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.

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“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.”