OPPORTUNITIES FOR INVESTMENT

Mexico 2016 | EXECUTIVE GUIDE | REVIEW: ACCOUNTANCY

Deloitte runs down all the major facts you need to know about doing business in Mexico.

Economic Environment

Mexico had a GDP growth of 2.5% during 2015, and a 2.4% GDP growth rate is expected for 2016. This compares positively against other OECD countries and major Latin America economies. Annual inflation has been moving slightly below the Central Bank's target of 3%, reaching 2.1% during 2015; this represents the lowest rate recorded in the last five years, contributing to a stability of purchasing power and higher consumption by families. Inflation is projected near 3% for 2016. The external environment of higher volatility in global financial markets, the normalization of monetary policy in the US, lower oil prices, and the slowdown of economic growth in China have all contributed to the depreciation of the peso. Despite a decline in oil revenues of 2.4% of GDP, the public sector reached a reasonable public deficit of 3.5% during 2015 as targeted. Public sector borrowing requirements represented 4.1% of GDP in 2015, 0.5% lower than in 2014.

Economic growth by sector

Mexico has emerged as a global automotive manufacturing powerhouse, becoming the seventh largest vehicle manufacturer and the sixth largest auto parts manufacturer. The automotive industry represents around 4% of Mexico's GDP and 23% of the manufacturing industry. Energy is also one of the most important components of the Mexican economy. This sector represented 8.2% of GDP in 2014, but that figure decreased to 3.5% in 2015 due to the downturn of international oil prices. As part of a global investment trend in clean energy production, projects in Mexico broke record last year, reaching $328.9 billion. It is noteworthy that in 2014 environmental costs represented 5.3% of GDP, which is the reason why development and investment in the clean energy sector will have such a direct impact on GDP.
The telecommunications sector has already generated an impact on the economy. At the end of 4Q2015, the biggest economic growth of this sector came from the mass media information segment, which grew by 18.9% over the same period in 2014. The telecommunications subsector had the highest annual growth rate, at 20.9%.
Mexico is the fifth largest country for mining investments in the world. The mining industry is the fifth largest contributor to GDP and in 2015 experienced a contraction of 5.3%, while services related to this industry dwindled by 19%. The competitiveness of the Mexican mining industry was related to the governance of Mexico's mining resources and the detonation of the country's present and future mining potential.

Implementation of structural reforms

A series of reforms have been approved during President Enrique Peña Nieto's term to increase Mexico's productivity and competitiveness in areas such as energy, infrastructure, economic competition, telecommunication, financial services, labor, and tax.
It is expected that these reforms will stimulate economic activity through greater consumption among Mexican families, financing for SMEs, and increased foreign investment. FDI reached $28.3 billion during 2015, which represented an increase of 25% with respect to the previous year.

Energy reform

Constitutional amendments and new legislation introduced in 2013 and 2014 heralded a seismic shift in Mexico's energy sector—the state oil monopoly ended and the sector was opened to private foreign and local investors for the first time since 1938—followed by legislation that clarifies the steps needed to transition opportunities to reality.
The nation's vast natural resources may be better exploited due to the expertise and financial strength of private investment. In this sense, financing plays a key role due to the magnitude of investment, the current oil prices, and reduced cash flows.
One mechanism to encourage investment in energy infrastructure has been the use of specific financing vehicles, such as the Investment Trusts in Energy and Infrastructure (FIBRA E), which aims to provide a stable and tax-efficient vehicle for participants (i.e. investors, fund managers, and the trust itself) to participate in large-scale energy and investment projects. FIBRA E is suitable for all types of companies (both private and those with government participation) with projects that generate stable cash flows, such as transmission and distribution lines in the power industry. The structure is treated as a pass-through entity, and certain tax exemptions are available.

Trade opening

Mexico has 11 FTAs in force with 46 countries, two of the most important being those with the EU and Canada. The main benefit granted under these commercial agreements is the application of preferential rates on the import of goods considered as originating from the FTA-member nations. In addition, the Trans-Pacific Partnership (TPP), which was concluded in 2015, will allow access to the six additional countries of Australia, Brunei, Malaysia, New Zealand, Singapore, and Vietnam.

Ease of doing business

According to the “Doing Business 2016" report issued by the World Bank, Mexico is ranked 38 out of 189 countries in terms of the ease of doing business, just above other benchmarked emerging economies such as Chile, Colombia, China, Brazil, Argentina, and India. The 10 topics included in this ranking are starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across border, enforcing contracts, and resolving insolvency.

LEGAL STRUCTURE

Principal business entities

The vehicles commonly used to incorporate a Mexican company are the variable capital limited liability stock corporation (SA) and the non-stock variable capital limited liability corporation (SRL). In these kinds of companies, the partners and shareholders are limited in their responsibility to the full payment of their capital contributions, and the capital stock must be incorporated with a minimum of two partners or shareholders (either corporations or individuals). In an SRL, capital stock is divided into equity participations; evidence of participation as a partner, therefore does not reside in a stock certificate and may only be transferred with the approval of the other partner(s). In an SA, the capital stock is divided into shares evidenced through stock certificates, which can be freely transferred pursuant to the bylaw requirements established by the shareholders. The management of an SRL or SA can be handled by one or more managers or directors, who do not necessarily need to be partners or shareholders of the company.

Immigration

If a foreign company desires to bring foreign employees to the Mexican company, there are several types of immigration statuses and visas in Mexico according to the period of time and the income that the visit may generate.

TAXATION

Corporate taxation

Residence – An entity is resident if it is managed and controlled in Mexico.
Basis – Residents are taxed on worldwide income; nonresidents are taxed only on Mexican-source income. Foreign-source income derived by residents is subject to tax in the same manner as Mexican-source income. Branches are taxed in the same way as subsidiaries.

Taxable income – Corporate tax is imposed on a company's profits, which consist of business and trading income, passive income, and capital gains. Normal business expenses may be deducted in computing taxable income. Inflationary accounting for tax purposes is applicable to certain types of revenue and expenses.
Taxation of dividends – Dividends received by a Mexican resident company from another Mexican resident company are exempt from corporate tax. Dividends received from a foreign company are subject to corporate tax in the period in which the dividends are payable, but a credit for underlying corporate and withholding tax is generally available for foreign tax paid.

If dividends from a Mexican company are not paid from the CUFIN account (i.e. already taxed profits), the payer is required to pay tax.

As of January 1, 2016, Mexican companies with investments in renewable sources of energy may create a special net profit account (the CUFIER), and if such a company distributes dividends that are not paid from the CUFIER account, the payer will be required to pay tax (30% on a gross-up amount) on the distribution.
Capital gains – Mexican entities are not subject to special tax treatment on capital gains, and the use of capital losses is restricted in some cases.

Losses – Losses may be carried forward for 10 years, subject to applicable inflation adjustments. The carryback of losses is not permitted.

Rate – 30%
Surtax – No
Alternative minimum tax – No
Foreign tax credit – Foreign tax paid may be credited against Mexican tax on the same profits, but the credit is limited to the amount of Mexican tax payable on the foreign income.
Participation exemption – No
Holding company regime – No
Incentives – Special rules apply to maquiladoras. Incentives are granted for national cinematographic and theatrical production, as well as for innovation (CONACYT), the FIBRAS (real estate investment trust) regime, and investments in risk capital.
Immediate depreciation for investments in certain new assets is available as of January 1, 2016 for taxpayers with revenues up to MXN100 million; for taxpayers with investments in the construction and improvement of transport infrastructure and those with activities related to the treatment, processing, or transport of oil, natural gas, and petrochemicals, no revenue limit applies.
From January 2016 through June 2016, individuals and entities resident in Mexico and nonresidents with a permanent establishment in Mexico may regularize the tax compliance for previously unreported offshore investments that remained abroad up to December 31, 2014 with certain tax benefits, subject to the actual repatriation and investment of the assets in Mexico for at least three years.

Withholding tax

Dividends – A company that distributes dividends—including distributions derived from investments in renewable sources of energy and made from the CUFIER account—to a nonresident or a resident individual must withhold a 10% tax, which is considered a final tax. For nonresidents, the 10% rate may be reduced under an applicable tax treaty. A grandfather rule applies under which CUFIN balances as of December 31, 2013 are not subject to withholding tax when distributed in the future. The 10% tax may be reduced for dividends paid to individuals resident in Mexico if profits generated in 2014, 2015, and 2016 are reinvested and distributed as of 2017.

Interest – Interest paid to a nonresident is subject to withholding tax at rates ranging from 4.9% (interest paid to a bank) to 35%. A 40% rate applies where interest payments are made to a related party located in a tax haven.

Royalties – Royalties paid to a nonresident are subject to a withholding tax of 35% (patents and trademarks) or 25% (other forms of royalties), unless the rate is reduced under a tax treaty. A 40% rate applies where royalties are paid to a related party located in a tax haven. The leasing of machinery and equipment generally is considered a royalty.

Technical service fees – Fees paid for technical assistance are subject to a 25% withholding tax, unless the rate is reduced under a tax treaty.

Branch remittance tax – Rules similar to the CUFIN rules for dividends apply. Permanent establishments distributing dividends or gains to their head office are subject to an additional tax of 10% on such dividends or gains.

Other – There are certain other circumstances under which withholding tax may apply to nonresidents, such as payments relating to immovable property, salaries, fees, capital gains, and so on.

Other taxes on corporations

Capital duty – No
Payroll tax – Payroll taxes apply at the state level.
Real property tax – The municipal authorities levy rates on the ownership of real property. Rates are deductible in calculating the corporation tax liability.
Social security – Employer contributions for social security and other related contributions (e.g. housing and retirement) are mandatory, with rates ranging from 15% to 25%, depending on the salary structure of the group of employees.
Stamp duty – No
Transfer tax – A rate between 2% and 5% applies to the transfer of real estate.
Other – While not a tax, mandatory profit sharing rules imply that an entity is obliged to actually distribute 10% of taxed profits to its employees no later than May of the year following the year in which the profits were generated. A special excise tax on production and services is levied on the sale of certain goods and the provision of certain services.

Anti-Avoidance Rules

Transfer pricing – Rules following the OECD guidelines apply to cross-border and domestic transactions. Acceptable transfer pricing methods are as follows: the comparable uncontrolled price (CUP) method is considered the preferred method, followed by the cost plus and resale price methods. Profit-based methods are to be applied if the CUP, cost plus, and resale price methods are not applicable. The profit split, residual profit split, and transactional operating margin method are not applicable in specific circumstances. Documentation rules apply, and advance pricing agreements are available.

Thin capitalization – Interest payments made by a Mexican resident company on a loan from a nonresident related party are nondeductible for income tax purposes to the extent that the debt-to-equity ratio of the payer company exceeds 3:1. Debts incurred for the construction, operation, or maintenance of productive infrastructure linked to strategic areas or for the generation of electricity are excluded from the thin capitalization rules.

Controlled foreign companies – Income is attributed to Mexican tax residents (including resident foreigners) from “controlled" entities wherein more than 20% of their income is passive income (broadly defined) that is taxed locally at a rate less than 75% of Mexico's statutory rate. Reporting rules may apply.
Disclosure requirements – External tax auditors are required to disclose on the tax audit report when a taxpayer has entered into a transaction that is not considered viable by the Mexican tax authorities.
Other – An optional tax audit report may be filed for taxpayers with more than 300 employees, gross income exceeding MXN100 million or assets exceeding MXN79 million.

Compliance for corporations

Tax year – Calendar year
Consolidated returns – Mexico's tax consolidation system has been abolished and replaced by a new tax integration regime. The regime allows a group to defer income tax for up to three years, taking into account only the profits and losses of entities in the group.
Filing requirements – Under the self-assessment regime, advance corporate tax is payable in 12 installments. The annual tax return must be filed within the first three months of the following year (no extensions are available). An advance electronic signature certificate must be available, electronic accounting records must be maintained, and the general ledger must be submitted to the tax authorities on a monthly basis. All taxpayers are required to issue digital invoices with respect to their transactions.
Penalties – Penalties apply for noncompliance with the tax rules.
Rulings – The tax authorities will issue rulings on the tax consequences of actual transactions.

Personal taxation

Basis – Mexican nationals are taxed on their worldwide income. Nonresidents are taxed only on Mexico-source income.

Residence – An individual is considered resident if he or she has a permanent home in Mexico. If an individual has a home in two countries, the key factor in determining residence is the location of the individual's center of vital interests. Mexican nationals are, in principle, considered tax residents, subject to the permanent home and/or the center-of-vital-interests test.

Filing status – Tax returns are filed individually, regardless of marital status.

Taxable income – Income is taxed, in part, under a scheduler system, although some categories of income can be mixed to determine taxable income. Profits derived from the carrying on by an individual of a trade or profession generally are taxed in the same way as profits derived by companies. A separate regime applies to interest earned by individuals.

Capital gains – Capital gains arising from an individual's sale of publicly traded shares, including financial derivatives, are subject to a 10% tax on the gains.

Deductions and allowances – Subject to certain restrictions and caps (the lesser of MXN130,000 or 15% of taxable income), deductions are granted for medical expenses and medical insurance, retirement annuities, mortgage interest, and so on. Medical, dental, and hospital expenses (among others) are deductible with no restrictions when they derive from an “inability" or disability under the terms of the corresponding laws. Personal allowances are available to the taxpayer and his or her spouse, children, and dependents.
Rates – Rates are progressive up to 35%.

Other – See “Incentives" under “Corporate Taxation," above, for a temporary incentive relating to the repatriation of capital.

Other taxes on individuals

Capital duty – No
Stamp duty – No
Capital acquisitions tax – No
Real property tax – The municipal authorities levy rates on the ownership of real property. Rates are deductible in calculating the individual's taxable income related to leasing of real property.
Inheritance/estate tax – No
Net wealth/net worth tax – No
Social security – Employed individuals are required to make social security contributions, with the amount based on the individual's salary.

Compliance for individuals

Tax year – Calendar year
Filing and payment – Tax on employment income is withheld by the employer and remitted to the tax authorities. Other types of income, such as income from the provision of services and leasing income, are subject to withholding. Income not subject to withholding is self-assessed; the individual must file a tax return and make prepayments of tax. Final tax is due on April 30 following the tax year (no extensions are available). An advance electronic signature certificate must be available. For individuals carrying on a business activity, electronic accounting records must be maintained and a general ledger must be submitted on a monthly basis.
Penalties – Penalties apply for noncompliance with the tax rules.

Value-added tax (VAT)

Taxable transactions – VAT is levied on the sale of goods, leasing, and the provision of services, as well as on imports.
Rates – The general VAT rate is 16%, and a 0% rate applies to food, medicine, and certain other items (with some exceptions).
Registration – All persons must be registered to be able to credit the VAT paid to vendors, suppliers, or at the border. Nonresidents supplying goods or services in Mexico must register.
Filing and payment – VAT filing is due monthly within the first 17 days of the following month.
Source of tax law: Income Tax, Value Added Tax, Federal Tax Code
Tax treaties: Mexico has 55 income tax treaties in force.
Tax authorities: Servicio de Administración Tributaria (SAT or Tax Administration Service)