No. 3 October 2007
Point of contact • Information for clients
2008 Mexican Tax Reforms
On October 1, 2007, the President enacted legislation establishing two new tax burdens, reformed diverse federal tax laws and repealed the Asset Tax law. The new taxes are: the Single or Flat Rate Business Tax (referred to as “IETU” for its acronym in Spanishor “Flat Tax”) and the Tax on Cash Deposits (referred to as “IDE” for its acronym in Spanish), both of which aim to increase the tax revenues. This bulletin highlights the most important aspects of these new taxes, and summarizes certain other reforms made to the Mexican Income Tax Law (“MITL”), the Excise Tax law the Federal Tax Code (“FTC”), and provides case studies on the application of theFlat Tax.
Salaries and wages, employer contributions to the social security system, employee non-taxable beneﬁts, most interest income, as well as royalties received from related parties for the temporary use or enjoyment of intangible assets, are not included in income under the Flat Tax law, and payments for these types of expenses are also nondeductible for purposes of the Flat Tax law.Nevertheless, the employer is permitted to obtain a Flat Tax credit on “taxable” wages and social security contributions, which is equivalent to deducting these two items. Certain taxpayers are exempt from the Flat Tax, mainly those that are not considered taxpayers under the MITL, including non-proﬁt organizations, if those organizations are authorized to receive tax deductible charitable donations,and they do not distribute retained earnings to any person. In this sense, the Flat Tax applies to educational institutions organized as civil societies and civil associations if they do not have the authorization to receive tax deductible charitable donations. Nevertheless, if by the end of year of 2008 the educational institution obtains the authorization to receive tax deductible donations, theywill be able to obtain a refund of the monthly advance taxes paid during the year. The Flat Tax operates as a supplemental tax to the Income Tax, to the extent the computation yields an amount which is higher than the Income Tax for the taxable year. Accordingly, the initial Flat Tax computation is reduced by a “credit” for an amount equal to the Income Tax of the taxable year, as well as theIncome Tax arising from distributions of dividends exceeding the cumulative tax basis earnings and proﬁts account (CUFIN). The Flat Tax is calculated on a calendar year basis; nevertheless, monthly advance Flat Tax payments are due based on the month-to-date Flat Tax gross income, minus the authorized deductions in that same period. Depreciation and amortization are not deductible for Flat Taxpurposes. However, a transitional rule provides that new investments in depreciable assets and certain deferred charges and expenses acquired and paid for
Flat Rate Business Tax (Flat Tax)
The Flat Tax law will be effective on January 1, 2008 and replaces the Asset Tax law. The Flat Tax applies to Mexican resident taxpayers’ income from worldwide sources, as well as to foreign residents withpermanent establishments in Mexico, for such income attributed to the establishments. A tax rate of 17.5% is applied to the Flat Tax base. In general, the Flat Tax base is the excess of the income collected relating to: the sale or disposition of property, the provision of independent services, and the granting of the temporary use or enjoyment of assets (i.e. rental income and unrelated party royaltyincome), over amounts paid for: the acquisition of assets, the receipt of independent services and the temporary use or enjoyment of assets, as well as certain other expenses.
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