The first quarter of 2014 has just ended and the initial effects of the recent tax reform, in force as of this past January 1st, can now be seen.
The year has started up slowly and has been characterized by, among other things, an increase in prices, weak consumer spending, and a reduction in job creation. In fact, the International Monetary Fund and several other analysts have lowered growth expectations for the Mexican economy from 3.9 to 2.7 percent.
Under these circumstances, some specialists have raised their voices to argue that the tax reform was a mistake or, at best, insufficient. They presume that an effective reform that favored greater economic growth would have necessarily involved the lowering of tax rates and the combating of tax evasion.
We think it is still too early to evaluate the economic reach of the changes. Undoubtedly, the effects of this reform will be seen in the long term. They involve, as was expected, an immediate contraction of internal consumption and a rise in prices as a result of the changes in the Income Tax and the Special Tax on Production and Services.
In time, the performance of this reform will have to be evaluated together with the financial, antitrust, and energy reforms that were approved at the end of 2013 but whose benefits will not be felt until 2015. The approval of the secondary energy reform legislation in the coming days is of special importance.
The international markets are watching the development of all the above reforms very closely. Their mood is optimistic, especially regarding the energy reform.
We trust that these transformations, together with an increase in the economic activity in the United States, will produce the levels of economic growth that we all so desire.
A procedural rule is added concerning the benefits of treaties to avoid double taxation. In the case of a transaction between business associates, the tax authorities can request residents abroad to inform them of the foreign law whose application could generate double taxation for them.
The following deductions are eliminated:
The immediate deduction of fixed assets. The line deduction of 100 percent of investments, except those related to (i) machinery and equipment for the generation of energy from renewable sources or from efficient cogeneration of electricity and (ii) adaptations of facilities to improve access to them by disabled people. The donation of goods that have lost their value, except in the case of basic goods for human subsistence including food, clothing, housing, and health,1 provided those goods are used for these purposes and their sale, supply, or use are not expressly prohibited. The deduction of payments that are also deductible by business associates residing in Mexico or abroad. Social security contributions made for the worker by the employer. 3. Deductions Reduced
The value of deductions permitted in the following situations is decreased:
Deductions for donations made to the federal government, states, municipalities, or their decentralized bodies is limited to four percent of the taxable profit obtained by entities or four percent of the taxable income obtained by individuals. Only up to 53 percent of the exempt remunerations paid to the worker by the employer (e.g., social security, funds placed in employee savings and loans, severance payments, annual bonuses, overtime, vacation and Sunday premiums, and worker profit sharing [participación de los trabajadores en las utilidades de las empresas, PTU]) can be deducted from taxes. The percentage of the deduction will be 47 percent when those remunerations are decreased. The cap on deductions for the purchase of automobiles is reduced from 175,000 to 130,000 pesos (not including the Value Added Tax, VAT). The cap on the deduction of the cost of leasing an automobile is reduced from 250 to 200 pesos daily. The cap on the deduction of the cost of restaurant meals is reduced from 12.5 to 8.5 percent of the cost of the meal. 4. New Requirements for Deductions
A new requirement has been established for deducting consumer vouchers. These vouchers must be "deposited" in the employee's electronic wallet, as authorized by the Tax Administration Service (Servicio de Administración Tributaria, SAT).
Financial institutions now have the obligation to inform the tax authority once a year of the cash deposits taxpayers receive in accounts opened in their names when they accrue more than 15,000 pesos monthly, including acquisitions in cash from cashier's checks. This obligation was previously included in the Tax on Cash Deposits Law, which has been repealed.
The regime for Cooperative Production Companies is eliminated. The regime for Real Estate Companies (Sociedades Inmobiliarias de Bienes Raíces, Sibras) is eliminated. In the case of the deduction of exploration expenses in the mine sector, the possibility of deducting expenses that accrue during pre-operating periods for the fiscal year in which they were accrued is eliminated. They can now be deducted at a rate of 10 percent annually. Accumulation at the time of collection for sales on credit installments is eliminated.2 The Tax Consolidation Regime is eliminated. 7. Preferred Tax Regimes
The concept of passive income is revised to include (i) income from the transfer of real estate; (ii) income obtained for allowing temporary use and/or enjoyment of goods; (iii) income received in the form of a gift. When the taxes paid under a preferred tax regime cannot be totally or partially claimed as tax credit, they can be claimed in the ten following fiscal years until they are exhausted. 8. Real Estate Investment Trusts (Fideicomisos de Inversión en Bienes Raíces, Fibras)