Do you want to set up your company in Mexico to try the mexican market ? If this is what you want, you need first to figure out what mexican taxation policies are about. Our expert on international tax systems, Simon Davari, from SDM Accounting (http://www.sdmaccounting.com/fr/, is going to explain it to you.
What are the tax constraints to consider in the implementation of its business in Mexico ?
It should first be noted that the corporate tax of 30 % in Mexico is higher than the Canadian rate. Moreover, Mexico tends to apply various deductions from payments made to non-residents that can reach up to 35%, depending on the nature of the payment. However, Canada has signed an agreement to avoid double taxation with Mexico. It aims to provide some benefits to Canadian taxpayers.
Therefore, most applicable withholdings under local law in Mexico are eliminated or reduced under this agreement. Canadian companies which want to establish in Mexico must also choose between the implementation of a subsidiary or a branch. Similar to many foreign jurisdictions, tax differences are negligible between these two options . In the case of a company incorporated in Mexico or a branch, tax rate is 30 %. This rate may be even higher if the dividends paid are more than the available CUFIN balance. The CUFIN is a representation of the net cumulated taxable profit.
This is the equivalent of retained earnings based under the tax rules instead of accounting rules. So be careful when distributing dividends to have enough CUFIN especially if dividends are paid during the year before the income figures are finalized. However, this withholding, which is a new tax derived from the 2014 tax reform, is applicable only on toretained earnings of 2014 and beyond.
Mexican companies which accumulated profits from older years might want to seek advice on how this 10% withholding may apply to them. Finally, we must raise the shareholding of Mexican corporation, if it is owned by an individual resident in Canada, the local withholding tax of 10 % applies as mentioned above.
However, if the company is owned by a corporation resident in Canada ,with voting common shares of over 10%, the withholding tax rate is reduced to 5% under the convention. Transfer pricing is also a hot topic in Mexico that requires annual compliance. Canadian companies must make sure that their policies are compliant with Mexican regulations.
Is it possible to benefit from reduced rates ? (Available in some areas of the country in particular), deduction of expenses ( training , salary of directors, etc. ..) in Mexico ?
Contrary to the global trend, Mexico has no tax credit for research and development, but the government still contributes to projects for companies submitting for credit programs meeting certain criterias. In addition, several sectors benefit from certain exemptions since the first of January 2014. More specifically, the affected sectors are agriculture, forestry, livestock and fishing. However, the reform has eliminated other investment incentives, tax breaks and beneficial regimes that had been in place for several years.
Does this system is very different from the Quebec system ?
Mexico has its peculiarities and Canadian companies must be aware of these differences. A major difference in Mexico is the obligation of sharing profits with employees. This is calculated annually and companies must budget a cost for this distribution. This is an additional burden. The indirect tax system is somewhat of a traditional value added tax system but still requires a very specific compliance.
Another element to mention is to discuss with Mexican customers about their interpretation of the application of withholdings. Unlike Quebec, Mexican companies tend to apply withholdings to several payment when paying non-residents and Canadians are strongly advised to discuss these issues before billing.
On an operational standpoint, it should be considered that tax authority in Mexico is revenue oriented. This also applies to tax reimbursements, particularly VAT, and tends to be a sensitive issue in Mexican subsidiaries with an heavy export orientation. Mexican tax administration is shifting the compliance environment to a very restricted model. Currently companies must invoice to clients through the government digital platform, so every invoice is recorded automatically by the tax administration. In a few months, monthly filing of the trial balance will be mandatory and the government will propose a unified ledger for all companies.
Is there been recent changes in the tax system for companies setting up operations abroad ?
The Mexican tax system has undergone a pretty significant reform since 1 January 2014, which affected several aspects of the tax system. The main points are the following :
• The alternative flat tax called IETU system was repealed, which has the effect of simplifying the calculation of the taxes payable.
• The reduction of the corporate tax rate is eliminated and the rate is maintained at 30% and rate for individuals was raised up to 35% and deductions were limited. Any Canadian expat working in Mexico will need to review its secondment agreement and tax equalization plan.
• A tightening of benefits under a tax treaty. The foreign company must now show that the income is taxable in the foreign country.
• Limitation of certain expenses incurred with companies which are resident in a country with a favorable or reduced tax regime.
• Application of a 10% withholding tax on dividends distributed to non-residents and Mexican individuals
• The possibility of a consolidated return is repealed, and substituted to a less powerful and less attractive group regime
• Maquiladora regime (in-bound manufacturing) was also modified. Now temporary importations are subject to regular VAT rather than exempt, and tax reliefs were removed. Canadian companies with Maquiladora operations in Mexico need to review the changes and determine its effects. There are several other changes that may affect individuals or companies and should be analyzed on a case by case basis.
Did you need a tax advisor on the spot ?
Like any other foreign jurisdiction, it is strongly recommended to use a local advisor who has experience with foreign companies. Issues often involve risks that advisors need to know in detail and a professional with international experience can assist to navigate these risks and optimize the structure and operations.