Member Article

Mexican tax laws, rules and regulations are subject to amendments on a regular basis. Herein we intend to provide our friends and clients a general overview of the most recent and significant changes to our tax system[1]. Rule JG-SAT-IE-1-2005. - Debt Forgiveness for Certain Taxpayers. The Federal Public Revenue Law for 2005 authorizes the Tax Administration Service (“TAS”) to grant debt forgiveness on surcharges and penalties with respect to taxes due before January 1, 2003, in those cases where those items are extremely burdensome for the taxpayer. In these cases, the TAS is also authorized to enter into agreements for installment payments with the taxpayers in connection with the overdue tax itself, as well as its corresponding upgrading for inflation. On May 18, 2005, TAS’ Rule JG-SAT-IE-1-2005 was published at the Mexican Official Gazette. This Rule provides the procedure the taxpayers must follow in order to apply for said debt forgiveness, pursuant to the Law of Revenues for 2005. Thus, with Rule JG-SAT-IE-1-2005, the benefits of the Federal Public Revenue Law for 2005 become readily available for qualifying taxpayers. Tax Regulations for 2005. On May 30, 2005, the Tax Regulations for 2005 were published at the Mexican Official Gazette, which will enter into force as of June 1, 2005. In general, these regulations implement all the provisions set forth in the various federal tax laws. Likewise, they clarify certain aspects of the law. In our view, the most relevant aspects of these regulations for international transactions are the following: 1. It maintains the 4.9% withholding Income Tax rate for interests paid by Mexican residents to foreign residents, derived from negotiable notes traded by banks or brokerage houses in countries which have entered into agreements to avoid double taxation in Mexico, provided that certain requirements are met. 2. According to the Income Tax Law, payments from Mexican residents to foreign persons whose income is subject to a preferential tax regime (tax haven) are subject to a 40% withholding rate. However, the regulations narrow the scope of this provision by establishing that the same is applicable only to related-party transactions. Otherwise, the general rules regarding income tax on income derived by foreign residents from Mexican sources of wealth must be applied. 3. It clarifies that income from Mexican sources of wealth derived by foreign flow-through entities will be taxed in accordance with the tax treatment applicable to its members. 4. It exempts from the regime applicable to investments in tax havens, income derived by Mexican resident individuals from such investments not exceeding approximately $14,414.14 U. S. Dollars. 5. It exempts from the regime applicable to investments in tax havens income derived by banks through foreign entities or legal mechanisms from transactions entered into with non-related parties, provided that such foreign entities or legal mechanisms are residents of a country which has entered into an agreement for the exchange of information with Mexico. Finally, we must note that occasionally, the Tax Regulations brings more intricacies to our tax system. For instance, the Income Tax Law provides that the regime for tax havens will be applicable to any income derived by Mexican residents from foreign sources, subject to an income tax abroad which is 75% lesser to the income tax that the same income would have triggered in Mexico. Thus, assuming that the Income tax rate in Mexico is 30%, the minimum acceptable income tax rate abroad is 22.5%. Nonetheless, the Tax Regulations provide that the minimum income tax rate abroad is 23%. Obviously, there is an inconsistency between the law and the regulations, which may have a negative impact on the taxpayers. Should you have any inquiries regarding these or any other legal issues, we will be pleased to oblige. If you need additional information, please do not hesitate to contact our lawyers from our tax practice group.

 

Footnotes: [1] This report is intended to be informative only, not professional advice.