This content is from: Mexico

Mexico: Rules to identify when tax paid abroad qualifies for foreign tax credit


David Cuellar
Mario Alberto Gutierrez
In early 2012, the Mexican tax authorities (SAT) released, through its website, the official letter number 900-2012-7839, which contained the guidelines applicable for the determination of whether a tax paid abroad qualifies as an income tax for purposes of claiming a foreign tax credit (FTC) under the Mexican Income Tax Law (MITL).

Considering that the 2014 tax bill included a comprehensive package of FTC rules for Mexican taxpayers, said rules included that a foreign tax paid would need to comply with the provisions of the administrative rules issued by the SAT (commonly known as Miscellaneous Resolutions). In March 2014, as part of said administrative rules in force for such fiscal year (FY), a new provision was introduced providing the methodology for determining whether a tax paid abroad is considered as income tax for purposes of claiming a credit in Mexico.

The 2014 rule is very similar to the guideline released in 2012. In general terms, both texts cover the requirements and characteristics that the payment of a foreign tax would need to satisfy for Mexican tax purposes. The following are among the most relevant requirements::

  • It derives from a legal provision; the application of which is general and binding;
  • It does not derive from the alienation or the use, enjoyment or exploitation of a good, the provision of a service or obtaining a direct, specific or personal benefit;
  • Its payment is not a consequence for the termination of an obligation derived from a fee, a public work tax, a social security contribution or a levy, as defined by the Mexican Federal Tax Code (MFTC);
  • Its payment is not for the termination of an obligation derived from surcharges, fines or inflationary adjustments of a contribution or a levy, as defined by the MFTC;
  • The tax derives from income obtained by the person who is liable to tax. In case there is a lack of clarity as to whether the subject of the tax consists in income obtained by the person who is liable to tax, the following shall be taken into account:

1) The legal tax regime shall allow deductible items similar to those set forth in the MITL or, as an alternative, shall foresee the necessary means to allow the determination of a net income.

2) The legal tax regime shall acknowledge that income is obtained and deductible items are applied, in similar moments to those established in the MITL.

  • The amount paid abroad and deemed to be an income tax shall be considered as paid in respect of income subject to tax under the MITL to the extent that such income is covered by the classes of income foreseen as taxable income under such law; and
  • In case the amount paid abroad does not fulfill the requirements mentioned above, such amount may be considered as income tax provided that the subject of the tax, and in case of doubt, its tax base, is substantially similar to the one established in the MITL.

Also, both texts (that is, the administrative rule and the guidance) clarify that the following shall not be relevant when confirming the allowance of claiming a FTC:

  • The title or name of the tax in the foreign jurisdiction;
  • The nature of the tax according to the country's position in which such tax is levied;
  • The nature of the tax according to third countries' position; and
  • If the tax is levied by the federal or central government, or any of their political subdivisions.

What the recently added administrative rule does not include, in comparison to the guideline, is the case when the tax paid abroad is covered by a tax treaty entered into by Mexico. Nonetheless, this is because the 2014 tax bill also added, as part of the FTC rules for Mexican taxpayers, that a foreign tax paid expressly stated and included on a tax treaty in force to which Mexico is a contracting state, should be considered as income tax for said purposes.

The guideline also establishes that if a country with which Mexico has entered into a tax treaty establishes a new tax, an analysis according to the previously mentioned considerations may be taken into account by the Mexican Competent Authorities in order to determine if such new tax qualifies as identical or similar to those covered by the relevant tax treaty. The recently published administrative rule is silent on this regard.

David Cuellar (david.cuellar@mx.pwc.com) and Mario Alberto Gutierrez (mario.alberto.gutierrez@mx.pwc.com), Mexico City.
PwC
Tel: +52 55 5263 5816
Fax: +52 55 5263 6010
Website: www.pwc.com

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