Amendments to the Netherlands–Mexico Double Taxation Convention

Excerpt from Practical Mexican Tax Strategies by Luis C. Carbajo, Florian Ruijten and Jaime González-Béndiksen (Baker & McKenzie)

The Netherlands and Mexico signed a new protocol to amend the existing double taxation convention. The Protocol will enter into force 30 days after the Netherlands and Mexico have completed their ratification procedures. It is expected that the amendments to the Convention will come into effect on January 1, 2010. The new protocol contains several new features that can be expected to have significant impact for investments, especially those related to capital gains and withholding tax. This is the first of Mexico’s treaties expressly including IETU among the taxes covered.

Read more on significant features of the Protocol (free)

Recent Developments in Mexican Rulings and Administrative Decisions

Exerpt from September/October 2008 Issue of Practical Mexican Tax Strategies by Terri Grosselin and Santiago Chacon (Ernst & Young)

Recent actions by the Mexican Ministry of Economy and the tax administration indicate a change in policy with respect to companies operating under the popular Maquiladora regime. Although the tax benefits for companies operating in the regime are being carried forward, it appears compliance with the terms of the program will be more strictly monitored.

In 2006, Mexico’s Maquiladora program was combined with other export regimes as part of the Decree for the Promotion of the Manufacturing, Maquiladora and Export Services Industries (“IMMEX Decree”). The Ministry of Economy is the Mexican agency in charge of granting and monitoring permits to IMMEX companies. So far during 2008, this agency, in close cooperation with the Mexican tax authorities, published a list of a total of 1,342 companies with an IMMEX program that were not compliant with one or more of the requirements to operate under the IMMEX regime for 2006 and 2007. The implication for entities included in this publication, is the possible suspension of certain rights granted under the program with the risk that the IMMEX permit will be cancelled altogether, unless the companies rectify identified deficiencies in a short time frame.

Read More on the impact of non-compliance with IMMEX regulations

Mexico Tax Audits

Excerpt from August 2008 Issue of Practical Mexican Tax Strategies by Jaime González-Béndiksen (Baker & McKenzie)

The Mexican tax administration continues to increase its audit activity in practically all sectors of taxpayers, with special emphasis being paid lately to the pharmaceutical and oil sectors. This article excerpt will briefly discuss some of the transfer pricing issues being raised in recent audits.

Transfer Pricing
Secret comparables. It appears that the tax administration is testing the waters with respect to the use of the so-called secret comparables. These are comparables that the tax administration gathers from its own internal records, such as customs records. The administration gathers information on imports of what it considers to be products similar to those of the taxpayer and, on the basis of such information, rejects the prices paid by the Mexican taxpayer to its related parties abroad. The taxpayer is allowed to review the information gathered by the tax administration and to make notes. It does not, however, have any access to the entire customs files of the administration such that it could confirm whether or not the information gathered by the administration is correct or such that it could locate other information to disprove the administration’s findings. In our view, use of the secret comparables violates Constitutional principles and, as such, should be overturned by our courts when this matter comes to their attention.

Business Restructuring. The tax administration continues to audit business or supply-chain restructurings. It is not that the restructuring, as such, are prohibited. The tax administration’s arguments are basically that the restructuring and, consequently the transfer pricing study to support it, lacks substance. The administration tries to disprov the functions and risks that have arguably being transferred from the Mexican entity to one or more foreign companies within the same group. Regarding functions, the administration generally argues that in fact no functions were transferred abroad. Typically, where the taxpayer argues that purchasing and sales functions are now outside of Mexico, the tax administration looks into whether the foreign entity now charged with the functions has, in fact, employees to carry on these functions and whether or not the Mexican personnel formerly charged with these functions has left the Mexican company or continues to work there. Where managerial functions have reportedly been moved outside of Mexico, the tax administration also looks into whether the employees of the Mexican company formerly charged with the managerial functions in question, have or have not been relocated. On the risks side, the administration looks into whether the Mexican company’s history shows any such risks in fact occurring in the past, such as inventory risks, product liability, bad debts, etc. Its motto is that where there is nothing to lose no risk is being assumed.

These audits, however, typically forget to address the fact that whatever flaws the functions or risks may have, assets have in fact moved. Intangibles are now owned by a foreign member of the group. The production is also owned by a foreign principal who either sells it to a commissionaire in Mexico or sells it to the Mexican company for distribution. No doubt the mere fact that the Mexican taxpayer now owns virtually no assets, calls for a lower return. As mentioned earlier, this is often ignored by the auditors.

More on Business Restructuring

Mexico's Dictamen Fiscal Is Similar to New Fin 48 in the US

Excerpt from Practical Mexican Tax Strategies by Steve Axler & Dinorah Gonzalez (Halliburton)

One of the concerns resulting from the introduction of FIN 48 for many in-house tax practitioners, especially for US based multinational companies, is that the US Internal Revenue Service would now essentially have a road map to various tax positions taken by the taxpayer. However, the disclosure of tax positions to the tax authorities is not a new or unusual event in Mexico. In fact, for large taxpayers in Mexico this is an annual occurrence known in Spanish as the Dictamen Fiscal.

Often simply referred to just as “the Dictamen”, this is a tax audit of a Mexican legal entity or person that carries out business activities or any foreign residents with a permanent establishment in Mexico. The Dictamen Fiscal can only be performed by a registered and certified Mexican public accountant. Upon completion of the Dictamen, the accountant will issue a report which will be filed with the Mexican tax authorities (Servicio Administración Tributaria or “SAT”) stating whether, according to the applicable tax regulations and audit standards, the taxpayer has complied with its obligations. The public accountant is required to sign the Dictamen under penalty of perjury.

It cannot be emphasized enough the influence that a Mexican statutory auditor has regarding the tax positions taken by a taxpayer in Mexico.

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IRS Won't Challenge Credits against US Income Tax for Payments of Mexico's New Flat Tax

by Scott Studebaker (WorldTrade Executive, Inc.)


Mexico’s new flat tax, the IETU, will go into effect on January 1, 2008. The new tax has caused anxiety among U.S. investors over the tax implications. Investors and tax professionals have worried that the new tax might not qualify as an income tax under Article 24 of the U.S.-Mexico tax treaty. This, in turn, would mean that U.S. investors would not be able to receive a credit against their U.S. income taxes for the IETU paid in Mexico—a classic case of double taxation.

But the IRS has stepped in with a welcome, if provisional, clarification. On December 10, the IRS issued Notice 2008-3, in which it said that it, too, had not determined whether the IETU qualified as an income tax under Article 24(1) of the Treaty, and that the agency was going to study the new tax in order to make a determination.


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Mexico Issues Decree to Diminish Negative Effects of Flat Tax on Certain Industries, Including Maquiladoras

Mexico's Congress recently approved a tax reform package for fiscal year 2008 that includes the creation of a new single rate business tax, the IETU, which reflects the Mexican government's policy objective of collecting more revenue. In addition, on November 5, 2007 Mexican President Felipe Calderon issued a Tax Subsidy Decree (Tax Subsidy Decree) in order to diminish the negative effects of the IETU on certain industries, including the maquiladora export industry.



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Mexican Flat Tax Creditability Continued

If the conclusion is that the United States, for the purposes of its federal income tax, determines that the IETU is not an income tax creditable to the United States parent company, then IETU tax paid in Mexico will not be creditable in the United States, thus causing double taxation at the international level. Mexico's Secretary of Finance, Agustin Carstens, stated at the beginning of October that the Mexican government had reached an agreement with various other countries with respect to whether or not the IETU will be creditable, including: the United Kingdom, Italy, India, South Africa and the Bahamas.

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Is the New Mexican Flat Rate Tax Creditable in the US and Canada?

On Monday, October 1st, 2007, an array of amendments to the several Mexican tax laws, the abrogation of the Asset Tax Law and the enactment of a new tax (Impuesto Empresarial de Tasa Única - IETU) were published in the Mexican Official Gazette.

One of the most significant aspects of the new legislation was the introduction of a new tax that will work as a truly minimum corporate tax. This tax will be compared with the annual income tax liability and will be paid only if the income tax liability is lower.

Upon the entrance into effect of this new tax, the Asset Tax will be eliminated. This new tax is truly a minimum corporate tax because it will admit very limited credits against the income tax. The single rate minimum tax will admit loss carry forward alternatives. This minimum tax will affect 40% of the companies that as of this year did not pay income tax. The taxable basis of this new tax is broader than the one of the income tax because of the existence of less deductible items.

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Determining Uncertain Tax Positions under FIN 48 for Operations in Mexico and China

Companies are evaluating the impact of FIN 48, a US Financial Accounting Standards Board Interpretation, for their reporting of operations in emerging international markets such as Mexico and China.


FIN 48 prescribes a comprehensive model for the manner in which a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return.



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