2004 Mexican Tax Reforms. (Part II)

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By PricewaterhouseCoopers.
II. Various Tax Legislation Changes
A. INCOME TAX LAW

Entities

In order to determine the profit ratio for estimated tax payments, the taxable income for the year should be considered without modifying the tax income or loss for the concepts of accrual or deduction that have differing effects from year to year.

Small TaxpayersThe states and municipalities that execute coordination agreements for the administration of taxes collected from small taxpayers can estimate the taxable income of these taxpayers and set fixed quotas for the collection of the tax. The states and municipalities that execute such coordination agreements will retain 100% of the taxes collected.

Assignment of rights to the leasing of Real Estate

The assignment of contractual rights related to the leasing of real estate is given the
nature of a financial operation. Consequently, the amount paid for the assignment should be treated as a loan and income will be accrued in accordance with the terms agreed to in the contract for the collection of rent. The remuneration paid or received for the assignment will be considered credit or debt for purposes of the annual adjustment for inflation and the difference between the total amount of the lease payments and the amount paid for the assignment will be treated as interest income or expense, respectively, for the creditor or borrower.

Tax Incentives for the Construction and Acquisition of Real Estate

Similar to a U.S. REIT, trusts formed under with Mexican law will have certain tax and financial benefits. Mexican trusts which are formed to construct or acquire real estate for subsequent sale or lease, as well as to acquire rights for the receipt of income from the leasing of real estate will be subject to the following when at least 70% of the trust corpus is invested in these activities and the 30% remainder is invested in instruments issued by the federal government:
a.
 The trustee will not be obligated to make estimated tax payments on behalf of the trust.
b.
 The beneficiaries will determine their gain from the sale of the trust participation certificate by reducing the income received from the sale by the average tax basis of the trust interest.
c.
 The contribution of real estate to the trust by the grantor will not be treated as a sale so long as, among other requirements, the properties are rented by the grantor, the grantor does not take the tax deduction for depreciation but only deducts up to 12% of the tax value of the real estate.
d.
 Pension and retirement funds of Mexican companies can invest up to 10% of their reserves in trust participation certificates that are issued by the aforementioned real estate trusts. The trust participation certificates can be included by such funds in calculating their minimum investment requirement (i.e., 70%).
e.
 Individual and non-resident entity beneficiaries (except pension funds) should consider the income from the sale of the trust participation certificates as arising from real estate investments. The provision does not clarify whether such persons should accrue the profit obtained by the trust.
f.
 Entities governed by the general tax regime should accrue the profit or deduct the loss obtained by the trust in the proportional amount, as well as the income obtained due to the sale of the trust participation certificates. However, the provision does not give guidance as to how previously accrued income should be treated in order to avoid duplication.

Withholding Tax on Foreign Banks

An extension is made in 2004 for the 4.9% income tax withholding rate applicable to interest paid to foreign banks registered before the Tax Administration Service, so long as the effective beneficiary resides in a country with which Mexico has an income tax treaty in place.

B. VALUE ADDED TAX LAW

Activities Taxed at 0% Rate

The sale of magazines carried out by the editor will be taxed at a 0% rate.

Small Taxpayers

The states and municipalities that execute coordination agreements for the management
of taxes collected from small taxpayers may estimate the taxable income of such taxpayers and set fixed quotas for the collection of VAT. The states and municipalities with such coordination agreements will direct the VAT collected from small taxpayers to a social program that will protect each of the small taxpayers and for which contracts may be celebrated with the Mexican Social Security Institute.

C. LAW FOR THE SPECIAL TAX ON PRODUCTION AND SERVICES (EXCISE TAX)

Adjustment to the Rates

The tax rates applicable to beer and alcoholic beverages are modified, basically, in order to:

1) adjust the first two levels of alcohol gradation from 13.5° G.L. to 14° G.L.;
2) tax the sale and importation of uncrystallized syrups;
3) incorporate into the law the exemption applicable to beverages with an alcohol gradation of more than 20° G.L., equal to one sixth of the tax caused, as provided in the Presidential Decree published in the Official Gazette of the Federation March 5, 2002. The rates are as follows:

a. Beer and alcoholic beverages:

With alcohol gradation of up to 14° G.L. 25%
With alcohol gradation of more than 14° and up to 20° G.L. 30%
With alcohol gradation of more than 20° G.L. 50%
b. Alcohol, semi-processed alcohol and uncrystallized syrups 50%

Alcohol, Processed Alcohol and Fluid (Uncrystallized) Syrups

The sale and importation of the products referred above are taxed in all cases. The acquirer and the importer of the goods can credit the tax paid against the tax caused on the sale of the alcoholic beverages or, if no tax is applicable on the sale, against their income tax obligation.

Soft Drinks

The concept of soft drinks is broadened to include non-alcoholic flavored beverages
manufactured by the dissolution in water, among others, of sweeteners and flavors, either natural, artificial or synthetic. These beverages may or may not also include fruit or vegetable juice, pulp or nectar, concentrate, extract or other additives and they may or may not be carbonated. Juices and fruit and vegetable nectar that meet the specifications provided in the law will continue to fall outside the definition of soft drinks, even when they contain a combination of fruits and vegetables.

Soft drinks sweetened with other than sugar cane continue to be subject to this tax.

Taxpayer Obligations

The taxpayers that sell or import wine should file with the Tax Administration Service, in the months of January and July of each year, the information of those taxpayers that were transferred the tax, in an express and separate manner, as well as the information related to the 50 main clients and suppliers. This obligation was previously a trimester requirement.

Such taxpayers will not be obligated to maintain physical control of the volume manufactured, produced and bottled or to make the respective reports.

The application of seals, in the case of imported alcoholic beverages in bulk, should be done, without exception, prior to the receipt of the products in Mexico.

Goods Not Subject to the Tax

The following goods and services will no longer by subject to the tax:

a. Mineralized water
b. Telecommunication and ancillary services
c. The sale of alcoholic beverages made to the general public by the manufacturer, producer, bottler or importer in open bottles or by the glass, for consumption on the premises where the sale is made.

D. LAW FOR THE TAX ON NEW AUTOMOBILES

A new figure is subject to the tax on New Automobiles denominated "Vehicle Trader". This figure includes individuals and entities whose activity is the importation and sale of
new and used vehicles. Automobile importers registered before the Ministry of Economy are no longer subject to the tax.

This change for 2004 arose due to the economic liberalization of the automotive industry and the North American Free Trade Agreement. These two events give rise to a necessity to tax the importers of cars into Mexico for sale in the same manner as the authorized manufacturers and distributors of vehicles.

Indexation of New Automobile Tax

The indexation of the tax included in the law will be carried out only in January of each year, instead of in January, May and September. The indexation will be based on the Consumer Price Index from November of the next to last year up to November of the previous year.

E. TAX ON OWNERSHIP OR USE OF VEHICLES

Moment Tax Arises

The calculation and filing of the tax should be done at the moment the vehicle is registered, when the temporary permit for circulation in transit is requested or when such
permit is issued, instead of when the vehicle is delivered or the invoice issued. This change will allow more effective management by the state and local authorities and ensure that the tax is actually collected.

In addition to the above, the federal, state or municipal authorities that authorize temporary permits for the circulation of the vehicle in transit without ascertaining that no liabilities exist for the tax will be jointly and severally liable.

Subject to Tax

As in the case of the Tax on New Automobiles, a new definition of person subject to the tax is created, "Vehicle Trader".

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