Executive summary. Income Tax Law (LISR) Legal entities. A summary of the salient modifications is as follows:

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Randall Weaver
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1 2016 Tax Reforms

3 Index I. Income Tax Law 5 Legal Entities 5 Tax Deconsolidation 7 Tax Integration Regime 7 Individuals 7 II. Financial Sector 8 III.Primary Sector 8 IV. Repealed Provisions 9 V. Special Tax on Products and Services Transitory Provisions 9 VI. Federal Tax Code 10 PwC Mexico 3

5 Executive summary In October 2015, Congress approved several modifications to the tax regime applicable to the 2016 tax year which are to be published in the Official Federal Journal. The majority of these reforms enter into force on January 1, Upon implementation of the approved measures, the federal government expects to obtain 4.7 billion pesos in revenues, which represents an increase in inflation adjusted terms of 1.47% over the budgetary revenues for The Federal Revenue Law (i.e., the budget) of 2016 estimated an average exchange rate of $16.40 pesos per 1 USD dollar, annual inflation of 3%, average price per barrel of oil of 50 USD, growth in gross domestic production (GDP) of between 2.6% to 3.6%, and external and internal debt up to 535 billion pesos and 6 billion USD, respectively, which corresponds to the equivalent of 13% of total budgetary revenues. Revenues from taxes, social security contributions and rights will increase 22%, 7.5% and 7%, respectively, over the 2015 tax year. The principal increases are in the areas of Special Tax on Products and Services (IEPS), with an increase of 118%, and income taxes, with an increase of 18%. The annual withholding rate applicable to interest paid through the financial system will be 0.5% on capital. [Is this correct? It is not 0.53%?] The tax reforms are intended to maintain fiscal discipline, give certainty to taxpayers without incorporating new taxes or increases in existing tax rates, promote the formalization of and compliance with tax provisions, and provide increased international cooperation to reinforce Mexico s commitments under the Organization for Economic Cooperation and Development (OECD) to combat tax evasion. A summary of the salient modifications is as follows: Income Tax Law (LISR) Legal entities Accelerated Deduction Companies, including those dedicated to transportation infrastructure and those that invest in hydrocarbon-related activities and the generation of electricity, and individuals engaged in entrepreneurial or professional activities who have obtained revenues in the prior tax year up to 100 million pesos, can apply an accelerated deduction for investments in new fixed assets which were acquired in the last quarter of the 2015 tax year, or in 2016 or For purposes of the value added tax (VAT), this deduction will be considered an expenditure that is fully creditable so long as the requirements set forth in the LISR are satisfied. Tax Profit Accounts for Investments in Renewable Energy Taxpayers dedicated exclusively to the generation of energy from renewable sources or efficient energy through cogeneration systems and which have fully deducted their investments, shall establish an account designated as Tax Profit Accounts for Investments in Renewable Energy which will allow for the distribution of dividends without payment of corporate tax. This exception does not apply to the withholding tax applicable individuals who are resident in Mexico or abroad. PwC Mexico 5

Thin Capitalization in the Electricity Industry To determine the amount of debt that exceeds three times the accounting net equity of the taxpayer ( thin capitalizationl rule ), debts incurred for

6 Thin Capitalization in the Electricity Industry To determine the amount of debt that exceeds three times the accounting net equity of the taxpayer ( thin capitalizationl rule ), debts incurred for the purpose of investment in infrastructure related to the generation of electricity will be excluded from the calculation. Additionally, those taxpayers with a favorable balance arising from the payment of tax on interest exceeding three times the accounting net equity can only compensate such tax within the terms of Article 23 of the Federal Tax Code ( CFF ). Reinvestment of Profits Individual shareholders of companies that reinvest profits generated from 2014 to 2016 will be entitled to a reduction in tax on dividends of up to 5% to the extent such profits are distributed beginning in To qualify for this benefit, the company must identify in its books and note on its financial statement information related to such profits, the reinvestment and distribution of those profits, and must present other relevant information as established by the Tax Administration Service (SAT). If the shares of the company are not publicly traded, the company must present a tax report with respect to its financial statements according to the terms of Article 32-A of the CFF. Related Party Transactions As from the 2016 tax year, those taxpayers who are required to present an informational return with respect to their tax status (a DISIF ) are required to present information relating to transactions carried out with related parties by December 31 of the year following the tax year in which the transaction occurred, by way of the following returns: Master Informational Return: including information related to the multifunctional business group. Local Informational Return: including information relating to the taxpayer and related party transactions. Country by Country Informational Return: including information on a tax jurisdictional level, based on the jurisdictions in which the multinational group operates, so long as the taxpayer is the controlling multinational company, a Mexican tax resident or a foreign resident with a PE in Mexico and has been designated as the party responsible for presenting the tax return. Investment Deduction Investments in automobiles will be deductible up to MXN$175,000. Repatriation of Capital Individuals and legal entities which in the first 6 months of 2016 repatriate, through the financial system, resources maintained outside of Mexico until 2014, shall be considered to have met their formal tax obligations, so long as they pay the respective tax within 15 days of the date of repatriation (without fees or fines) and satisfy other requirements, including that such investment remain in Mexico for 3 years. Note that although the provision is not clear in this regard, based on the legislative intent, we believe that the tax to be paid should not be subject to inflation adjustment Tax Reform

7 Tax Deconsolidation Companies, which until 2013 consolidated for tax purposes with their subsidiaries, are entitled to reduce their deferred tax by crediting against the consolidated tax the tax on dividends paid between members of the group, and to reduce by up to 50% the consolidated tax by applying losses (valued at 15%) incurred by the controlled entities. Companies that exercise this option must meet several requirements, including participating for five years in a real-time verification program implemented by the SAT. In addition, the controlling company that incurred losses upon the alienation of shares issued by a controlled company and did not reverse such losses for purposes of calculating the deferred tax is entitled to rectify their tax status over 10 payments. Tax Incorporation Regime (RIF) Issuance of Tax Invoices There is no obligation to issue a tax invoice for transactions with the general public where the amount of the transaction is less than 250 pesos and as long as the acquirer of the goods or the recipient of the services does not request such an invoice. Alienation of a Business In case of the alienation of a business, assets, and deferred charges and expenses, the acquirer shall be taxed under the RIF so long as it presents a notice to the SAT in which it indicates the date of the acquisition of the business and the years in which the seller was taxed under the RIF with respect to such business, within the 15 days following the date of the alienation. Individuals Personal Deductions a) Expenses Related to Sick Leave Individuals may deduct 100% of the expenses related to employee sick leave as referred to in Article 477 of the Federal Labor Law as long as certain requirements are met. The employee must have the corresponding certificate issued by the public institutions within the Social Security system, and the relevant formal tax invoice (CFDI) must specify that the expenses are directly related to the reason for the health related work absence. b) Total Amount of Personal Deductions The total amount of personal deduction may not exceed the lesser of five General Minimum Salaries ( SMG ), approximately equal to MXN$127,932, or 10% of the total amount of revenue. Previously the limit was four SMG. Sale of Residence Amount obtained as consideration in the sale of a residence will be exempt revenue so long as the following requirements are met: (1) the exemption is capped at 700,000 Unidades de Inversión (UDIS), (2) the transfer of the property is formalized with public faith, and (3) no other residence has been sold by the taxpayer in the prior three years. Taxpayer Obligations If an individual fails to present an income tax return to the SAT on two consecutive occasions or on three occasions within a sixyear period counted from the year of the first missed return, such individual will not be taxed under the RIF but rather under the general tax regime applicable to individuals. Leasing or Temporary Use or Enjoyment of Goods Individuals obtaining income from leasing, or from granting the temporary use or enjoyment of real estate, are entitled to be taxed under the RIF so long as their income does not exceed two million pesos. Taxpayers who exercise this option will enjoy, among other benefits, a reduction of up to 100% of the income tax, VAT and IEPS taxes for which they are responsible. Applicability of the Tax Incorporation Regime (RIF) Taxpayers who are taxable under the RIF regime and who obtained income in the immediately preceding tax year from their own entrepreneurial activities of up to 300,000 pesos may reduce by 100% the amounts of VAT and IEPS they would otherwise be required to pay. PwC Mexico 7

8 II. Financial Sector Interest Paid to Foreign Banks The withholding tax rate applicable to interest paid to foreign banks will be 4.9% so long as the effective beneficiary of the interest is resident in a country that has an income tax treaty in effect with Mexico, and there is compliance with the requirements provided for in the relevant tax treaty. Standard for Information Exchange In accordance with the standard for the automatic exchange of information regarding financial accounts as recommended by the OECD, financial institutions that are resident in Mexico or resident abroad with a branch in Mexico, should report the following information to the tax authority: The procedures for identifying foreign financial accounts and reporting financial account within the high value accounts by December 31, Information regarding those high value financial accounts and new reportable accounts by June 30, The information of low value accounts and pre-existing reportable accounts by June 30, Notwithstanding the above, if reportable accounts are identified among the low value accounts or pre-existing legal entity accounts by December 31, 2016, this information should be presented by June 30, III. Primary Sector Primary Sector Individuals that carry out agricultural, forestry, livestock or fishing activities will not be subject to Income Tax up to one SMG annually (MXN$25,586) so long as the total revenue for the year does not exceed eight SMG (MXN$204,692) and such revenue represents at least 25% of the taxpayer s total revenue. Parceled Communal Land (ejido) and Communities As of January 1, 2014, the ejidos and communities dedicated exclusively to agricultural, livestock, forestry and fishing activities will not pay Income Tax corresponding to such activities up to an annual amount of 20 SMG (MXN$498,444). Taxpayers that paid Income Tax in 2014 can recalculate the Income Tax with the aforementioned exemption and, in the event of a favorable balance, this can be applied against the following years but cannot be refunded. Disbursements Made to Taxpayers in the Primary Sector Businesses that make payments to individual taxpayers or entities that exclusively carry out agricultural, livestock, forestry or fishing activities can deduct the expense when it is effective paid Tax Reform

9 IV. Repealed Provisions Employee Benefits The fourth and last paragraphs of Article 27.XI of the LISR are repealed. These paragraphs provided the procedures for determining that the benefits granted to non-unionized employees were, on average, arithmetically equal to or less than those benefits given to unionized employees. The repeal of these paragraphs signifies that the relevant employee benefits can be deductible so long as they are granted in a general manner to all employees and the other requirements of the article are met. V. Special Tax on Production and Services (Excise Tax) Export of High Caloric Density Food Taxpayers that manufacture or produce non-basic food products with high caloric density and definitively export such products may apply a 0% rate in the determination of the applicable Excise Tax. Sale of Gasoline and Diesel The tax due on the sale of gasoline and diesel will be based on fixed quotas per liter in accordance with the following: 1. Fossil Fuel... Quota a. Gasoline with less than 92 octanes pesos b. Gasoline with greater than or equal to 92 octanes pesos c. Diesel pesos 2. Non-Fossil Fuel pesos For purposes of the Excise Tax, Fossil Fuel will be deemed to exclude paraffin, raw materials for carbon black (negro de humo), large residuals, asphalts, light cyclic acid, basic oils (lubricants), propylene, lubricants, refinery grade propylene and chemical grade propylene. Such goods will, consequently, not be subject to the Excise Tax. Methodology of Conversion A methodology is included for converting the applicable quota per ton of carbon to the applicable quota per liter of fuel that is sold or imported. Excise Tax Transitory Provisions Sale of Gasoline and Diesel In the case of gasoline and diesel sold in December of 2015 and when the consideration is collected by January 10, 2016, for purposes of determining the corresponding tax, the quotas effective at December 31, 2015 will apply. A filing must be made with the SAT which contains the information regarding such sales and collections in accordance with the regulations. Gasoline and Diesel Prices The Finance Ministry must publish by December 31, 2015 and 2016, respectively, a range of minimum and maximum values for the gasoline and diesel prices. This range will be the basis for determining the applicable quota in the sale of such fuels for the years 2016 and Tax Stimulus for Acquiring Diesel A tax stimulus will continue for persons who carry our entrepreneurial activities, which will now also include mining, and who acquire diesel for final consumption. The tax stimulus allows for the crediting of an amount equal to the IEPS that would have been triggered on the sale of such diesel under IEPS law, so long as the diesel is used exclusively in general machinery (not vehicles). PwC Mexico 9

10 VI. Federal Tax Code ( CFF ) Tax Authority Audit Powers A procedure is granted to the tax authority in order to verify the origin of favorable balances for each refund request presented by the taxpayers, even when such request is related to the tax or periods at issue, without this procedure giving rise to a tax assessment. If the authorities exercise their powers of verification and detect facts or omissions that resulted in a failure to pay tax, the tax authority must notify the taxpayer through its tax virtual mailbox or management team (for legal entities) of their formal observations, or of the definitive resolution at least 10 business days prior to the preparation of the relevant report. Tax Lotteries The SAT is empowered to carry out National Lotteries in which individuals can participate when they do not carry out business activities and they make electronics payments, so long as such taxpayers do not have a tax assessment determined against them. Violations Article 81 of the CFF defines violations as the omission, erroneous filing, inconsistent filing or filings with formats other than those provided by the tax provisions of the following information: Information return of Relevant Transactions Related Party Tax Returns referred to in Article 76-A of the Income Tax Law, and Electronic Accounting CFF Transitory Provisions Tax Payment Option Pursuant to transitory provisions, the SAT included an optional procedure to facilitate Income Tax payment for individuals that make or sale artisanal products with annual revenues up to MXN$200,000 and whose total income is comprised at least 90% by revenue from such activity. We invite you to learn more about the different aspects of the proposal as PwC Mexico experts analyze the 2016 economic reform package and explain in detail its reach and challenges Tax Reform

11 Contacts Mauricio Hurtado Lead Partner, Tax and Legal Services 01 (55) Mexico City and The Metropolitan Area José Alfredo Hernández Partner 01 (55) Southeast Region (Cancún, Mérida, Puebla, Veracruz, Villahermosa) Pedro Carreón Partner 01 (55) Northeast Region (Monterrey, Torreón) Fausto Cantú Partner 01 (81) West and Bajío (Chihuahua, Ciudad Juárez, Guadalajara, San Luis Potosí, Hermosillo, León, Mexicali, Querétaro, Tijuana) Raúl Sicilia Partner 01 (33) This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

12 Follow us: 2015 PricewaterhouseCoopers, S.C. All rights reserved. PwC refers to the Mexico member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. MPC: ms-foll-reformas-fiscales-ingles-2016-tls

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