Our sixth chapter of Doing Business in Mexico, Taxation in Mexico, will provide a general overview of the main Mexican taxes focused on foreign individuals and/or legal entities, including rules on permanent establishment, tax withholding, among other tax obligations.
This chapter includes the following sections:
As noted in Chapter 1 – Why Invest in Mexico? Mexico is a Federation made up of 32 States, and each State, in turn, is made up of municipalities. The Mexican constitution establishes the jurisdiction for each level of government and, thus, different taxes apply. Federal taxes are the primary level of taxation in Mexico, while States and municipal (local) taxes are more limited. Needless to say, States and municipalities, to a great extent, receive budget allocations from federal taxes that are collected within their borders.
The Tax Administration Service (SAT, acronym in Spanish) is the relevant government body or agency in charge of collecting federal taxes as well as surveilling compliance.
At a local level, States and Municipalities have their own treasuries that enforce their local Tax Law. However, the Federal government and a State government may enter into tax coordination agreements, whereby the State is entitled to audit and collect federal taxes.
The main federal and local taxes in Mexico are the following:
Foreigners are individuals or entities that are normally subject to the tax law legislation of another country for reasons such as nationality, address, place of residence, or business, among other criteria. Mexican Tax Law, however, establishes a set of rules whereby a foreign individual or entity is considered as a resident –for tax purposes– in Mexico (hereon referred to as “tax resident”).
The individuals, whether Mexicans or foreigners, that have their home in Mexico are tax residents. Furthermore, an individual without a home can still be a tax resident when, for instance, his or her “place of professional activities” is located in Mexico or more than 50% of his or her annual income comes from Mexico.
As for legal entities, a company incorporated in Mexico is a tax resident. Foreign entities are tax residents when their main place of business or corporate address is in Mexico.
Individuals or legal entities that are non-residents may, under certain circumstances, be subject to Mexican taxes. For instance, a foreign individual or entity is subject to Mexican taxes when he or she has a “permanent establishment” in Mexico or obtains income from any source of wealth located in Mexico. A permanent establishment, in general terms, is any business place where activities are partially or totally developed or where independent personal services are offered. The law lists examples of permanent establishments in Mexico, including the following:
We highlight that the previous list is non-exhaustive. A foreign resident may, nevertheless, establish a permanent establishment when it has a representative or non-independent agent in Mexico.
Depending on the “tax-residency” status, the income tax may apply to all the income or the income attributable to the permanent establishment or source of wealth as follows:
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Download our Tax Alert in PDF: Alert – IMMEX Tax Forum
Last Tuesday, the National Council of the Export Manufacturing and Maquiladora Industry, Index, organized the 1st National Tax Forum of the Export Manufacturing Industry.
Ms. Myrna Aguilar, of the Transfer Pricing area of the Tax Administration Service (SAT), said that SAT has APA applications corresponding to the period from 2013 to 2017 that are still pending resolution. She suggested that taxpayers can apply the alternate procedure known as Fast Track and approach SAT to dissipate doubts.
Mrs. Aguilar considered that SAT must analyze and resolve each particular case, respecting the right that taxpayers have to request an individual resolution regarding transfer pricing and not oblige taxpayers to apply a procedure that may give them a theoretical profit margin higher than what they actually get in their operation.
On the other hand, she indicated that next October SAT will meet with the Internal Revenue Service (IRS) of the United States in order to analyze the possibility of continuing with the Fast Track procedure for the years from 2018 to 2022.
In the forum, the different problems regarding the delay of VAT tax returns in the manufacturing sector were exposed, for example, the excessive information requirements issued by the tax authority, the breach of deadlines for returning VAT favorable balances for certified companies and the different criteria applied by the authority to deny applications. In this regard, Mr. Luis Balderas, Director of the Area of Complaints of PRODECON (Tax Ombudsman), suggested using the procedure called “Complaint” (Queja) to try to expedite the resolutions of the tax return applications filed by the taxpayers.
On this point, he believes that taxpayer should initiate and exhaust the Complaint procedure before PRODECON when the taxpayer believes that his tax rights were violated before using one of the traditional legal remedies, e.g. Revocation Remedy or administrative lawsuits, which have the disadvantage that they take more time than the Complaint.
On June 23, 2017, the Inter-Ministerial Commission approved the creation of five SEZ, namely those that will be located in the states of Chiapas (Puerto Chiapas), Veracruz (Coatzacoalcos), Michoacán (Lázaro Cárdenas), Guerrero (Puerto Unión), Yucatán (Progreso) and Oaxaca (Salina Cruz).
Now, the next step is for the President to issue the Decrees that will officially create each SEZ. It is expected that in the upcoming months, or even weeks, Decrees will start being published in the Official Gazette. The Mexican States also play an important role in the development of a SEZ.
Therefore, the purpose of this update is to inform which are the economic sectors that are being targeted by the Mexican government to invest in the SEZ, as well as the significant legal developments regarding the implementation of the Mexican SEZ at the state level.
To access our update, please download it from the following link: Update-SEZ-17082017
Economic Sectors, featured, Income Tax, Investing in Mexico, Lazaro Cardenas, Mexican Lawyers, Mexican SEZ, Puerto Chiapas, Puerto progreso, Puerto Unión, Salina Cruz–Coatzacoalcos, Special Economic Zones, Tax Incentives, VAT