During his presidential campaign, Donald Trump mentioned that his strategy to prioritise domestic manufacturing and to attract foreign manufacturers to the US would include the granting of tax incentives and benefits through a proposed tax reform that would focus on extending the Tax Cuts and Jobs Acts (TCJA) benefits that are set to expire at the end of 2025, lowering corporate tax rates, and promoting onshoring.
Although there is no formal proposal yet, President Trump has indicated plans to reduce the US federal corporate tax rate to 15% and this has garnered significant attention from domestic and international investors. While this aims to stimulate economic growth within the US, it also carries substantial implications for foreign investors, particularly those from Mexico.
This article aims to alert Mexican investors to certain effects this reform may have if adopted, especially in light of the preferential tax regime provisions in Mexico.
Overview of the proposed tax reform
A reduction of the federal corporate tax rate to 15% is intended to make the US a more attractive destination for business investments by lowering the tax burden on corporations. The Trump administration expects that this will lead to increased capital inflows, job creation, and overall economic growth in the US.
Implications for Mexican investors
For Mexican investors, a reduction in the US federal corporate tax rate would present both opportunities and challenges.
On the one hand, the lower tax rate could enhance the profitability of investments in US entities, making them more attractive.
On the other hand, this change could trigger the application of the Mexican controlled foreign corporation (CFC) rules (REFIPRE, according to the regime’s Spanish acronym), which may bring considerable tax consequences for Mexican investors. REFIPRE is a Mexican anti-deferral regime for income generated by controlled foreign subsidiaries located in low-tax jurisdictions (territorial or taxed at a corporate income tax rate lower than 22.5%).
Mexican residents investing abroad are generally taxed once profits are effectively distributed; however, REFIPRE limits the deferral of Mexican income tax specifically in effectively controlled investments where the income tax applicable abroad is less than 22.5% and provided such income does not derive from business activities.
REFIPRE generally applies to passive income, which includes interest, dividends, royalties, capital gains, commission fees, profits derived from the disposition of real estate or of goods that are not physically located in the country, and leasing.
As such, this regime may result in Mexican taxpayers needing to anticipate the recognition of income deriving from the underlying investments and therefore pay taxes in Mexico regardless of whether profits are distributed by the US entity.
Furthermore, complex reporting obligations may arise for Mexican investors holding investments in the US. Failing to comply with such obligations may result in higher tax liabilities, including fines and potentially even imprisonment.
Consequences of the US being deemed a preferential tax regime
The reduction of the US federal corporate tax rate to 15% could classify the US as a jurisdiction with a preferential tax regime under Mexican law. As mentioned, this classification would result in several consequences for Mexican investors, including increasing the tax burden (mainly due to the avoidance of the deferral of income tax payment in Mexico) but also complex reporting requirements.
Although the current federal US corporate income tax rate of 21% already qualifies as a CFC regime, state taxes levied in the US are generally considered in the corresponding analysis, which currently results in most investments not falling within the Mexican CFC regime.
Strategic considerations for Mexican investors
Given the potential implications of the proposed US tax reform, Mexican investors should consider several strategic actions:
Review investment portfolios – investors should review their current and planned investments in US entities to assess the potential tax impact. This includes evaluating the profitability of these investments in light of the new tax rate and the potential additional tax burden in Mexico.
Verify if the CFC rules in Mexico are applicable to investments in the US and review compliance with the applicable obligations – the Mexican CFC rules are quite complex and to determine whether revenue generated by foreign investments falls within the scope of REFIPRE, a case-by-case analysis is required. Complex reporting obligations should be observed.
Stay informed – it is essential for investors to closely monitor developments related to the proposed tax reform. This will enable them to make informed decisions and adapt their strategies as needed.
Key takeaways
While a lowering of the US federal corporate tax rate to 15% could make US investments more attractive, it also raises significant tax implications under Mexican law. By understanding these implications and taking proactive steps, Mexican investors can navigate the complexities of REFIPRE and optimise their investment outcomes.
Additionally, this initiative comes amid recent actions related to the imposition of tariffs on Mexican imports, which is also expected to have a significant impact on the Mexican economy.
Mexican taxpayers investing in the US should continue to monitor the progress of this potential reform closely.
