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Mexico’s Tax reform impact for the future

Mexico’s Tax reform impact for the future. Lourdes M. Quinn. Main impact for International Companies. VAT Sales from a US entity to a Mexican resident VAT from a National supplier to a Mexican Manufacturer VAT payments in border cities.

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Mexico’s Tax reform impact for the future

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  1. Mexico’s Tax reform impact for the future Lourdes M. Quinn

  2. Mainimpactfor International Companies • VAT Sales from a US entity to a Mexican resident • VAT from a National supplier to a Mexican Manufacturer • VAT payments in border cities. • VAT in temporary importation unless a credit is obtained. VAT - IVA • Limitation to sales in Mexico • Limitations in deductions for payroll. • Incentives for Income Tax concluded • Increase administrative and internal control INCOME TAX - ISR ERP-MRP/ANNEX 24 • Increase administrative and internal control

  3. Value added Tax Unexpected changes

  4. Top Ten VAT RATES IN THE WORLD

  5. Why VAT changedfor IMMEX? • OCDE VAT/GST GUIDELINES: • Destination. Until 2010 the main rule was to tax the place where the last consumer was located. • Neutrality. • Definition of the place of taxation in the case of cross border trade in services and intangibles between B2B supplies. • There are pending guidelines in the case of B2C supplies for cross border

  6. Impact and effects Purchases in Mexico are recommended to be conducted by using “Virtual Pedimentos” (customs declaration without presenting merchandise for customs clearance) When they are related to products that are used for the production process. Definitive importation will have an impact of 5% more going from 11% to 16% for consumables, spare parts, and other tools that the company is importing under definitive basis. This will have an effect in the importation of tools and other consumables under definitive basis. Time to go back to temporary importations for tools and spare parts? VAT Value Added Tax Rate to 16% Leveling of VAT tax rate in border cities from 11% to 16%. Rates of 0% in certain products will remain the same.

  7. VAT IMMEX national companies (Ex Pitex) who were purchasing products from national suppliers will have to pay the VAT and make a credit to recover the VAT. This change affects Mexican Manufacturers who are exporting more than a 10% of their product. Also and as in the past, this makes a Mexican Manufacturer to find suppliers abroad since the VAT effect reduces the VAT burden. Mexican Manufacturer’s purchases to Mexican Suppliers - VAT zero effect no longer applicable

  8. VAT FOR MEXICAN MANUFACTURERS (MM) WITH IMMEX CLIENT ABROAD EXPORT VAT 0% VAT 16% SUPPLIERS MERCHANDISE MOVING IMMEX MM RT SALE OF RAW MATERIAL SALE OF FINISH PRODUCT SERVICE SALE VIRTUAL PEDIMENTOS

  9. VAT FOR MEXICAN MANUFACTURERS (MM) WITH IMMEX BEFORE AND AFTER VAT TO RECOVER OR CREDIT

  10. VAT The sale was exempt before, the reform obligates to follow the rule of location of the goods when they are sold (consumer location). The incentive form the government is to pay and withhold the VAT with the following conditions: • A Virtual Pedimento has to be filed • It has to be a sale within the supply chain for exportation • A CFDI (Digital Fiscal Certificate) complementary should be issued VAT in sales from a Foreign resident to an IMMEX now is subject to VAT, as an incentive the tax can be withheld.

  11. SALE 0% SALE 16% CLIENT CLIENT-SUPPLIER ABROAD IMMEX MM V1 MEXICAN SUPPLIER V1 EXPORT OF GOODS WITHHOLD VAT MERCHANDISE MOVING SALE OF RAW MATERIAL VAT TEMPORARY IMPO 16% SALE OF FINISH PRODUCT SERVICE SALE VIRTUAL PEDIMENTOS

  12. SALE 16% CLIENT ABROAD PARENT COMPANY PARENT COMPANY EXPORT IMMEX MM V1 IMMEX MEXICO V1 IMMEX MEXICO V1-RT RETURN OF GOODS WITHHOLD VAT MERCHANDISE MOVING SALE OF RAW MATERIAL VAT TEMPORARY IMPO 16% SALE OF FINISH PRODUCT SERVICE SALE VIRTUAL PEDIMENTOS

  13. VAT SALES OF FOREIGN RESIDENT TO MEXICAN MANUFACTURERS (MM) BEFORE AND AFTER

  14. VAT The sale remains exempt as before, this put in disadvantage the MM operations. Companies are considering • Sales within corporations abroad • Virtual Pedimento only in sales between foreign residents. • Sales from a Foreign resident made the merchandise to be exported to a FTZ • Exporting inbond Juarez re-importing it by Laredo (Article 59 CFF may affect those transactions) VAT in sales between foreign residents with transfers by IMMEX in Mexico did not changed.

  15. NO VAT PARENT COMPANY PARENT COMPANY VAT EXEMPT EXPORT 0% IMMEX MEXICO V1 IMMEX MEXICO V1-RT RETURN OF GOODS MERCHANDISE MOVING SALE OF RAW MATERIAL VAT TEMPORARY IMPO 2015 SALE OF FINISH PRODUCT SERVICE SALE VIRTUAL PEDIMENTOS

  16. VAT The sale remains exempt as before, is also a disadvantage for MM. • Virtual pedimento has to be filed • There is two Virtual Pedimentos • A virtual exportation for the supplier. • A virtual importation for the IMMEX • No VAT would be paid or withheld in this transaction except for the VAT related to the temporary importation. VAT for sales from a Mexican Supplier to a Foreign resident remains to 0% using a virtual pedimento.

  17. VAT 0% ? MATRIZ O «PARENT COMPANY» MEXICAN SUPPLIER V1 IMPORT OF GOODS EXPORT OF SERVICES MERCHANDISE MOVING IMMEX V1-RT SALE OF RAW MATERIAL SALE OF FINISH PRODUCT SERVICE SALE VIRTUAL PEDIMENTOS

  18. VAT • Conflicts on interfaces within ERP-MRP systems Annex 24. • 2014 option to obtain the certification. • New type of reports to inform the credit applied and the balances pending to return VAT FOR TEMPORARY IMPORTATIONS WILL BE 16% TAXABLE IN 2015. Option: Certification levels A, AA and AAA. Or Bond. • Basic requirements: • Tax Compliance. Company, partners, shareholders, legal representatives, suppliers. • More than 10 employees • Productive process for exportation • Annex 24

  19. If the merchandise is exported a VAT return can be claimed, if the merchandise is sold in Mexico the VAT is credited VAT 16% SUPPLIERS MERCHANDISE MOVING IMMEX MM RT &/OR SALE SALE OF RAW MATERIAL SALE OF FINISH PRODUCT SERVICE SALE VIRTUAL PEDIMENTOS

  20. PARENT COMPANY PARENT COMPANY EXPORT EXPORT IMMEX MM V1 IMMEX MEXICO V1 IMMEX MEXICO V1-RT EXPORT 0% MERCHANDISE MOVING SALE OF RAW MATERIAL VAT TEMPORARY IMPO 16% VAT TEMPORARY IMPO 16% VAT TEMPORARY IMPO 16% SALE OF FINISH PRODUCT SERVICE SALE VIRTUAL PEDIMENTOS

  21. VAT 0% EXPORT MATRIZ O «PARENT COMPANY» MEXICAN SUPPLIER V1 IMPORT OF GOODS EXPORT OF SERVICES MERCHANDISE MOVING IMMEX V1 SALE OF RAW MATERIAL SALE OF FINISH PRODUCT VAT TEMPORARY IMPO 16% SERVICE SALE VIRTUAL PEDIMENTOS

  22. The VAT base include all customs expenses. Scenario 1: Examples IMPORTATION for consumption NAFTA products don’t pay processing fee. Note that the VAT can be credit against the VAT transferred from the clients in a sale in Mexico. Duty and Processing fee (DTA) will be deductible.

  23. Scenario 2: Example Bonded warehouse (Tax Deposit)TEMPORARYIMPORTATION Tax Deposit for general bonded warehouse was not affected by the VAT reform Entering into the bonded warehouse for general importation will not pay VAT on the temporary importation but the merchandise is subject to the “CartaCupo” Ifthecompanyimportsthemerchandiseunderquotatheywillnotpaythe VAT fortemporaryimportation.

  24. IMMEX do not pay VAT in 2014 Scenario 3: Example Importation by an IMMEX company – TEMPORARY IMPORTATION IMMEX pay VAT in 2015 Certified IMMEX wontpay VAT IMMEX pay a reduced DTA Note that the VAT is exempted for 2014 and has to be paid in 2015, unless the company obtains a VAT certification (Trusted Taxpayer Certification)

  25. INCOME TAX Less incentives, increase of regulations

  26. Incometax – VAT & Customsrelations • INCOME TAX • RELATED TO DEDUCTIONS • CUSTOMS VALUATION • X • TARIFF RATE • IGI • VAT IMPORTS • Ad valorem • Tariffclassification • OriginQualification

  27. EXPORTS Incometax – VAT & Customsrelations • INCOME TAX • RELATION WITH INCOME • COMMERCIAL VALUE • X • TARIFF RATE • EXPORT DUTY • VAT • SALE, RENT, SERVICES USUALLY 0% • USUALLY 0% FOR EXPORTS FROM MEXICO

  28. Fear to the Permanent Establishment. TAX EVASION/TAX FRAUD DOUBLE TAXATION NO TAXATION LIMITED TAXATION GOVS SEEK FOR TAXATION DIFFERENCE ON TAXABLE BASE

  29. INCOME TAX – Permanentestablishment • Foreign investment • Export 100% • Raw Material, Machinery and equipment owned by US resident • Transformation process • Unifies Article 33 of the DIMMEX CONTRACT • Maquila Contract • Transformation process also includes packaging, classifying other services • No sales of the finish products • Income from sale of scrap or other sources related to the IMMEX process is accepted but limited to a 10% • Grandparent clause for ownership • 30% of machinery is accepted • DIEMSE

  30. “New definition” of Maquila Operation • 181 LISR .- A new definition for the IMMEX operation definition. : Requirements for Raw Material

  31. “New definition” of Maquila Operation Machinery & Equipment

  32. Maquila options for Income Tax payment 182 LISR (Anterior 216-bis).- Reduction to two the former methods for IMMEX. • DIEMSE obligation- June of the next Tax Year. • Safe Harbor – It is considered the total profit even if it is major than the IMMEX operations.

  33. Limited deduction Mexico Received recommendations published in July 2013, related to the BEPS Base erosion and profit shifting) Payments made by taxpayers to related parties residing in Mexico or foreign residents when such payments are taxable to an income tax rate inferior than 75% of the one caused in Mexico. It will not be deductible the payments made by a Mexican Taxpayer to a related party in Mexico or in a foreign territory if such company is also making such deduction.

  34. Other modifications: Impact on additional taxes: • Tax on employees • Limitation in deductions • Social security regulations reform • Notifications by electronic means • Responsibility of Legal representatives, professionals and managers on tax fraud and tax penalties.

  35. ERP MRP Annex 24 The puzzler of international companies

  36. ERP-MRP/ Annex 24 Annex 24: • ACCURATE BOM’S • CONSTANT UPDATES AND MODIFICATIONS • INCLUDING MATERIALS THAT ARE USUALLY OUT OF THE BOM’S • CORRECT CUSTOMS VALUATION • CONSIDEING ADDED VALUE • UNIT MEASURES The control of inventories and its connection to Income Tax and Value Added Tax

  37. ERP-MRP/ Annex 24 Annex 24: • Review of Regional Content Value for the qualification of Origin • Review of the value of transactions, assets and movements on international transactions • Source for government review on possible tax evasion in international operations • Statistics and decision making Why is important now? Why was important before

  38. Recommended Actions Supporting our clients on Tax Impact

  39. BE PROACTIVE NOT REACTIVE! • Obtain NEEC • Establishment of internal procedures • Contracts with related parties • Internal regulations and company’s policies • Tax plan for operations in Mexico • Seer for Amparo and tax defense on the following matters • Limitation of deductions • Limitation on VAT credit • Uploading of accounting records • Reviewing procedures and backup of customs valuation • Contracts and suppliers tax compliance • Annex 24 update and controls for VAT impact

  40. Lourdes Moreno mlmoreno@bakettillymexico.com Legal & Foreign Trade Partner 915 238 2757 656 265 9571 Gracias!!

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