June 2011 Deloitte Mexico. Investment Environment in Mexico.

Transcription

1 June 2011 Deloitte Mexico Investment Environment in Mexico.

2 Why Mexico? Opportunity to enjoy benefits of NAFTA and 44 plus free-trade agreements Political and economic stability Proven export processing manufacturing program: Maquiladora (IMMEX) Competitive manufacturing costs as compared to the U.S. Competitive tax system Wide network of treaties to prevent double taxation Hospitable environment for Asian investment Proximity to largest market in the world: The United States of America Friendly country to foreign investment Recommendations Understand Mexican business and people s culture Understand Mexico s business environment as part of NAFTA and other free-trade agreements Different business concerns, i.e. maquiladoras have different legislation and practices (More beneficial for maquiladoras than other taxpayers) Different regions in Mexico have different business environment General recommendations for startup projects Under Mexican law the form prevails over the substance Consider to explore creative new structuring opportunities Investigate tax incentives and evaluate their benefit to your special case Transfer pricing compliance has proved manageable for most maquiladoras seeking timely advice Determine duty exposure for Non-Nafta materials. Consider outsourcing Accounting & Payroll issues (through shelters or expert firms ) What to first considering regarding Mexican legal matters Foreign investment rules most economic sectors are open to 100% foreign ownership and management Limitations include: energy, telecommunications, media, mail, ports and airports Co-existence of Mexican law and international law: NAFTA and tax treaties Labor rules and practices Environmental rules Tax law Treaty benefits 44 countries No tax on services lasting less than 6 months No tax on salaries for presence in Mexico of less than 183 days No tax on ancillary activities Reduced withholding rates on interest from 0% to 15% Reduced withholding rates on royalty payments: 10% 12 countries trade agreements to reduce the payments of duties. China-Mexico treaty to avoid double taxation Signed in Effective as of January 1, 2007 Benefits similar to other Chinese treaties to avoid double taxation Tax exemptions (i.e. technical assistance) and reduced withholding rates (i.e. interest and royalties) Allows maquiladora operations to enjoy Mexican special tax regime that provides tax administrative conveniences Tax exemption on interest paid to People s Bank of China, State Development Bank, Import and Export Bank of China, Agriculture Development Bank of China, China Export & Credit Insurance Corp.

3 Mexican tax system Corporate tax system - income tax Income tax 30% flat rate No state or city income taxes Profits previously taxed not subject to dividend tax Decree published on October 30th., 2003 to reduce almost 44% of the 30% of corporate income tax rate Business flat tax (BFT) 17.5% Tax rate BFT Companies will pay the greater of the income tax or the BFT Decree published on November 5, 2007, neutralize BFT for maquiladora operations. Conditions apply Decree of BFT grants tax incentives to other activities Business Flat Tax Act overview - General rules Special taxable income of: Total cash inflows from sales, provision of services and rental business (3 BFT taxable activities) Less total cash outflows for payments of 3 BFT taxable activities Payroll and employer payroll taxes, interest and royalties (whenever the latter are paid between related parties) are not deductible A tax credit is granted equivalent to 17.5% of the BFT on the payroll and employer payroll taxes The BFT will be studied this year, to potentially eliminate corporate income tax and leave only the BFT Other credits and exceptions to general rules apply Corporate Tax System Value- Added Tax (VAT) Sales and/or use tax General rate of 16% Certain activities subject to 0% tax: i.e. exporting activities Activities in US/Mexico border area subject to 11% reduced VAT rate In exporting activities VAT paid to vendors is refundable to exporter or creditable against other federal taxes Other Taxes Payroll taxes, around 25% of the payroll Other taxes of minor impact include: - State payroll taxes, vary from State to State - Property taxes, vary from city to city. No more than 2% of the property price. Employee profit-sharing mandatory: 10% of taxable profit. Payroll Taxes Employer Burden Social security (Avg.) 16.2% Housing Fund 5% Retirement fund 2% State Tax * *Vary from State to State Employee Profit Sharing rate Employee Profit Sharing rate 10% EPS Taxable Income 100 Rate 10% Employee profit Sharing 10 Additional Tax Information Calendar year by law Transactions between related parties must be established on an arm s-length basis (transfer pricing) Special rule requires 3 to 1 debt to equity ratio. Interest on excess paid to nonresident related parties is nondeductible. Exceptions apply Anti-tax haven legislation Groups consolidated filing is possible. Certain limitations apply Maquiladora special tax regime establishes transfer pricing guidelines to avoid tax presence in Mexico of parent company (permanent establishment)

4 Government actions to support foreign investment into Mexico The Federal Government grants to maquiladoras companies - Partial exemption on income tax, and - Reduction on BFT Maquiladora scheme allows to process Raw Material in Mexico and export the Final Product and also it allows to sell Final Product in Mexico VAT Tax rate 11% (16% out of the border region) Mexico supports maquiladoras and exporters providing preferential VAT tax rate of 0% on service rendered by maquiladora (in-bond processing) for export. Value added tax paid to vendors is refundable to exporters. May also be offset against federal taxes. Income Tax Maquiladora Regime - General Scope Article 216-BIS ITL Transfer Price Study + 1% M&E (Fr. I) Safe Harbor (Fr. II) Transfer Price Study Based on ROA (Fr.III) 6.9% of Assets 6.5% on costs and expenses Each fraction is optional and can be changed yearly. Maquiladora Concept and main provisions Maquiladora: a customs concept Parts and components are imported into Mexico on a temporary basis to manufacture goods to be exported: principally to U.S. market Machinery and equipment provided by parent company Building rented or owned by Mexican maquiladora company Non NAFTA raw materials may be subject to duties Some sectors included in Prosec program: Automotive Medical Electric Electronic Textile Metal-mechanic Mining Prosec program relieves duty on non-nafta parts and components (could be 0% of duties) Major Asian companies working in Mexico under the maquiladora regime (1): Amtek Enlight Nissan Sanyo China Resources Daewoo Hitachi Hyundai Panasonic Pou Chen (Yue Yuen) Sony Tatung Toyota Delta LG Samsung FoxConn (1) Each fraction is optional and can be changed yearly.

5 Modes of Operation Sub Contract Existing maquiladora manufactures products to your specifications Shelter operation Arrangement whereby the client is responsible of production, machinery and equipment and inventories. Shelter operator is responsible of back office : Human Resources, Customs and Accounting Wholly-owned subsidiary Mexican company directly owned by Chinese parent or through and intermediary, i.e. U.S., Australia, etc. Maquiladora Concept Maquiladora Framework Typical maquiladora structure China China Company China / U.S. Parent Mexico Machinery Inventories 100% Management and Control Maquiladora Machinery & Equipment Raw materials and semi finished goods Finished goods Exports Maquiladora U.S., Mexico or other countries Owns or rents facility

6 Tax issues / highlights for investing in Mexico and China Highlights Mexico China Currency Mexican Peso (MXN) Renminbi or Yuan (CNY) Foreign Exchange control None Strict exchange controls Accounting principles / financial statements Principal business entities Corporate taxation Mexican GAAP Corporation (SA) Limited liability company (SRL) Foreign corporation Residence: if it is managed and controlled in Mexico Similar to IFRS Chinese accounting standards Domestic enterprises Foreign companies Partnership enterprises Residence: if it is established in China or its place of effective management is in China Withholding tax Other taxes on corporations Basis: taxed on worldwide income and nonresidents are taxed on Mexican source income Taxable income: Corporate tax is imposed on a company s profits Taxation of dividends: Dividends received by a Mexican resident company from another Mexican entity are exempt. Dividends received from a foreign company could be subject to income tax at 30%. Profits previously taxed not subject to dividend tax Capital gains: Mexican entities are not subject to special tax treatment on capital gains Losses: A 10-year carry forward is allowed Rate: 30% Alternative minimum tax: Business Flat Tax (IETU). The tax rate is 17.5% and operates under a cash flow method Foreign tax credit: Foreign tax paid may be credited against Mexican tax on the same profits Holding company regime: No Consolidate returns: Mexican groups may net their income tax results Dividends: None Interest: 4.9% to a general 30% Royalties: 25% to a general 30% *Unless reduced under an applicable tax treaty. Payroll tax: Applies at State level Real property tax: Municipal authorities levy rates on the ownership Social Security: 15% to 25% applies to employer contributions Basis: taxed on worldwide income and nonresidents are taxed on China source income Taxable income: Corporate tax is imposed on a company s profits Taxation of dividends: An exemption applies for dividends paid by resident enterprises to other resident enterprises to China. Dividends received from a foreign company are subject to income tax at 25% Capital gains: Capital gains are generally combined with other operating income and tax Losses: A 5-year carry forward is allowed Rate: 25% standard companies, 20% and 15% applies to small scale enterprises Alternative minimum tax: No Foreign tax credit: Foreign tax paid may be credited against Chinese tax on the same profits Holding company regime: China maintains a domestic holding company regime for foreign multinationals that wish to have a domestic company structure Consolidate returns: No Dividends: 10% Interest: 5% to a general 10% Royalties: 5% to a general 10% Payroll tax: No Real property tax: Urban real estate tax levied on urban land and buildings which is levied at 1.2%, and 12% to 18% Social Security: 20% to 40% applies to employer contributions

7 Highlights Mexico China Other taxes on corporations Transfer tax: 2% to 3% applies to the transfer of real state Transfer tax: No Anti-avoidance rules Administration and compliance Personal taxation Administration and compliance Value added tax Other: Profit sharing distribute 10% of taxed profits among its employees Transfer pricing: Rules similar to the OECD Thin capitalization: Rules apply with a 3:1 debt to equity safe harbor ratio for loans granted from abroad by related parties Other: A tax audit is mandatory for taxpayers with more than 300 employees or gross income exceeding MXN 34.8 million or assets exceeding MXN 69.6 million Tax year: Calendar year Filing requirements: Advance corporate tax is payable in 12 installments. The annual tax return must be filed within the first 3 months of the following year Penalties: Applies for non-compliance Residence: An individual is resident if he/she has a permanent home in Mexico. If he/she has a home in 2 countries, the key factor is the location of his/her centre of vital interests Basis: Residents are taxed on worldwide income and nonresidents are taxed on Mexican source income Filing status: Tax returns are filed individually, regardless of marital status Taxable income: Income is taxed under a scheduler system Capital gains: Capital gains are generally taxed as income Tax year: Calendar year Filing and payment: Tax on employment income is withheld by the employer and remitted to the tax authorities Penalties: Applies for non-compliance Taxable transactions: VAT is levied on the sale of goods, leasing and the provision of services, as well on imports Rates: 16% general, 11% at the borders and 0% for food, medicine and exportations Other: Deed tax is imposed at 3%-5% on the total value on land use rights or building ownerships Transfer pricing: Rules similar to the OECD Thin capitalization: Rules apply with a 2:1 debt to equity safe harbor ratio for loans granted from abroad by related parties Other: a general anti-avoidance rule requires a bona fide business purpose for any business arrangement that has the effect of reducing, deferring or avoiding taxable income Tax year: Calendar year Filing requirements: Enterprises must file provisional income tax returns with the local tax authorities within the 15 days of the end of each quarter. The annual tax return must be filed within the first 5 months of the following year Penalties: Applies for non-compliance Residence: The test for residence in China is whether and individual is usually or habitually residing in China Basis: Residents are taxed on worldwide income and nonresidents are taxed on China source income Filing status: Tax returns are filed individually Taxable income: Varying income Capital gains: Tax rate at 20% Tax year: Calendar year Filing and payment: Tax on employment income is withheld by the employer and remitted to the State Treasury Penalties: Applies for non-compliance Taxable transactions: VAT is levied on supply of goods, provision of processing, repair or replacement services and imports Rates: 17% general, 13%, 4%, 3% or 6% applies to other Filing and payment: VAT filing is monthly, based on cash flow method Filing and payment: VAT filing is monthly Tax treaties 44 income tax treaties 90 income tax treaties Tax authorities Servicio de Administración Tributaria (SAT) International organizations OECD and WTO WTO State Administration of Taxation

8 Contacts: Mexico Cecilia Montaño Central Region / Mexico City Tel: +52 (55) cmontanohernandez@deloittemx.com Guillermo Durán Bajío Region / Guadalajara Tel: +52 (33) gduran@deloittemx.com Gonzalo Gómez Northwest Region / Tijuana Tel: +52 (664) gogomez@deloittemx.com David Chen Tel: davidchen@deloittemx.com José Luis Enciso Chinese Services Group Mexico City Tel. +52 (55) jenciso@deloittemx.com deloitte.com/mx Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte s approximately 170,000 professionals are committed to becoming the standard of excellence. This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the Deloitte Network ) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication Galaz, Yamazaki, Ruiz Urquiza, S.C.