Mexico is not a tax shelter, but since 2003 it has important income tax reduction incentives that bring the effective income tax rate to around 15% in 2010. Transfer pricing (TP) between related parties and permanent establishment (PE) is an important part of Mexican taxes and international fiscal treaties.
In the year 2000, rules changed to impose PE status to non-residents that use the services of a maquiladora. To avoid the problem and comply with TP rules, a minimum taxable income should be reported (safe harbour) or prepare a transfer pricing study. In the year 2003 these rules were incorporated to the Income Tax Law, with new options that decrease the taxable income, no longer requiring authorization from the tax authorities and simplifying the safe harbour option. In 2008, a new Corporate Single Rate Tax became effective and the asset tax was derogated, bringing the effective tax rate to 17.5% in 2010.
B. MOST IMPORTANT TAX OBLIGATIONS
2. Federal Income Tax
Corporations.
The tax rate is 30%, decreasing to 29% in 2013 and to 28% in 2014. It's payable by calendar year, with monthly advances, which are not required the first year of operations. By means of an Executive’s Decree, the effective tax rate decreased to around 15% for maquiladoras.
PE and TP rules establish that a minimum taxable income should be reported, the highest of 6.9% of the value of the assets or 6.5% of the cost and expenses, or otherwise prepare a transfer pricing study. In year 2003, the rules were incorporated into the Law to provide legal certainty and new alternatives to comply were included.
Dividends.
If dividends did not pay Corporate Income Tax, a tax rate of more than 40% is applicable.
Salaries.
Maximum tax rate is 30%, decreasing 1% in 2013 and 2014, with relatively high rates applied to low salaries.
Non-Residents (NR) working in Mexico.
Foreign residents are subject to Mexican income tax when they are present more than 182 days in any twelve-month period, if their salaries are paid by another non-resident. If by a resident, from the first day. First $125,900.00 Mx. Cy. (US$10,700) are exempt, with a 15% rate up to $1,000,000 Mx. Cy. (US$77,000) and 30% for what exceeds this amount.
Interest paid to NR.
NR will be subject to income tax when they receive interest payments from residents in Mexico. Rates can go from 4.9%, in case of credit institutions properly registered, to 28% for other kinds of loans. Generally tax treaties establish a 15% rate.
Royalties and technical assistance paid to NR.
NR are subject to the income tax when they receive royalties, with rates of 25% and 28%. In the existence of a tax treaty, the rate is 10%.
3. Corporate Single Rate Tax – Asset Tax
On January 1st., 2008, the asset tax was derogated and the new Corporate Single Rate Tax (CSTR) became effective, having a cash flow base which is broader and a lower rate of 17.5%, eliminating most of the incentives and special income tax regimens of the Income Tax Law. It is a control or minimum tax.
4. Value Added Tax (VAT)
Tax rate is 11% on border zones and 16% in the interior of Mexico. It is charged on goods and services that are bought in Mexico or on permanent importations. Temporary importations and exportations by maquiladoras are non taxable. The tax is refunded in full and is not a cost.
5. Payroll related taxes
It comprehends social security, nursery tax, pension fund, housing fund and State tax on payroll.
Social Security and Nursery taxes.
Social Security for light industry amounts to approximately 13% of the wages and if minimum wages are paid, 17%.
Nursery tax amounts to 1% on integrated payroll.
Pension Fund.
Rate is 6.275% on integrated payroll.
Housing Tax.
Rate is 5% on integrated payroll.
State Tax on Payroll.
Rate is 2.07% on payroll. New companies or investment projects can qualify for total or partial exemption for up to five years.
6. Other local taxes
Real estate tax generally is 1% of the property value. Transfer property tax is 2% of the transaction value. There is no State income tax.
7. Profit sharing to employees
Amounts to 10% of the profit computed for this purpose, which is similar to the accounting profit. Applies from the second year of operation.
8. Tax and Social Security statutory audit reports
Companies with certain level of revenues, assets or employees are subject to present these reports to the authorities. Housing fund report is optional, but recommendable.
9. Tax incentives
Effective income tax rate of around 15% for maquiladoras.
Effective Corporate Single Rate Tax of 17.5%.
Simplified rules to comply with PE and TP provisions.
R&D income tax incentives.
Accelerated depreciation.
Income Tax reduction for disabled employees.
State Law that exempts from payroll tax, reduces water cost if recycling and infrastructure investments.
