{Update.} Mexico Tax, Labor, and Legal Update with the United States-Mexico Chamber of Commerce and Miller Canfield.

Transcription

1 {Update.} Mexico Tax, Labor, and Legal Update with the United States-Mexico Chamber of Commerce and Miller Canfield.

2 Welcome Mexico Tax, Labor, and Legal Update Sponsoring firms Plante Moran Miller Canfield in collaboration with Arizpe, Valdes & Marcos Attorneys & Counselors U.S. Mexico Chamber of Commerce

3 Agenda Understanding the SAT Tax Administration Service (SAT) in Mexico Audit by SAT at a Glance Mexican Tax Reform 2014 Background: Reasons for Tax Reform General Tax Related Changes VAT Changes Additional Dividend Tax and Related Ramifications Limitations on Cross Border Payments Deduction of Prorated Expense Allocations Electronic Filing Requirement Statutory Audit (Tax) Report IMMEX Changes Customs Program: IMMEX VAT Exemptions Stricter Interpretation from the 2014 Tax Reform Other Considerations Use of Safe Harbor Calculation or APA

4 Understanding the SAT A higher return on experience.

5 Understanding the SAT Tax Administration Service (SAT) in Mexico A decentralized agency responsible for: Implementing the tax and customs legislation Assessing and collecting federal taxes and customs duties Overseeing taxpayers to comply with tax and customs regulations Tax audits Tax authorities are empowered to: Review or audit in detail any federal return, including foreign trade taxes Review the taxpayers accounting records to determine compliance Tax system in Mexico Proper documentation & leaving evidence is very important Our experience with SAT

6 Understanding the SAT Audit by SAT at a Glance Old audit process vs electronic audits Currently normal audits are still being performed What is the SAT communication portal? Electronic notifications by the SAT expected to start in June 2015 o After three days, notification will be deemed as delivered What is the SAT looking to achieve? SAT can only physically reach out to taxpayers during the normal business hours (7:30 am to 6:00 pm), according to the Mexican Federal Tax Code Statute of limitations SAT generally has five years after filing to audit Ten years if the company fails to comply (did not file tax return in time, etc.)

7 Mexican Tax Reform 2014 A higher return on experience.

8 Mexican Tax Reform 2014 Background: Reasons for Tax Reform General effects: Increase in the tax base and rates for businesses and individuals Reduction in administrative burdens for businesses Drivers: Less dependence on oil industry for tax revenue Harder to evade taxes Some companies were abusing the IMMEX program system Fraudulent VAT refunds were being filed Un-qualified companies accessing the benefits of the IMMEX program

9 Mexican Tax Reform 2014 General Tax Related Changes Income tax rate for corporations remains at 30% Rate reductions for 2014 (29%) and 2015 (28%) have been eliminated Flat tax (IETU) has been eliminated Cash deposits tax (IDE) has been eliminated VAT tax in border regions increased from 11% to a general rate of 16% Mandatory use of straight-line depreciation method Generally, deductions for payments of exempt fringe benefits (i.e., contributions to pension plans, and medical benefits) is 53%; however, the deduction rate goes down to 47% if the benefits are lower than that of the prior year

10 Mexican Tax Reform 2014 Additional Dividend Tax and Related Ramifications Dividends paid to individuals / residents abroad are subject to 10% withholding tax The withholding tax is only calculated on earnings (CUFIN) from 2014 onwards Withholding tax could be interpreted to be applicable to deemed dividends resulting from adjustments made to related party transactions Dividends may be subject to a lower rate depending on whether the country of recipient has a treaty in place with Mexico E.g. US Mexico treaty provides for a reduction of 0% to 5% for corporate owners No reduction for individual owners Limitation of treaty benefits Treatment of LLCs / partnerships US residency certification

11 Mexican Tax Reform 2014 Limitations on Cross Border Payments Income tax deductions for payments of interest, royalties or technical assistance to related foreign entities will be disallowed if the payee: Is a transparent entity not subject to tax in their jurisdiction Disregards the payment Does not include the payment in their taxable income Further guidance is expected on how these will be applied

12 Mexican Tax Reform 2014 Deduction of Prorated Expense Allocations Previously a non-deductible expense The expense is now deductible if: It is related to the primary business purpose of the taxpayer The foreign resident that incurs the prorated expense is a resident of a country that has an information agreement with Mexico Taxpayer can demonstrate that the services related to each prorated expense was actually rendered Taxpayer maintains documentation to support all transactions that were prorated abroad

13 Mexican Tax Reform 2014 Electronic Filing Requirement Companies now have to electronically submit trial balances on a monthly basis Starting January 1, 2015 Corporations and individuals with gross income during 2013 greater than MXN $4 million (First filing was due on April 30, 2015) Starting January 1, 2016 Corporations and individuals with gross income during 2013 less than MXN $4 million Chart of accounts and format Must be grouped according to the standard sub-accounts established by the law Must be reported in the xml format Journal entries and additional information may be requested by the SAT Extended deadlines Taxpayers, SAT, ERP software are not ready for this requirement Filing deadline has been pushed back by the tax authorities

14 Mexican Tax Reform 2014 Statutory Audit (Tax) Report The statutory audit requirement (dictamen fiscal) has been eliminated This practice is optional for taxpayers with: Income of more than MXP 100 million Assets of MXP 79 million, or At least 300 employees Taxpayers without the above attributes do not have the option to file Must be filed by July 15 th of the following year

15 IMMEX Changes A higher return on experience.

16 IMMEX Changes Customs Program: IMMEX Significance Program which allows for the temporary importation of goods for subsequent export Created in the mid-1960s to help develop the infrastructure along Mexico s northern border, create employment and facilitate the transfer of technology into the country Ability to avoid paying the typical 16% VAT (no cash flow effect) Application process and maintenance Simple application process Accurate monitoring, tracking and reporting of temporarily imported items Invoicing can be direct or via related party charges Sensitive products subject to special rules

17 IMMEX Changes Customs Program: IMMEX (Continued) VAT Reform 2014 VAT exemption for sales made by a foreign resident to a Mexican company with an IMMEX program was eliminated. As a consequence, foreign resident sales are taxed with a 16% withholding VAT Invoice from the foreign entity should be structured in a way to show: VAT being charged by the foreign entity The same amount being subtracted as a withholding by the maquiladora A Tax Benefits Decree granted the benefit of an immediate VAT credit equal to the withholding amount. The maquiladora can take immediate credit on the withholding VAT, resulting in a zero cash flow effect

18 IMMEX Changes VAT Exemptions Previous 0% VAT rate on products imported by IMMEX companies are generally eliminated Instead, IMMEX entities may receive a certification that allows for immediate credit on the VAT (thus no cash-flow effect) related to imported products IMMEX entities may opt to file a bond or letter of credit to guarantee the payment of the import VAT The certification process requires that the IMMEX company be in compliance with all aspects of the IMMEX law in place Levels of certification: A, AA, AAA Takes 40 business days to get processed by SAT Process to get certified is still vague for companies starting business in Mexico

19 IMMEX Changes VAT Exemptions (Continued) While not an all-inclusive list, general requirements include: Maintain adequate inventory controls to track imported goods and raw materials Positive opinion on compliance with all tax obligations The Company may not be listed on the Mexican tax authorities website as a noncompliant taxpayer. Demonstrate that all personnel are registered at the Mexican Social Security Institute (IMSS) Provide documentation proving investment in Mexico A list of customers and suppliers located abroad with which foreign trade operations were conducted

20 IMMEX Changes VAT Exemptions (Continued) Benefits: A monthly tax credit equal to the value-added tax payable on operations under the temporary importation regime The timing of the refund process is reduced to 20, 15 or 10 days according to the level of certification obtained Unclear whether the tax authorities will follow these timing guidelines

21 IMMEX Changes Stricter Interpretation from the 2014 Reform Generally, goods subject to transformation need to be imported temporarily and exported out of Mexico once the maquiladora services are rendered The maquiladora must receive all of its revenue from its operations as a maquiladora The foreign related entity must own all materials used by the maquiladora The foreign company receiving the maquiladora services must own at least 30% of the machinery and equipment used in the maquiladora s operations But Virtual exports & imports are allowed Selling scrap is allowed Providing minor services to related entities is allowed

22 IMMEX Changes Other Considerations What happens if companies don t meet IMMEX requirements? Failing to meet IMMEX requirements could lead to a taxable presence deemed for the parent company Could lead to loss of the benefits related to IMMEX program Decisions are being made without fully understanding facts / alternatives Proper analysis and study recommended

23 IMMEX Changes Use of Safe Harbor Calculation or APA Maquiladoras can no longer use transfer-pricing studies to determine their taxable income in Mexico Taxable income must be calculated using the Safe Harbor Method Or Cost-plus markup on expenses (6.5%) or assets (6.9%), whichever is larger Advanced Pricing Agreement with the Mexican government Difficult to obtain, and long approval process. Once approved, generally applies from 3-5 years Could be costly

24 Questions? Scott Sneckenberger Partner Global Services Direct Dial: Julio C. Valdez International Senior Consultant - Mexico Direct Dial: julio.valdez@plantemoran.com Plante Moran Monterrey Office Ave. Roble 300, Suite 607 Colonia Valle del Campestre San Pedro Garza Garcia, Nuevo Leon, Phone:

25 Gracias. Thank you. Plante Moran Global Services

26 Labor and Legal Update Mexico Tax, Labor, and Legal Update with the United States-Mexico Chamber of Commerce and Miller Canfield.

27 INDEX Setting operations in Mexico Types of business organizations Corporate aspects of a Mexican entity IMMEX Program Immigration, Labor and Employment Real Estate in Mexico Commercial Agreements

28 Setting operations in Mexico (Parties Involved) * To minimize complications, it is critical to assemble a compact team of cross border professionals who know each other s duties and work well together.

29 Setting operations in Mexico (Options) M&A Green- Field Shelter Joint Venture Acquisition of an ongoing business Extensive Due Diligence* Antitrust matters: COFECE clearance May need to incorporate (Stock vs. Asset) Environmental Need to Incorporate Real estate: acquisition* or lease Environmental Cons: May need to incorporate Pros: Menu of Services Permanent Establishment (4 years) Invoicing FCPA Price May need to incorporate Strategic Alliance

30 Types of business organizations In Mexico the most common types of business organizations for foreign corporations are the following: Sociedad Anónima, (S.A.) = U.S. Corporations Sociedad Anónima Promotora de Inversión, (S.A.P.I.) = U.S. Corporation Sociedad de Responsabilidad Limitada, (S. de R.L.) = Limited Liability Company Branch office of a Foreign Company

31 Types of business organizations (cont d) There is no minimum capital stock required by Mexican Corporation Law. A local legal representative will be required for tax purposes. Branches of foreign entities may be established in Mexico. The process of incorporation of a Mexican Company takes approximately two weeks.

32 Corporate aspects of a Mexican entity Management: Mexican companies may have a Board of Directors or a sole administrator elected by the shareholders. Powers of Attorney: To act on behalf of a Mexican company, formal powers of attorney must be granted before Public Notary, either to foreign individuals or Mexican nationals.

33 Corporate aspects of a Mexican entity (cont d) PHASE 1 Shareholder s Power of Attorney Name Selection and Authorization Bylaws and Deed of Incorporation Mexican Entity s Powers of Attorney Notarization Tax Registrations RFC Address FIEL/ELECTRONIC TAX PASSCODE Public Registry (RNIE) Mexican Companies with foreign participation and Foreign Companies established in Mexico must register before the National Foreign Investment Registry.

34 Corporate aspects of a Mexican entity (cont d) PHASE 2 (IMMEX) The IMMEX Program is a vehicle through which the temporary import of necessary goods to be used in transforming, elaborating or fixing goods for export is allowed free of the General Import Tax, Value Added Tax (VAT) and any Countervailing Duties that may apply. The IMMEX Program offers the holder the possibility of temporarily importing free of the Import Taxes (VAT is not included), the goods that will be incorporated and used in the manufacturing process of goods for export, or to perform service activities in connection with the goods for export. To obtain an IMMEX Program the applicant must comply with the following: Yearly sales of USD $500,000 or exports of 10% of total sales. Return the goods within the authorized term and hold the goods at the registered domicile. Carry an automated inventory control (software program).

35 Corporate aspects of a Mexican entity (cont d) PHASE 2 (IMMEX) The Ministry of Economy will authorize a program under any of the following modes: Industrial, program related to the manufacture or transformation of goods for export Services, when services are performed to goods for export, or export services are provided as determined by the Ministry of Economy

36 Immigration, Labor and Employment Principal visas to be obtained for those individuals who want to do business in Mexico: FMM: Required for those individuals who intend to be in Mexico for less than 180 days; it can be used for a business visit or vacation trip but not for work (have a payment such as a salary in Mexico). TEMPORARY RESIDENT CARD: Used by individuals who intend to live in Mexico for 4 years (or period of time), working with a company and with the intention to return to their home country. PERMANENT RESIDENT CARD: Granted to individuals who will be relocated to Mexico on a permanent basis. (Note: Nationals of some countries are restricted to enter Mexico and have to follow a different procedure. Some of these countries include: Colombia, India, Saudi Arabia, Costa Rica, Ecuador and Cuba).

37 Immigration, Labor and Employment (cont d) Business Trip Less than 180 Days No visa required for US citizen if : Trip to Mexico exclusively for business purposes (e.g., business meetings, marketing, trade exhibits, staff support) Person does not intend to enter the local job market Business Trip More than 180 Days Visa required for US citizen if: Trip exceeds 180 Days or working for Mexican company Individual is travelling to Mexico for business purposes Maximum period: 1 year (multiple entries) Renewable: 4 x 1 year.

38 Immigration, Labor and Employment (cont d) Key differences with US practice: There is no at-will employment in Mexico PTU (mandatory profit sharing): 10% of company annual profit (certain exceptions) IMSS (social security) of approximately 17% of wages but varies SAR (pension) of approximately 2% of wages INFONAVIT (housing fund) of 5% of wages Vacations paid by seniority: after 1 year of service, 6 days of vacations, thereafter, 2 days every year of service until accruing 12 days vacation, and 2 days every 5 years of service until termination Overtime double time for regular overtime and more on Sundays and official holidays Aguinaldo (Christmas bonus, payable no later than December 20 each year) or a minimum of 2 weeks pay.

39 Immigration, Labor and Employment (cont d) Termination by employer: Dismissal must be for cause If employer terminates worker without cause, worker has right to sue for either mandatory reinstatement or indemnification Indemnification for workers dismissed without cause includes: 3 months salary, plus 20 days actual salary for each complete year of service Seniority premium of 12 days pay for each year of service Accrued salary, bonuses or extra statutory benefits

40 Immigration, Labor and Employment (cont d) OUTSOURCING Outsourcing Agreements must meet the following criteria in order to avoid joint and several or subsidiary responsibility for the beneficiary: (i) Contractor must provide the services with his own employees, (ii) Such employees must be under his authority as to directions and place of work, (iii) Services must be provided on a non-exclusive basis, (iv) Contractor should have solvency to fulfill his labor obligations Both contractor and beneficiary must notify the existence of any outsourcing agreement before the Mexican Institute of Social Security on a quarterly basis.

41 Real Estate in Mexico and Commercial Agreements Real Estate Mexican companies with foreign investment may acquire real estate in Mexican territory without any restriction, except for real estate for residential purposes in the restricted area (borders and coasts). Commercial Agreements Any kind of commercial agreements must be made in written form and depending on its nature, certain additional formalities might be required (e.g. notarization, recording, governmental authorizations, etc.) Parties may freely agree to the terms they deem necessary for the transaction within the scope set forth by any provisions of the applicable law. Items to considered: Outsourcing vs Direct Hiring Compliance with the mandatory technical standards (NOMs) Guaranties Jurisdiction

42 Thank you! José M. Robles-Michelena Mexico Business Manager Miller Canfield 225 W. Washington, Suite 2600 Chicago, Illinois (USA) T F robles@millercanfield.com