BEYOND BORDERS: DOING BUSINESS OUTSIDE THE US

Transcription

1 BEYOND BORDERS: DOING BUSINESS OUTSIDE THE US Southbound: Are you Mexico-ready? 0

2 Webcast notes To download a copy of today s presentation, visit the Resource List at the bottom of your screen To answer quiz questions, click on the radio button to the left of your desired response, then click Submit to record your response For technical assistance, click the Help widget at the bottom of your screen 1

3 CPE credit eligibility Participate in practice questions 2 To answer a practice question, click on the radio button to the left of your desired response, then click Submit to record your answer Correctly answer 70% of questions on final exam 1.0 CPE credit will be issued to eligible participants at the end of the event Visit the Certification panel to the right of your screen Be sure to save a copy to your computer before the end of the event RSM US LLP employees: CPE will appear on your LearningLinks transcript within 30 days NASBA will not issue credit if all criteria are not met, without exception

4 RSM US LLP. All Rights Reserved.

5 Today s presenters Alejandro Luna Partner, Santamarina y Steta Corporate lawyer with one of the largest law firms in Mexico City 25+ years experience in general corporate practice, including mergers and acquisitions and foreign investment Edgar Lopezlena Senior Manager Manages RSM s Mexican/Latin American Tax Practice 20+ years experience providing tax structuring and planning advice for companies with economic activity in Latin America Daniel Carrera International Manager Responsible for managing global audits for companies with over $500M in revenues and presence in Latin America Liaison for Mexico and Latin America Steven Menaker Partner National Consumer and Industrial Products Industry Leader Advises privately-held and private equity-owned companies, including those that are internationally active 4

6 BEYOND BORDERS: DOING BUSINESS OUTSIDE THE US Southbound: Are you Mexico-ready? 5

7 Agenda Topics Minutes Welcome 3 Tax update 15 Five relevant considerations for establishing your 15 business in Mexico Financial reporting 15 Closing remarks 3 6

8 Learning objectives At the conclusion of this course, participants will be able to: Define the different entity choices in Mexico and their legal and tax consequences Identify some key aspects of doing business in Mexico (limited liability, labor issues, intellectual property, etc.) Assess the impact of the base erosion and profit shifting (BEPS) legislation in Mexico Consider recent tax regulatory developments for Maquiladoras and earnings repatriation Examine the differences between U.S. GAAP and Mexican FRS and the impact on financial reporting 7

9 TAX UPDATE 8

10 Tax update Choice of entity Base erosion and profit shifting (BEPS) A Mexican perspective Maquiladora A brave new world Dividend taxation 9

11 Choice of entity There are different types of Mexican entities the Sociedad Anónima (S.A.) and the Sociedad de Responsabilidad Limitada (S. de R.L.) are the most commonly used How does the type of entity affect its tax character? In Mexico Type of entity has no tax impact Both an S.A. and an S. de R.L. are taxed as corporations in Mexico No pass-through treatment available The legal entity, and not its owners, is the taxpayer for Mexican tax purposes 10

12 Choice of entity (cont.) In the United States Default treatment for both type of entities: Foreign corporation (wholly owned subsidiary: controlled foreign corporation) Reg. sections (b)(3) and (h)(2) Think of yourself as owning a subchapter C corporation The S. de R.L. is eligible for pass-through treatment if a timely election is filed with the IRS (Reg. section ) Caution: No election made, no pass-through treatment, even if the Mexican entity is an S. de R.L. Sociedad Anónima de Capital Variable (S.A. de C.V.) is never an electable entity The Mexican corporate taxpayer character is retained whether or not an election with the IRS is made 11

13 Choice of entity (cont.) Ownership structure will determine entity classification election of a pass-through entity If one owner: foreign disregarded entity (FDE). Mexico has a minimum two-owner rule, but certain techniques allow for FDE treatment in spite of this rule If more than one owner: Foreign partnership Pass-through treatment generally allows for foreign tax credits in the U.S. tax return for the Mexican corporate income tax paid by the entity, subject to limitations and adjustments 12

14 BEPS A Mexican perspective Disclosure of relevant transactions 26 different types of relevant transactions listed, most of which pertain to related-party transactions and reorganizations. Notable examples: Adjustments in intercompany prices (certain thresholds apply) Immigration or emigration of intellectual property Royalties charged by or to related parties where the residual profit split method was used Taxable and nontaxable corporate reorganizations involving Mexican entities Change in Mexican tax residency status Transactions with a resident of a country with a territorial tax system First filing in December 2015 for relevant transactions carried out during Quarterly filings thereafter Failure to timely disclose relevant transactions: Penalty of approximately U.S. $1,000 per transaction Disallowance of tax benefits (deduction, value-added tax recoverability) on unreported transactions Considerable increase in the risk of audit 13

15 BEPS A Mexican perspective (cont.) Mexico One of only three countries to have enacted BEPSoriented law Changes in the income tax law effective 2016: Additional information return filing requirements (consistent with OECD BEPS Action 13) Master file (U.S. $36 million threshold) Local file (most internationally active taxpayers) Country-by-country (CbC) report (for large multinational enterprises) First filing will be for calendar year ending Dec. 31, 2016, with a due date of Dec. 31, 2017 Penalties and consequences for failure to comply will be severe Failure to file will trigger a transfer audit by Servicio de Administracion Tributatria (SAT) agents 14

16 BEPS A Mexican perspective (cont.) These new provisions empower the SAT to share information returns with other tax jurisdictions where a tax treaty exists, without the need for prior consent from the taxpayer The Mexican government has announced that adoption of other BEPS Action Plan measures will be incorporated into the tax legislation STAY TUNED! 15

17 Maquiladoras A brave new world Income tax Repeal of a long-standing tax stimulus that reduced the Maquiladora s effective tax rate to approximately 17 percent (even less in some cases) All Maquiladoras are now subject to the statutory 30 percent tax rate Tests to prevent permanent establishment (PE) More clarity (good) More stringent rules (bad) 16

18 Maquiladoras A brave new world (cont.) Tests to prevent PE (cont.) Maquiladoras can no longer sell finished products in Mexico More restrictive measures to source inputs from local vendors Production assets owned by the foreign related party should represent at least 30 percent of the aggregate production assets used in the Maquila activity Maquiladoras that commenced operations prior to Jan. 1, 2009 that have not met this test had until Jan. 1, 2016 to do so Failure to comply with any of the test means the foreign related party will be subject to Mexican taxes on at least a portion of the products manufactured or transformed by the Maquiladora, even if the products are sold outside Mexico (PE or nexus principle) 17

19 Maquiladoras A brave new world (cont.) Safe harbor alternative approach still applicable (determine a minimum amount of net taxable income based on a mechanism established by the law) Net taxable income must be the amount that is the highest between: 6.5% of all costs and expenses, or 6.9% of the net value of assets used by the Maquiladora. Certain subtle changes in the rules can trigger a large net minimum taxable income under the safe harbor option TRANSFER PRICING Alternative: Negotiate a transfer pricing policy with the Mexican tax authorities through an advance pricing agreement (APA) procedure A significant portion of Maquiladoras are opting for the APA instead of the safe harbor 18

20 Maquiladoras A brave new world (cont.) Value-added tax (VAT) Maquiladoras now have to pay VAT upon introducing into Mexico inputs and production assets used in the Maquila activity, unless they obtain a special certification (formerly, VAT was waived) Additional reporting requirements to maintain the special certification and thereby avoid paying the VAT 19

21 Maquiladoras A brave new world (cont.) Because of the significant changes in Maquiladora taxation, a considerable number of companies are opting out of the Maquiladora arrangement and migrating to more conventional manufacturing and distribution operations Opt-out can be done at any time during the year and typically does not trigger adverse tax consequences All parties involved must be on board (management, production, accounting, tax, engineers, vendors, customers). Maquiladora is not a tax election, it is an operational model 20

22 Maquiladoras A brave new world (cont.) Shelter operations Foreign residents that contract toll manufacturing or subassembly with a Mexican third-party contractor Effective Jan. 1, 2014: Four years to opt out of the shelter contract Four-year period starts counting on the date the shelter contract is signed, thus: Year shelter contract signed Anytime during 2014 Anytime during 2015 Anytime during 2016 Opt-out year / date 2018 (on the 4th anniversary date) 2019 (on the 4th anniversary date) 2020 (on the 4th anniversary date) 21

23 Dividend taxation Until 2013, dividends paid by a Mexican entity were not subject to any level of Mexican taxation if the amount distributed was up to the CUFIN (Mexican version of accumulated earnings and profits ) Excess dividends triggered a tax of 43 percent on the distributing entity (not the shareholder) Now, dividends paid from post-2013 retained earnings to individuals or foreign residents are subject to a 10 percent withholding tax in addition to the corporate 43 percent tax on excess dividends Under treaty provisions, the 10 percent withholding may be reduced to 5 percent if the beneficial owner is a U.S. company and to 0 percent if the beneficial owner has more than 80 percent ownership of the Mexican entity Caution: Dividend treatment usually applies to any distributions made by Mexican companies, even in a pass-through environment 22

24 FIVE ASPECTS TO ESTABLISHING YOUR BUSINESS IN MEXICO 23

25 Mexican corporate entities Mexican corporations All Mexican companies require at least two shareholders, with one exception for when an individual forms a simple S.A. Main types of Mexican corporations that afford limited liability to shareholders/partners: S.A. S. de R.L. Similar to a U.S. C corporation vs. a company (LLC) or a partnership Corporate capital is represented by shares Shares may be freely transferred unless bylaws or shareholders agreement restricts such transferability Similar to an LLC Transferability of equity interest participation requires approval by partners Statutory auditor is optional Considered a pass-through entity for U.S. consolidation purposes. S.A.P.I. Corporation for the promotion of investment It is a variation of an S.A., with some added flexibility 24

26 Mexican corporate entities (cont.) Characteristics: Corporate veil: Liability of shareholders/partners does not exceed their capital contributions Variable capital: Capital variations may take place with fewer formalities, provided the minimum fixed capital is not modified (the phrase de Capital Variable or de C.V. must be added to the type of entity: i.e., S.A. de C.V.) Main registrations: Public registry of commerce Tax registration Importers registry National Registry of Foreign Investments 25

27 Mexican corporate entities (cont.) Branches Need prior approval of bylaws from the General Directorate of Foreign Investments of the Ministry of the Economy Further formalization of bylaws with Mexican Notary Public Final registration with the corresponding Pubic Registry of Commerce is required so as to legally act in Mexico and obtain its taxpayers registration Other requirements are similar to those for incorporating a new entity (notarization of bylaws, registration with different registries) From an administrative and pragmatic point of view, formation of a subsidiary is more commonly recommended 26

28 Labor aspects Minimum wage and statutory benefits Profit sharing applies to all companies The concept of employment at will does not exist, and labor law is very protective of employees Should properly document employment relationship with individual work agreements Indemnity and stringent severance apply in case of unjustified dismissal Labor procedural law imposes burden of proof on employer Payroll taxes may apply and vary depending on state jurisdiction (1 2 percent) Contributions to Social Security institutions such as Mexican Institute of Social Security (IMSS) and Workers National Housing Fund (INFONAVIT) are mandatory 27

29 Intellectual property Industrial property Must be registered before the Mexican Institute of Industrial Property Trademarks Trademarks have a term of protection of 10 years Term may be renewed for equal periods Trademarks not used during three years may be subject to expiration by claim from a third party interested in the use of such trademark Classification is harmonized with international conventions subscribed by Mexico Inventions (patents) Patents have a term of protection of 20 years Term may be not be renewed 28

30 Intellectual property (cont.) Authorship rights/copyrights are to be registered before indautor Economic rights are protected during the life of the author and 100 years from his/her death Plant varieties Must be registered before the National Registry of Plant Varieties Term of protection is 18 years for perennial species and 15 years for annual species Royalties paid to related foreign parties must be determined on an arm s length basis License agreements should be registered with the authorities to protect proper trademark use 29

31 Free trade agreements (FTA) 15 FTAs or similar arrangements signed up to date, comprise more than 46 countries Grants Mexico competitive advantage as a manufacturing and logistical platform Reduction/elimination of trade tariffs Rules of origin Rules on customs valuation Standards and technical regulations (sanitary, customer protection) Examples: NAFTA FTA EU-Mex Trans-Pacific 30

32 Compliance Anti-corruption Applies to public procurement activities A new national anti-corruption system is being created and implemented Mexican federal government needs to demonstrate greater willingness to enforce anti-corruption laws Data privacy Establishes practices in management of third-party data by individuals or businesses Recent law and authorities are starting to enforce it stringently 31

33 FINANCIAL REPORTING 32

34 Financial reporting background Mexican Financial Reporting Standards (FRS) Statements in Mexico will be prepared in accordance with Mexican FRS Public companies follow International Financial Reporting Standards (IFRS ) Consejo de Normas de Informacion Financiera, A.C. (CINIF) created Normas de Informacion Financiera (NIF) NIFs superseded Principios de Contabilidad Generalmente Aceptados or Generally Accepted Accounting Principles in Mexico This is analogous to GAAP for U.S. companies 33

35 Financial accounting background Generally Accepted Auditing Standards (GAAS) vs. International Standards on Auditing (ISA) Statements in Mexico are audited in accordance with ISA Impact to your financial statements Affect the nature, timing and extend of the audit procedures AICPA document: Substantive differences between International Standards on Auditing and Generally Accepted Auditing Standards Section 0240 extended requirements for fraud brainstorming Section 0330 confirmation of accounts receivable Section 0520 documentation of and reliance on analytical procedures 34

36 US GAAP vs NIF differences Revenue recognition Certain transactions may not be recorded in accordance with GAAP Examples: Multiple element arrangements Earnings process is clearly defined or specified by milestones in contracts Contracts that have services such as installations, training, etc. attached to the physical products This raises the question of whether the service would be delivered/provided without the physical product Not compliant with Staff Accounting Bulletin (SAB) 104 Revenue is usually recognized on the date of invoicing as it signifies the issuance of a tax document, not when the transfer of risk or loss and title occur 35

37 Other matters for attention Items not usually recognized 36 Small to mid-sized companies tend to ignore the recognition of certain accruals, even if NIF-mandated Mandatory profit sharing payable to employees Mandatory benefits (severance payment, seniority premiums, vacation premiums, year-end bonuses, etc.) Deferred taxes (note that NIFs do not have a FIN-48 equivalent) U.S. parents with Mexican subsidiaries should make sure that the above are recognized Intercompany profit For purposes of consolidation, intercompany profit on assets remaining within the group should be eliminated Potential contingencies

38 Functional currency U.S. dollar (USD) vs. Mexican peso Indicators: Financing, expense, cash flow and intercompany transactions and arrangements Triggers if the majority of purchases are made in USD primarily from the U.S. and other sister companies as opposed to third parties, then that suggests that the local currency is not the functional currency as Mexico is subject to changes in pricing in those markets In essence, if there is dependency or reliance, then it appears to be operating as an extension of the U.S. Re-measurement rather than translation method Flows through the income statement 37

39 Statutory audit Dictamen Fiscal: The statutory tax audit report (commonly known as Dictamen Fiscal ) attests to the company s general tax positions The Dictamen Fiscal is filed with Mexico s Federal Taxing Authority, known as Servicio de Administracion Tributatria (SAT) Prior to 2014, the Dictamen Fiscal was mandatory for certain large taxpayers Starting in 2014, it is optional for taxpayers with MX$100 million in gross receipts or MX$79 million of net assets in the prior year s tax return Audit of Social Security contributions: Mandatory for employers with 300 employees or more during the prior calendar year Auditor to assess compliance with employer s Social Security taxes Report with findings is filed with IMSS STATUTORY AUDIT REQUIRED?: No; Recommended FILING DEADLINE June 30th YEAR-END: Dec. 31 year-end no exceptions 38

40 Statutory audit (cont.) Why would I elect to file the Dictamen Fiscal? Benefits: Reduces the risk of direct audits conducted by SAT Expedites, in many instances, the process of obtaining tax refunds from the SAT Expedites the process of obtaining and renewing special export incentives (IMMEX Program) Increases the probability of obtaining from the SAT favorable resolutions on letter ruling requests on items such as advance pricing agreements, tax-free corporate reorganizations and reductions of estimated tax payments, among others 39

41 CONCLUSION 40

42 Contact information Alejandro Luna Partner, Santamarina y Steta aluna@s-s.com.mx Edgar Lopezlena Senior Manager edgar.lopezlena@rsmus.com Daniel Carrera International Manager daniel.carrera@rsmus.com Steven Menaker Partner steve.menaker@rsmus.com 41

43 Related resources To learn more about international tax planning, please visit our resource center at: 42

44 Upcoming tax events and webcasts RSM webcast Country-by-country reporting: Is your organization prepared? (hosted by Bloomberg BNA) July 20, :30-2:30 p.m. ET / 12:30-1:30 p.m. CT 43

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