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Tax Overview

Author:Mr Ignacio Sosa López
Profession:Ortiz, Sosa, Ysusi Y Cía, S.c.
 
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Highlights

National Level Tax Rates

Corporate Income Tax

30%1

Capital Gains Tax:

30%

Branch Profits Tax:

30%

Dividends Tax:

0%2

Tax Withholding3 on:

- Interests:

From 4.9% to 30%

- Royalties:

5 %, 25% or 30%

- Technical Assistance:

25 %

- Technical Services:

25 %

- Other Services:

From 0% to 25%

Net Operating Tax Losses

Carry-Forward Term:

10 years

Transfer Pricing Rules:

Yes

Tax Free Reorganizations:

Mergers, spin-offs, transfer of shares, etc., provided that certain requirements are met

VAT on Sales:

16% (11% on border region)

VAT on Services:

16% (11% on border region)

VAT on Imports:

16% (11% on border region)

Flat Rate Business Tax:

17.5%

Tax on Cash Deposits:

3 %

TREATY TAXATION:

Items of Income

Contracting State(1)

Dividends

Interest(3)

Patent and know-how Royalites(4)

Tech. Services(8)

Tech. Assistance

(8)

Australia

0/15%

10/15%

10%

0%

0%

Austria

5 /10%

10%

10%

0%

0%

Barbados

5 /10%

10%

1-%

0%

0%

Belgium

5 /15%

10/15%

10%

0%

0%

Brazil

10/15%(2)

10/15%(2)

10/15%(2)

0/15%(2)

0/15%(2)

Canada

5 /15%

10%

1 0%

0%

0%

Chile

5/10%

15%(2)

15%(2)

0%

0%

China

5 %

10%

10%

0%

0%

Czech Republic

10%

10%

10%

0%

0%

Denmark

0/15%

5 /15%

10%

0%

0%

Ecuador

5%

10/15%

10%

0%

0%

Finland

0%

10/15%

10%

0%

0%

France

0/5/15%

5 /10/15%(2)

10/15%(2)

0%

0%

Germany

5 /15%

5 /10%

10%

0%

0%

Greece

10%

10%

10%

0%

0%

Iceland

5 /15%

10%

10%

0%

0%

India (5)

Indonesia

10%

10%

10%

0%

0%

Ireland

5 /10%

5 /10%

10%

0%

0%

Israel

5 /10%

10%

10%

0%

0%

Italy

15 %

10/15%(2)

15%

0%

0%

Japan

0/5/15%

10/15%

10%

0%

0%

Korea

0/15%

5 /15%

10%

0%

0%

Luxembourg(6)

5 /8/15%

10%

10%

0%

0%

Netherlands(7)

0/5/15%

5 /10%

10%

0%

0%

New Zealand

15 %(2)

10%

10%

0%

0%

Norway

0/15%

10/15%

10%

0%

0%

Poland

5 /15%

10/15%

10%

0%

0%

Portugal

10%

10%

10%

0%

0%

Romania

10%

15 %

15 %

0%

0%

Russia

10%

10%

10%

0%

0%

Singapore

0%

5/15%

10%

0%

0%

Slovakia

0%

10%

10%

0%

0%

Spain

5 /15%

5 /10/15%(2)

1 0%(2)

0%

0%

Sweden

5 /15%

10/15%

10%

0%

0%

Switzerland

5 /15%

10/15%

10%

0%

0%

United Kingdom

0%

5 /10/15%

10%

0%

0%

United States

0/5/10%(2)

4 .9/10/15%

10%

0%

0%

Tax Treaty network as of January, 2010. These treaties have a most favorable nation clause (MFN). Under the MFN the withholding may be reduced in certain circumstances. In some cases, interest may only be taxed in the Contracting State in which the beneficial owner is a resident (i.e. if the beneficial owner is a Contracting State, a political subdivision or local authority, etc.). In some cases, royalties may only be taxed in the Contracting State in which the beneficial owner is a resident (i.e. copyright royalties). India Tax Treaty has already been signed and it is pending to be published in the Mexican Official Gazette, in order for such treaty to enter into force. In order to benefit from the provisions, a resident of one of the Contracting States shall be required to produce to the tax authorities of the other Contracting State a certificate counter signed by the tax authorities of the first mentioned State, specifying the income obtained and certifying that this income will be liable to direct taxation in the resident's country. The benefits provided in the Tax Treaty are not applicable to the entities or other persons that are total or partially exempt of taxes by a special regime according to legislation of the administrative practices of any of the States. A special regime only will be considered as such, when the authorities in the matter of both States have decided by mutual agreement, that such is the case. In general terms, technical services and technical assistance are not subject to withholding in the Country of source. However this should be analyzed on a case by case basis, in accordance with the specific Tax Treaty and its Protocol. The commentaries of the Model Income Tax Convention adopted by the OECD should also be considered. 1. INCOME TAX

1.1 General Aspects

1.1.1 Income Tax Rate

Mexican resident corporations are subject to a federal corporate income tax at a rate of 30%. The rate will be reduced to 29% in 2013 and to 28% starting 2014.

1.1.2 Taxable Base

Corporations resident in Mexico are subject to income tax on their worldwide income. Corporations are deemed to be Mexican residents for tax purposes if their actual management site is located in Mexican territory.

The taxable basis shall be determined by reducing the deductible expenses from the worldwide income obtained by the corporation.

Non-residents carrying out business activities in Mexico through a permanent establishment (i.e., office branches, agencies, etc.) are subject to income tax on income attributable to such permanent establishment and, in general terms, they shall comply with the same obligations applicable to Mexican corporations.

1.1.3 Deductions

As a general rule, all costs and expenses are deductible provided that they are related and strictly necessary for purposes of carrying out the business activity of the taxpayer. Expenses will be non-deductible in the same proportion that the tax exempt income obtained by the taxpayer represents from its total income. Some costs and expenses are limited, depending on the facts and circumstances of each case (i.e., related party charges, travel expenses, tax losses derived from the alienation of shares, leasing of automobiles and airplanes, among others).

Starting 2005, the cost of goods sold shall be considered as a deductible item, instead of deducting the purchase of such goods. Transitory provisions are contemplated to deal with inventory existing as of December 31, 2004.

Mexican tax legislation establishes thin capitalization rules, providing that the deduction of interests derived from accounts payable to foreign related parties will be limited when such accounts exceed a 3:1 ratio regarding the total equity of the Mexican entities.

Because of inflation adjustments, the total amount of interest may not be fully deductible for tax purposes.

1.1.4 Employee Profit Sharing (EPS).

EPS is allowed as a deduction from the taxable income (gross income minus tax deductions). Although it results in a lower taxable income, technically the EPS is not a deduction. Taxable loss resulting in a fiscal year will be increased by the EPS paid in the same year.

1.1.5 Depreciation.

The method used to depreciate tangible fixed assets and to amortize intangible assets is the straight line method. Depreciation is calculated considering the maximum annual percentages established by the Mexican Income Tax Law. Taxpayers may elect to use lower depreciation percentages.

Depreciation of new assets acquired during the fiscal year is calculated on a proportional basis according to the number of months it was used during such fiscal year.

Depreciation is computed considering the original cost of fixed assets as a basis, indexed for inflation.

1.1.6 Transfer Pricing

The Mexican Income Tax Law provides as traditional transaction methods: the Comparable Uncontrolled Price Method (CUP Method), the Resale Price Method (RPM) and the Cost Plus Method (Cost Plus Method). And as transactional profit based methods: the Profit Split Method (PSM), the Residual Profit Split Method (RPSM) and the Transactional Operating Profit Margin Method (TOPMM).

As a member of the Organization for Economic Co-operation and Development (OECD), Mexico has enacted transfer pricing laws that are generally consistent with OECD guidelines for Multinational Enterprises and the Tax Administrations. Mexico's best method rule favors traditional methodologies, starting with the CUP method, over profit-based methods. Given the Mexican tax authorities' aggressive enforcements of transfer pricing rules, careful compliance with filing requirements and transfer pricing reports is strongly advisable.

1.1.7 Inflation Adjustments.

Mexico has an annual inflation adjustment, which consists in determining the monetary gain or loss, derived from the effect of the inflation on debts and credits.

For such purposes, taxpayers shall compare the average balance of their debts with that of their credits; in case the balance of the debts is higher, an inflationary gain will be obtained which shall be considered as a taxable income; otherwise, an inflationary loss will be obtained, which may be considered as a deductible item for income tax purposes. The referred inflationary gain or loss is determined by applying to the annual average of debts or credits an annual inflation ratio.

1.1.8 Net Operating Tax Losses (NO L's) Carry-Forward.

NOL's can be carried forward for a maximum term of 10 fiscal years adjusted for inflation. There is no carry-back possibility.

Certain limitations apply to the NOL's (i.e. mergers, in the case where partners or shareholders holding 50% of the voting shares of a company change).

1.1.9 Tax-Free Reorganizations.

Mergers and spin-offs are considered tax free reorganizations, provided that certain requirements established in the Federal Tax Code are met.

Also, the stock-for-stock reorganizations are tax free, provided that certain requirements are fulfilled...

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