Doing Business in Mexico

Transcription

1 2013 CliftonLarsonAllen LLP 2013 CliftonLarsonAllen LLP Doing Business in Mexico September 10, 2013 CLAconnect.com

2 2013 CliftonLarsonAllen LLP Circular 230 To ensure compliance imposed by IRS Circular 230, any U. S. federal tax advice contained in this presentation is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by CliftonLarsonAllen LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her CliftonLarsonAllen LLP or other tax professional prior to taking any action based upon this information. CliftonLarsonAllen LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

3 2013 CliftonLarsonAllen LLP Housekeeping If you are experiencing technical difficulties, please dial: The PowerPoint presentation, as well as the webinar recording, will be sent to you within the next 10 business days. Submit questions via GoToWebinar questions function. Please complete our online survey.

4 2013 CliftonLarsonAllen LLP CPE Requirements Answer the polling questions. If you are participating in a group, complete the CPE sign-in sheet and return within two business days. Contact Kristen.Nelson@CLAconnect Allow four weeks for receipt of your certificate; it will be sent to you via .

5 2013 CliftonLarsonAllen LLP Learning Objectives At the end of this session, you will be able to: Understand the various key developments in the Mexican economy Obtain practical guidance for doing business in Mexico Understand the Mexican tax structure

6 2013 CliftonLarsonAllen LLP About CliftonLarsonAllen A national CPA and consulting firm Service areas include audit, tax, consulting, and outsourcing 3,600+ professionals More than 90 offices nationwide Independent member of Nexia International

7 2013 CliftonLarsonAllen LLP Speakers Jeff Kvilhaug CliftonLarsonAllen LLP Phoenix, AZ Alfredo Solloa Solloa CP Mexico City, Mexico

8 Doing Business in Mexico September 2013

9 WEBINAR OUTLINE Mexico: A Profile Geographical/Historical Background Solloa-Nexia Why Mexico? Investment Climate Economy, Labor Investment opportunities Mexico vs.??? Issues for clients starting a business in Mexico Type of entity preferred by US subs. Income Tax and Flat Tax Value Added Tax (VAT) Expatriating profits Dividends, Royalties, Interest Transfer Pricing IMMEX VAT and Income Tax benefits 9

10 MEXICO A PROFILE GEOGRAPHY & HISTORY POLITICAL REGIME & LEGAL SYSTEM SOLLOA-NEXIA ECONOMY LABOR-MGT. RELATIONS INVESTMENT CLIMATE AND OPORTUNITIES 10

11 MEXICO Independence from Spain in 1810 Mexico in 1821: Separation of Central America With the Treaty of Guadalupe Hidalgo, Mexico gave up over 50% of its territory to the US - California, Nevada, Utah, New Mexico & Texas and parts of Arizona, Colorado, Wyoming, Kansas & Oklahoma) 11

12 MEXICO Revolution from End of dictatorship & beginning of Military & Democratic regimes Legal system based in Civil Law Democratic Republic Federal System 3 Powers Executive, Legislative & Judicial 32 States (31 + Federal District) 3 levels of Government : Federal, State & Municipal Population of 115+ million Presidential regime 6 yrs. 12

13 SOLLOA- NEXIA COVERAGE GENERAL OVERVIEW SERVICES 13

14 GEOGRAPHY & FOOTPRINT 32 STATES PRESENCE IN 15+ INFLUENCE SOLLOA COVERAGE 14

15 50 Years in Business 300+ Total Staff nationwide 6 Offices throughout the country HQ in Mexico City Ranked in top 15 in the country Member of Nexia (former group) for 20 years PCAOB Registered since

16 Client Base: 850+ clients in varied industry sectors. Publicly Traded or with publicly traded debt. Well known US and EU company subs established in Mexico Mid-size privately held Mexican companies. Government 16

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18 ECONOMY Ranked 12-14th. Economy in the World (GDP) and climbing. #10 for 2018 above Spain, Canada, Italy & South Korea Balanced Budget 0.3% GDP deficit for FY12 & 0% for FY13 Inflation of 3.6% for 2012 and 3.5%-4% for 2013 Stable currency & record Reserves (160+ BUSD) Minimum wage - reference 18

19 ECONOMY NAFTA Member Exports tripled since Mexico is 2nd. US source for imports (Canada is #1) US represents 85% of Mexican exports. EU represents only 4.3% Part of OCED 34 country group. 31 Commercial Treaties in effect. 34 Double Taxation Avoidance Treaties (3 in process) Foreign Account Tax Compliance Act (FATCA) signee. 19

20 ECONOMY Major Industry Sectors: Petroleum & Gas (7th. largest producer) Automotive - Car Assembly & Export (3rd. in World) Tourism (22M+ visitors per year) Agriculture Electronics second supplier to US 20

21 1. Mexico is Polling Question rd source for imports into the US 2. Not a commercial partner with the US 3. Second supplier of electronics to the US 4. Not a member of NAFTA 21

22 Labor-Management Relations Employee Profit Sharing 10% (taxable income) New Labor Law just approved in Dec Limits the use of Outsourcing Intends to limit general outsourcing not by specific area of service (ie. admin., technical, marketing ) Potential Social Security (IMSS) and Employee Profit Sharing (PTU) issues. New forms of contracts allowed. 22

23 Investment Climate Not an over-regulated environment. Open Investment allowances in most sectors. Foreign Investment Law Limits foreign investment in some strategic sectors - to any type of ownership or majority ownership. Most activities allowed for foreign investment Filings with RNIE (Foreign Investment Registry) Major Regulation changes for Telecomunications & TV in

24 Investment Climate cont Anti-monopoly regulations getting stringer. Oportunities: Real estate foreign ownership along border and beach pending Senate approval. Petroleum extraction initiative in Congress. Infrastructure (roads, rails) 24

25 Mexico Wages currently 20% lower than China vs. 200% more costly 2003 Demographic Bonus Growing labor market 20% from 2010 to 2020 (14.2 million) Low transportation costs to major NAFTA markets and quick supply. Structural reforms which promote Competitiveness and Foreign Investment. Accounts for 12.4% of US imports Legal certainty. Mexico vs. China China Wages have become less competitive 2.9% growth in labor market from 2010 to 2020 (27.2 million) Working age population estimated to shrink after 2030 Accounts for 17.5% of US imports. Logistics issues. Corruption problems. 25

26 Mexico vs. China according to IMF 26

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30 THE EMERGING MARKET OF THE AMERICAS Video 30

31 Polling Question 2 1. Worldwide, Mexico is the largest exporter of: 1. Beer, silver and flat screen tvs 2. Silver, Petroleum and cars 3. Electronics and minerals 4. Cement, IT services and beer 31

32 COMMON FORMS FOR STRUCTURING A BUSINESS IN MEXICO PREFERRED TYPES OF ENTITIES PROCESS OUTLINE TIMELINE & COSTS 32

33 BUSINESS STARTUPS Legal Forms, Fiscal Treatment & Other Mexican Entity (subsidiary) S.A. or S. de R.L (Corp. vs. LLC) Branch or Office PE tax consequences Permanent Establishment Acting through a representative or hiring employees Limited sectors for investment - Foreign Investment Law Employee Profit Sharing (PTU) 10% 33

34 PREFERRED TYPES CHARACTERISTICS Limited Liability Corp (LLC) or Partnership *(LLP) (S de RL or *SC in Mexico) *SC (LLP) only allowed in certain cases Partners/shareholders 2 minimum / 50 maximum Restrictions Directors BUSINESS STARTUPS Partnership: 2 minimum, no limit No limit Private corporation (Ltd) and Public corporation (SA in Mexico) 2 minimum / no max. (S de RL or SA) Sole Administrator or a Board of Directors Minimum capital LLC: 3,000 pesos Partnership: no minimum No minimum 34

35 Liability Governance Taxation Official name BUSINESS STARTUPS The legal representative (with power of attorney) and in some cases the Sole Administrator or Board as well as the partners up to the amount of their contribution. LLC: Board of Directors or Sole Administrator Board of Directors or Sole Administrator Partnership: One or more partners Mexican residents on all income, regardless of source Sociedad de Responsabilidad Sociedad Anónima (SA) Limitada (S de RL) with fixed or with fixed or variable variable equity (CV) equity (CV) If publicly held: Sociedad Anónima Sociedad Civil (SC) Bursátil (SAB). 35

36 BUSINESS STARTUPS Process Outline Obtain authorization of company name from the Ministry of Economics Valid for 90 days or forfeit name reservation Prepare draft deed with object, duration, partners, governance body, paid in capital, POA s, company domicile, etcetera. Sign deed of incorporation before Notary Public Notarized and Apostilled POA s in case of foreigners. Register Deed in the Public Register of Commerce Register before Tax Authorities obtain tax ID number Obtain electronic signature for filing tax returns and notices - FIEL 36

37 BUSINESS STARTUPS Process Outline continued Register with the Mexican Social Security Institute (IMSS) only employers Register with the local (State) Tax administration for payroll tax Notice of opening a mercantile establishment before local government Filing with the Foreign Investment Registry (RNIE) 45 days Filing with the National Institute of Statistics, Geography and Information Issue certificates to shareholders or partners Time needed approximately 3 4 weeks 37

38 BUSINESS STARTUPS Timeline & Costs Obtain Company Name Authorization (Ministry of Economics) Prepare draft Incorporation Deed Sign and get copy of Incorporation Deed with Notary Obtain Tax ID number & other tax registrations Parallel Actions Obtain Notarized and Apostilled POA s abroad Notary to proceed with Public Registry and issue letter that in process Foreign Investment Registry and opening bank accounts Time 3-4 Weeks 38

39 MEXICAN TAX HIGHLIGHTS - Companies - Individuals INCOME TAX (ISR) FLAT TAX (IETU) VAT FISCAL CODE DIGITAL INVOICING DOUBLE TAXATION TREATIES EXPATRIATION OF PROFITS MAQUILADORAS 39

40 INCOME TAX (ISR) TAX RATE INFLATIONARY EFFECTS (GAIN/LOSS) DIVIDENDS TRANSFER PRICING FOREIGN RESIDENTS 40

41 INCOME TAX (ISR) General description Taxable entities Resident corporation Corporate income tax Incorporated in Mexico and/or overseas with central management and control located in Mexico Permanent establishment (PE) Branch income tax PE located in Mexico Taxable income Worldwide profits Profits derived by PE in Mexico Calculation of taxable profits Interest payments Related party transactions Tax year, return and payment Accounting profit is adjusted for various tax add-backs and allowances to arrive to profits chargeable to corporation tax Tax deductible Comparisons with inflation rates = taxable gains or deductible losses Thin capitalisation rule is 3:1 If liability exceeds ratio, interests paid in excess = non-deductible On an arm s length basis Substantiate w/ formal annual transfer pricing study Calendar year Monthly advanced payments Annual tax return (3 months after tax year end) 41

42 Taxable income Worldwide profits Profits derived by PE in Mexico Calculation of taxable profits Interest payments Related party transactions Tax year, return and payment Capital gains Losses Tax group Tax rates Tax rate Accounting profit is adjusted for various tax add-backs and allowances to arrive to profits chargeable to corporation tax Tax deductible Comparisons with inflation rates = taxable gains or deductible losses INCOME TAX (ISR) Thin capitalisation rule is 3:1 If liability exceeds ratio, interests paid in excess = non-deductible On an arm s length basis Substantiate w/ formal annual transfer pricing study Calendar year Monthly advanced payments Annual tax return (3 months after tax year end) Taxable at 30%. In some cases, withholding tax on gross proceeds Carry forward 10 years Set off against taxable profits Holding company w/ at least one subsidiary. Can consolidate results of each individual subsidiary and up to 100% of their losses can be offset against the profits of others 30% for 2012 & 2013 ( for 2014 expected to increase ) 30% during % during 2013 and 28% from 2014 and on 42

43 OTHER MEXICAN TAX RULES Mexico applies a so-called monetary correction to account for the impact of inflation on monetary assets and liabilities. As a result of the varying effects of monetary correction, there have been periods where Mexican companies have incurred a higher tax burden as a result of being capitalized by debt instead of equity. Management, technical assistance and service fees paid to related parties should be deductible in most cases, and such fees are not subject to Mexican withholding tax provided the services in question are rendered outside of Mexico. 43

44 OTHER MEXICAN TAX RULES cont Mexico will want documentation that intercompany charges are reasonable. The reasonableness of the transfer price on any purchases of products from or sales to related parties should also be documented. Transfer Pricing Study required yearly and reasonability and method used, must be mentioned by external auditor on filing audit report to Mexican IRS mandatory tax audit if gross income> MUSD in prior FY. 44

45 INCOME TAX ON INDIVIDUALS Residents Non-residents Taxable income Worldwide income On income from Mexican source Types of taxable income Property income (usually rent) From capital investment (interest, sale of goodwill, dividends, royalties, annuities) From business activities/professional activities From personal services or pensions 45

46 INCOME TAX ON INDIVIDUALS Calculation of taxable income Business income minus cost Rent income entitled to an optional 35% blind deduction, or else accountable expenses. Salary income computed by applying progressive 0% to 30% tax. (no deductions) Dividends not taxed if distribution paid tax at corporate level (originate from CUFIN basket) obligation to accrue and credit tax in annual tax return (applies if shareholder is a company) 46

47 INCOME TAX ON INDIVIDUALS Calendar year or any period of time until December Tax year, payment Usually withheld by payer Annual return due before end of April the following year Losses Maximum tax rates Very specific cases (from the sale of assets and business activities) 30% during % for and on???... 47

48 FLAT TAX (IETU) TAX RATE TAXABLE BASE CASH FLOW BASIS MONTHLY PAYMENTS HOW IT WORKS WITH INCOME TAX 48

49 FLAT TAX (IETU) General description Works as alternative minimum Income Tax (ISR) Payable to the extent it exceeds Income Tax Computed on a cash-flow basis Taxable entities and taxable income minus Collected income Expenses actually paid Except: salaries and wages (credit), interest and royalties paid to related parties which are not integrated into the tax base. 49

50 Tax year, tax assessment and tax payment FLAT TAX (IETU) Calendar year Monthly advance payments based on real accumulated cash flow base for the period. Annual return within 3 months after tax year end Losses Carry forward 10 years Set off ONLY against future IETU Tax Rate 17.5% 50

51 INCOME TAX & FLAT TAX CONCEPT A) INCOME TAX A) FLAT TAX Accruable Income 100 Collected Income 80 Allowed Deductions (accrued / paid) Taxable Base Income Tax (ISR) 9.0 Flat Tax (IETU) 5.25 Tax Payable: Income Tax 9.0 Flat Tax 0 51

52 VALUE ADDED TAX (VAT) TAX RATE HOW IT WORKS CASH FLOW BASIS EXPORTS IMMEX PROGRAM 52

53 TAX PAYERS VALUE ADDED TAX (VAT) All entities and individuals Residents or not Performing activities within Mexican territory, as described by Law TAXABLE ACTIVITIES Transfer of goods Rendering of services Property derived income (rent) Import of goods/services Export of goods/services 53

54 VALUE ADDED TAX (VAT) cont. 0% RATE (examples) Food (taxed for 2014?) Primary activities (agriculture, fishing, catering) Export of goods and some services Medicines (taxed for 2014?) EXEMPTIONS (examples) Books Interest from financial institutions Services rendered or goods transferred by not-for-profit organizations 54

55 VALUE ADDED TAX (VAT) cont. Within 40 working Not allowed to foreigners under REFUND days general rules Supplier of goods/services is responsible for charging TAX LIABILITY VAT Standard rate = 16% TAX RATES & BASE Rate along the border = 11% Rate on exports and food = 0% (for 2013) Tax is computed on a cash-flow basis 55

56 VALUE ADDED TAX (VAT) cont. Registration with tax authorities Applies even if no PE not exempt by Tax Treaties. File monthly returns ADMINISTRATIVE OBLIGATIONS Withhold VAT when applicable File monthly and annual informative returns via internet of all transactions with third parties (DIOT format A-29) VAT specifically separated in electronic invoicing or non-deductible for income tax. 56

57 FISCAL CODE DIGITAL INVOICING (CFF) 57

58 Mandatory for: DIGITAL INVOICING (CFF) - Taxpayers with TURNOVER above 4 million mxp (about 325,000 usd) and those already issuing digital invoices 58

59 Characteristics: DIGITAL INVOICING (CFF) Digital tax receipt called a CFDI or Digital Tax Invoice Documents and validates business transactions Must be generated, transmitted and protected by electronic means. Companies must keep track of the invoices issued, by storage or backup of digital vouchers (.XML), subject to review by Tax Authorities. 59

60 DOUBLE TAXATION TREATY TAXES COMPRISED EXPATRIATING PROFITS WITHHOLDING TAX RATES 60

61 TAX TREATY US - MEXICO TAXES COMPRISED: INCOME TAX FLAT TAX creditable while study in process how long?... (VAT NOT INCLUDED) 61

62 TAX TREATY US - MEXICO Dividends 5% 10% Interest 4.9% 15% Royalties 10% Sale of shares Taxable when more than 25%for at least 2 years * Business income not taxable 62

63 Mexican Taxes: Polling Question 3 1. Federal Income Tax in Mexico 35% 2. Flat Tax or IETU, works as a minimum Income Tax. 3. VAT in Mexico is 18% without exception 4. Dividends are always taxed when paid to shareholders. 63

64 MAQUILADORAS QUICK OVERVIEW IMMEX 64

65 Maquiladoras Maquila Industrial process or services for the production, transformation or repair of foreign goods temporarily imported for later export 65

66 IMMEX Incentives program for the: Manufacturing, Maquiladora and Export Services Industry Export Services: production, processing or repair of goods of foreign origin, imported temporarily for subsequent return abroad 66

67 REQUIREMENTS FOR IMMEX PROGRAM 1. Legal and economical relation with foreign entity (maquila contract) 2. Maquiladora incorporated as a corporation subject to Income Tax under Title II provisions. 3. Operations: - Repair or - Transformation into a different product with added value. 4. Goods imported temporarily must return abroad with the finished product. 67

68 REQUIREMENTS FOR IMMEX PROGRAM 5. Raw materials, parts and components under temporary importation, and 30% of machinery and equipment: Property of foreign resident entity that hired the maquila, or Property of foreign resident third party with manufacturing relationship with the above. 68

69 REQUIREMENTS FOR IMMEX PROGRAM 6. Export 500,000 USD or 10% of production. 7. Import only authorized fractions as per Customs Law. 8. Allocate goods for what was authorized. 69

70 REQUIREMENTS FOR IMMEX PROGRAM 9. Meet agreed deadlines. 10. Keep goods in declared domicile. 11. Keep inventory control as provided in the Customs Law 70

71 REQUIREMENTS FOR IMMEX PROGRAM 12. File reports to SE and SHCP if: Change of corporate name, RFC, address Change of sub-maquila s address Suspend activities. 13. Comply with Transfer Pricing provisions SE Secretaria de Economia (Ministry of Economics) SHCP Secretaria de Hacienda (Revenue Service) 71

72 MAQUILA BENEFITS No Permanent Establishment (PE) for foreign residents with legal or economic relationships with maquiladoras, if: It habitually processes goods or merchandise maintained in Mexico by the foreign resident. 72

73 MAQUILA BENEFITS cont Uses assets provided by the foreign resident or any related party. Mexico and the foreign resident's country have entered a Treaty to Avoid Double Taxation and meet requirements. Companies comply with Transfer Pricing provisions. 73

74 MAQUILA BENEFITS cont Temporarily import duty free for: Machinery and equipment (life of program approval) Parts, components and raw material (12 to 60 months) Containers (2 years) 74

75 MAQUILA BENEFITS cont VALUE ADDED TAX (IVA) 0% on maquila services 0% on sales to final consumer or distributors in Mexico = Export 75

76 MAQUILA BENEFITS cont VALUE ADDED TAX (IVA) No VAT on temporary imports No VAT on Mexican purchases Expedited VAT refunds on VAT paid in Mexico - General: 20 working days 5 if Entity is Certified 76

77 MAQUILA BENEFITS cont INCOME TAX (ISR) Partial exemption ISR payable considering greatest of operational cost +6.5%, or revenue of 6.9% on assets minus: ISR payable considering greatest of operative cost + 3% or revenue of 3% on assets 77

78 TAXABLE INCOME TO AVOID P.E. Safe Harbor Higher of: Assets employed in maquila operation x 6.9% Costs/expenses of maquila operations x 6.5% Methodology Study % Sales + (machinery x 1%) = Taxable income 78

79 SAFE HARBOR I. ASSETS EMPLOYED IN MAQUILA OPERATIONS Property of the maquiladora 500,000 Property of foreign resident 150,000 ª TOTAL 650,000 Percentage on assets 6.9% Taxable gain 44,850 II. COSTS AND EXPENSES OF MAQUILA OPERATIONS Costs and expenses incurred by maquiladora 250,000 Costs and expenses incurred by foreign resident 10,000 TOTAL 260,000 Percentage on expenses 6.5% Taxable gain 16,900 III. HIGHER OF I AND II 6.9% on assets 44,850 Income Tax Rate 30% INCOME TAX 13,455 79

80 METHODOLOGY STUDY % Methodology % Machinery (foreign) Total Sales 273, ,000ª x 1% = 1, ,500 Costs and expenses 260, ,000 Mark-Up 5% 5.5% Operating gain 13,000 14,500 Income Tax Rate 30% INCOME TAX 4,350 80

81 MAQUILA BENEFITS cont BUSINESS FLAT RATE TAX (IETU) Tax Credit Taxable Income = ISR 81

82 Polling Question 4 Maquiladoras adhering to IMMEX program: 1. Pay no Income Tax or VAT on sales 2. Pay no Income Tax 3. Constitute a PE in Mexico 4. Pay no VAT on sales 82

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85 2013 CliftonLarsonAllen LLP 2013 CliftonLarsonAllen LLP Thank you Jeff Kvilhaug, Partner CLAconnect.com twitter.com/ CLAconnect facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen 85