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September 14, 2008

Mexican tax policies create mixed blessings for the US profession

Recent changes in Mexico’s tax legislation are bringing both challenges and opportunities to US professional services firms, according to RSM McGladrey’s Mexican tax practice director.

Edgar Lopezlena, a native of Mexico City, told The Accountant that at the beginning of the year, a new alternative minimum tax system was introduced in Mexico.

Lopezlena said there had previously been only one system of corporate income tax, which was on an accrual basis and not dissimilar in principal to the US system for corporate income taxes.

“You came up with your net income per statutory Mexican GAAP, you made some book to tax adjustments and you paid your corporate income tax,” Lopezlena explained. This corporate income tax was available for a credit against the assets tax, a tax based on the net value of total assets, determined per Mexican tax rules with a flat rate of 1.25 percent.

Alternative tax base

This year, an additional alternative minimum tax based on cash flow was introduced. Lopezlena said this made corporate tax more difficult to calculate as Mexican taxpayers now have to simultaneously calculate two different tax bases.

“It doesn’t have the same deductions as the income tax; it has very limited deductions and whatever net income you have for this second tax, you pay a 17 percent rate beginning 2009,” Lopezlena explained.

The tax payer is required to pay whichever is highest out of the income tax and the new alternative minimum tax.

Lopezlena says this new tax means certain sectors, such as real estate, are ending up with a hefty tax liability because of the limitation that exists to deduct the cost of the inventory that remained in the taxpayer’s books as of 12 December 2007.

“That obviously causes confusion and again frustration from our clients and it is difficult to make them understand why that is,” he added.

Lopezlena explained that while the laws have been enacted, elements of the rules remain unclear and await government clarification. This creates difficulty finding tax planning opportunities.

However, another Mexican government initiative is having a more positive effect on the firm by creating a more business-friendly environment for investors.

Lopezlena says incentive programmes to entice foreign trade have existed for some time, but have only been perfected in recent years. Previously, there were two separate and “very complicated” export programmes, Maquiladora and Pitex, which allowed a business to import material to manufacture a product without paying any import duties or value-added tax, so long as the product was for export.

However, in 2006 the government consolidated the two programmes into a new vehicle called Immex, which allows for duty free importation with simplified procedures.

Lopezlena says this more business-friendly environment is one driver behind RSM McGladrey’s Mexican tax practice work doubling in the past three years.

Lopezlena’s main role with the firm is helping US clients that have ventures in Mexico navigate the Mexican tax system.

He said Mexico follows the Roman model of tax law, which concentrates on form over substance, as opposed to the US, which focuses on substance. This results in a Mexican system that remains very paper orientated.

“Everything has to be supported by documents that have very stringent requirements and that is difficult to understand for our US clients – understandably so,” he said. “Sometimes it is hard for them to understand why you need to keep this original invoice and if you lose this original invoice, you are going to get into a lot of trouble.”

While this is added work for the firm, Lopezlena said it can lead to a client perception that the firm is not doing its job properly.

“The government can, at any moment, ask for any information they think they need. So as accountants submitting a refund, you provide every single piece of information you think you will need but sometimes the government will still come back with an official notice saying ‘I need to also see the invoices for these inventories that you purchased’,” he said. The client perceives that as something the firm should have anticipated and did not. Something that we try to convey to our clients when we first file for refunds is that we cannot make any guarantees that we can get it right away. It is not automatic.”

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