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Mexico: Limitation on income tax deductions affecting international transactions

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David Cuellar


Claudia Solano

As part of the tax reform package in force as from January 1 2014, the Mexican tax authorities established new provisions ruling the deductibility of certain disbursements made by Mexican taxpayers. These limitations seem to be the first step taken by the Mexican tax authorities to align their efforts to the recommendations and action plan issued by the OECD as concerns the BEPS initiative.

As an example, the following provisions describe some of the limitations established by the Mexican tax authorities that may have an impact on entities carrying out international operations:

In terms of technical assistance, interest and royalty payments made to a foreign party that controls or is controlled by the Mexican entity, such payments would not be deductible when and to the extent that:

  • The company receiving the payment is considered to be transparent in terms of the Mexican Income Tax Law, except when the shareholders or associates of the foreign recipient are subject to income tax on the income received through such transparent foreign entity and the payment made by the taxpayer is carried out at market value; or

  • The payment is considered to be non-existent for tax purposes in the jurisdiction in which the foreign entity is located; or

  • The foreign recipient does not consider the payment to qualify as a taxable income in accordance with its applicable tax provisions.

For purposes of the above, control shall mean when one party has effective power over another entity or in the management of such other company, to an extent allowing it to decide when income, profits or dividends are distributed, either directly or through a third person.

Another example is a newly included provision established by the Mexican tax authorities focused on limiting the deduction of payments made by the taxpayer, when they are also deductible for a related party resident in Mexico or abroad, unless the related party deducting the payment made by the taxpayer includes it as part of its own taxable income in either the same fiscal year or in the following one.

As can be seen, multinationals with investments in Mexico should consider and model the tax impact that the above provisions, along with other new or amended rules part of the 2014 tax reform in Mexico, can have on their local businesses and on the overall tax burden of the group.

David Cuéllar (david.cuellar@mx.pwc.com) and Claudia Solano (claudia.solano@mx.pwc.com), Mexico City

PwC

Tel: +52 55 5263 5816

Fax: +52 55 5263 6010

Website: www.pwc.com

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