Mexico Tax: Update on Mexican tax reform 2010

The Mexican Chamber of Deputies approved on 21 October 2009 the proposed bill that contains a tax reform package for 2010. The bill was sent for debate to the Mexican Senate, where it must be finalized by 31 October so that the Chamber of Deputies may work on the Federal Budget for 2010.

The proposed bill contains changes to the income tax law focusing on a 2% rate increase and changes to the consolidated tax regime. The consolidation tax regime changes would require most taxpayers filing a consolidated return to recapture most benefits obtained through the regime to date. Further, the bill approved by the lower house confirms a tax increase for taxpayers who applied the simplified tax regime (a beneficial tax regime available for companies in the agricultural, livestock and transport business) from 19% to 21%, in line with the general tax increase proposed.

The discussion of the bill, however, focused on the proposed changes to indirect taxes. The most controversial proposal under the original bill submitted to Congress by President Calderon was a 2% tax on sales, services and leases, which in essence was an additional 2% VAT applicable to a greater base (the Tax Against Poverty); this proposal was eliminated. The PRI, the majority party in Congress, was unmovable in its opposition because the proposed tax would have taxed the sale of food and medicine, items that are currently subject to a 0% VAT rate.

As an alternative to the Tax Against Poverty, a proposal was introduced to increase the general rate of VAT from 15% to 16%. The rate applicable in the border region would also be increased from 10% to 11%. The tax base of VAT remains unchanged.

On the income tax side, most proposed changes were passed, including the temporary 2% corporate tax rate increase and amendments to the consolidation regime. The consolidation tax changes, if passed by the Senate, would require a recapture of benefits obtained under consolidated tax returns going back, in some instances, to 1982. The bill, as approved by the Chamber of Deputies introduced certain modifications to the original proposal from the Executive, which may be less negative for taxpayers. For instance, the original proposal established that the tax due to be recaptured in year six would be 60% of the previous benefits obtained, and then 10% per year for the following four years. The bill, as currently approved, foresees a change in the order that the benefits would be recaptured: 40% in year six, and the remaining 60% over four years (15% each year). As with the original proposal, past benefits would still be subject to this recapture rule.

The government (the Executive and the Chamber of Deputies concur in this opinion) believes that this change is not retroactive because taxpayers may opt out of the consolidation regime after five years.

The proposed bill, therefore, in effect converts the consolidation regime to a five-year optional tax regime. This is clearly an unfair position as compared to groups that do not consolidate, which are allowed, for instance, to utilize losses over a 10-year period.

Another technical aspect that changed in the proposed bill are the mechanics of how taxpayers must pay the tax associated with the recaptured benefits. The original bill would have required taxpayers to file amended tax returns for the year the benefit under consolidation arose. The current version provides that taxpayers may compute the additional tax based on the tax calculation for the year in which the tax will be due. This may allow taxpayers to plan in advance in order to reduce the negative effects of recapture.

The amount of the potential recapture is not yet clearly known to taxpayers as the proposed rules for the calculation of recapture continue to be complex and include various options. Taxpayers in Mexico should be estimating this cost and evaluating their planning options.

In other matters, the proposed changes to the excise tax on goods and services were passed, including a new tax on telecommunications services, although it was reduced from 4% as proposed in the bill, to 3%. The proposed increases to the excise tax on alcoholic beverages and cigarettes were also passed. As mentioned above, the Mexican Senate must approve the bill by 31 October so that the Chamber of Deputies can work on the Budget proposal until 15 November, when both laws should be approved.

Taxpayers should continue to monitor the ongoing discussion in Congress in to order take any appropriate measures before the bill is approved.