefore were not strictly indispensable.
On our opinion, even when the corporate restructure was implemented to erode the tax base in Mexico, this ruling is wrong on the account of three grounds: (i) The issue of the case should not had been if the publicity or advertising expenses were strictly indispensable or not, but rather if the corporate re-structure was implemented only for eroding or not the tax base in Mexico, which it clearly was; (ii) by denying the deduction of the advertisement expenses for not being strictly indispensable, it does not acknowledge two things: (a) the nature of a trademark of being the main trait of a product that allows it to distinguish itself from the rest of the market and (b) the direct relation of the advertisement of the brand to the sales of the product behind such brand; and (iii) it does not specifies the particularities of the case, like the fact that the non-exclusive license agreement was made between related parties.
Consequently, the ruling denies all publicity deductions to licensees of a trademark with no exclusivity, even when contrary to the case at hand, there is a valid business reason to acquire the non-exclusive right to use of the trademark and for promoting it without an intent of eroding its tax base or if it is done between independent parties. Franchise agreements between non-related parties where a franchisee acquires the non-exclusive right to use a trademark and that decides to advertise such trademark to boost profits and recognition in the local market would be an example of a valid reason of publicity expenses and in which not recognizing such expenses as valid deductions would be clearly unfair and illegal.
It is important to note that this precedent is still a non-binding precedent for other chambers of the Tax Court as well as for appeal courts but must likely will be followed by the tax authorities and not complying with it may lead to a tax assessment. Therefore, a careful strategy for drafting, reviewing, amending and implementing international franchise agreements that differentiates the particularities of the explained case is recommended so to be able to still promote the trademark under the master franchise agreement in Mexico without the adverse tax consequences of not deducting such publicity expenses.
PEMEX presents its Agreement to include Private Investors in Petroleum Exploration and Extraction Activities
By Jose Antonio Postigo Uribe, Tania Elizabeth Trejo & Marisa Romero Martínez
On July 16, Petróleos Mexicanos (PEMEX) presented its 2019-2023 Business Plan, establishing the strategic path of PEMEX for the next few years.
Under the plan, PEMEX will permit private investment in hydrocarbon production by means of Integrated Services of Exploration and Extraction Agreements (CSIEE) lasting between 15 and 25 years to ensure that the investor receives the payment for the total amount of its expenses with a profit margin.
Under this model, PEMEX holds the rights of assignment and continues to be the operator, paying the investor for its services a variable tariff established in dollars, using a produced hydrocarbon unit to be calculated in accordance with the specific features of each CSIEE, such as risk, required investments, and operative efficiency.
The private investor will perform the activities set forth in the agreement, assuming 100% of the capital expenditure (CAPEX) and operating expenses (OPEX). In addition, the investor assumes part of the production risks and could assume part of the hydrocarbon price risk.
Furthermore, in accordance with the Business Plan, better tax conditions, segregated accounts or trusts management to ensure that the income of the projects cover the fulfillment of contractual obligations, and the possibility of adjusting tariffs due to relevant changes in the hydrocarbon market index, are considered to be included in the agreements.
Amendments to the LIGIE Tariff and Various Decrees Applicable to Steel Products
By Jose Alberto Campos Vargas, Maria Luisa Mendoza López, Juan Carlos Jiménez Labora Mateos, Laura Elisa Sánchez Barrón, & Ernesto Vega Saldivar
On September 20, 2019, the Ministry of the Economy published in the Federal Official Gazette the "Decree modifying the General Imports and Exports Taxes Act Tariff (TIGIE), the Decree establishing the General Importation Tax (IGI) for the border region and the northern border strip (Border Decree), the Decree establishing various Sector Promotion Programs (PROSEC Decree) and the Decree for the Promotion of Manufacturing, Maquila and Export Services Industry (IMMEX Decree)", (together, the “Decree”).
The Decree entered into force on September 22, 2019, and by virtue of it, several tariff items were created, amended and eliminated, as well as their descriptions and/or their tariffs. These products correspond to the steel industry, including products such as steel plates, rolled steel plates, cold rolled steel sheet, hot rolled steel sheet, wire rod, tubes, rebar, and steel profiles, among others.
The creation, amendment, and elimination of tariff items took place to favor comparability between trade flows in the steel sector between Mexico and the United States, for purposes of meeting commitments made between both countries to monitor the foregoing, as part of the Agreement of May 17, 2019, which eliminated U.S. tariffs imposed on Mexican steel and aluminum imports (Section 232), and the retaliatory measures imposed by Mexico against U.S. imports (see "Newsletter about the Elimination of Section 232 Tariffs").
By virtue of the foregoing, the Border, PROSEC and IMMEX Decrees were amended, to align them to the modifications made to the TIGIE.
Additionally, the Decree concludes with the arrangement, initiated in October 2015, imposing and renewing every six months, import tariffs on various steel products. Instead, a medium and long term policy is established, starting with a 15% tariff rate set forth in the Decree, and based on a tariff reduction scheme established for the different tariff items, as shown in the annex to this newsletter (see here).
Derived from these amendments to the TIGIE, it is important to monitor potential adjustments to various provisions, such as the annex corresponding to goods subject to compliance with Mexican Official Standards at the point of entry or exit of the country (Annex 2.4.1), automatic import notices for steel products, sector importers’ registry, among others.
Finally, by means of the Decree, an Explanatory Note of national implementation is added to Chapter 72 of the TIGIE called "Foundry, iron and steel", which specifies what will be considered as “tool degree steel”.
It is advisable for importers and exporters of steel products to review the Decree in order to identify those amendments that have an implication in their foreign trade operations.
Likewise, it is essential to confirm the correct tariff classification of goods in this sector, in order to avoid contingencies derived from omitted contributions, lack of compliance with non-tariff regulations and restrictions, or with obligations related to foreign trade programs and certifications, incorrect determination of origin, among others.
The Mexican Ministry of Labor Issues Protocol for the Legitimization of Existing Collective Bargaining Agreements, Requiring Employee Ratification Vote
By Mónica Schiaffino - Shareholder & Andrés Díaz Barriga Ocampo - Associate
On July 31, 2019, the Mexican Ministry of Labor issued the Protocol for the Legitimization of existing Collective Bargaining Agreements (Protocol), which was published in the Official Gazette of the Federation. The Protocol will require all unions in Mexico that are parties to collective bargaining agreements to revisit employee support for the current agreement; otherwise, if the legitimization process is not carried out, the collective bargaining agreement will be terminated.
The Protocol took effect August 1, 2019 and remains in effect until the Federal Center for Conciliation and Labor Registration becomes operational, on May 1, 2021, as ordered in the reform of the Federal Labor Law. The Protocol’s guidelines establish that the content of a collective bargaining agreement must be approved by the majority of the employees covered by it, through a process in which the employees will freely and directly vote in order to legitimize the collective bargaining agreement before the STPS.
The procedure for the legitimization of an existing collective bargaining agreement will begin with the request of the certified union. The union must give notice to the STPS through a website established by the STPS for that purpose. In this notice, the union must provide information regarding itself, the employer, the collective bargaining agreement, and the consultation and voting process that will be provided to the employees to determine if the majority supports the collective bargaining agreement.
The vote may be carried out with verification by a public notary or with verification of a labor authority.
The union will provide a list of employees with a right to vote, excluding confidential employees and those that started rendering their services after the date on which the notice to the STPS was submitted. Likewise, employees who have been dismissed during the three months prior to the presentation of the notice will be entitled to vote, except for those who voluntarily terminated their employment relationship.
The union shall notify STPS of the outcome of the vote within three business days after the date of the election. If a public notary verifies the consultation process, the corresponding notarial certification must be included in this notice.
If the STPS finds that irregularities occurred in the consultation procedure, the results of the election will be declared void. If the STPS does not make observations or question the results during the 20 business days following the date on which the union gave notice of the result, the collective bargaining agreement shall be deemed legitimate, and the union may request a certificate of legitimization from the STPS.
Mexico Adopts Care Leave for Parents of Children with Cancer
By Ignacio Bermúdez Elizondo - Associate,Tania Terrazas Arnaldo - Associate& Erick Fernández
Summary: On June 4, 2019, the Mexican Department of Labor and Social Welfare (STPS by its acronym in Spanish) published a Decree in the Official Gazette of the Federation, amending the Social Security Law, the Law of the Institute of Security and Social Services of State Workers, and the Federal Labor Law. The Decree takes effect June 5, 2019 and revises each of these regulations to allow parents to take leave time from work to care for children under the age of 16 who have been diagnosed with cancer.
Social Security Laws
Article 140 Bis has been added to the Social Security Law to provide a new care leave to insured working mothers or fathers, whose children of up to sixteen years of age have been diagnosed with cancer of any kind by the Mexican Institute of Social Security (IMSS by its acronym in Spanish2), in the following circumstances.
A care leave will be granted by IMSS to insured working parents whose covered children require medical rest during critical periods of treatment or hospitalization according to the physician's orders, including treatment for pain relief and advanced cancer care.
The IMSS may issue a certificate attesting to the oncological condition and duration of the treatment, so that the employer is aware of the need and length of such leave.
The care leave certificate issued by the IMSS to the insured father or mother shall be valid for up to 28 days. IMSS can issue as many certificates as needed within a period of three years, but the employee’s leave cannot exceed 364 days in total.
The insured working parent will enjoy a subsidy equivalent to 60% of the last contribution base salary registered by the employer with the IMSS, provided that the employee has at least 30 weekly statutory social security contributions covered in the 12-month period prior to the date of the diagnosis. If that standard is not met, the employee seeking leave must have at least 52 immediate weekly statutory social security contributions prior to the start of the care leave.
The care leave may be granted only at the request of the interested party, to either the father or mother with parental custody of the child. In no case will this leave be granted to both working parents.
Strategic and Integral Advisory Services to SME’s Foreign Investors Doing Business in Mexico
By Carlos Niño López - Partner
The new trend among foreign investors setting up SME´s subsidiaries in other countries, is to engage with both legal and accounting firms focused on integrating with the company during the initial phase of the soft landing project, this option results in a more efficient and less costly solution for the investors.
The typical scenario where international investors engage separately with legal and accounting firms commonly works when the option chosen by the client is correct, nevertheless for SME´s the learning curve process is not an option when investing abroad.
Multicultural and business-oriented boutique law firms working together in strategic alliance with international accounting firms can offer a variety of services to foreign investors, mainly becoming some sort of “in house” (1) legal advisory, (2) legal representation before authorities, (3) logistics, (4) treasury, (5) accounting and (6) tax advisory, granting to the clients efficient investment, direct interaction with the advisors, better control on the first stages of the initial operation, and no less important, the immersion in a different culture of doing business as it happens with any different country.
The above mentioned, lets the investors focus on the business per se, instead of on wasting precious time on legal and administrative matters, generating cost-effective benefits on the short term for the corporation.
Further, these companies will be in the better position to create the internal legal and administrative departments under a less rush situation, and as a result of the increase of operations, becoming the best action plan under the eyes of the stakeholders.
Regardless from the fact that Mexico is an open economy and a very interesting market, looking for “best practices” alternatives to improve the investment and minimize the risk becomes a definitively attractive option to foreign SME´s investing in Mexico.