Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights Reserved.

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Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights Reserved

Dealing with an unstable Exchange Rate Mexican Tax and Accounting Issues Guillermo Gómez For WMTA Breakfast September 16, 2009

Background Exchange rate fluctuations are not new in Mexico. 7,500% of Peso devaluation from 1910 up today. From 2001 to 2007 average slide of 2% per year, relatively stable. High volatility since September of 2008: – Above Ps$15 to US$1 in March – Depreciation of peso from 2007 average to date of 23%. Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights Reserved

US Dollar Trend vs Mexican Peso Jan 2008 to Sep 2009 Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights Reserved

Principal Consequences Good news for the industry, as labor costs and other Mexican denominated expenses are worth less dollars. Significant exchange gains or losses on intercompany balances, other dollar denominated accounts and US dollar cash conversions. Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights Reserved

Tax and accounting issues Tax – Exchange gains and losses are computed differently for income tax and flat tax purposes: Income tax – accrual. Flat tax – cash. – VAT cash basis, NO tax effect. Accounting – Exchange G/L recognized on an accrual basis. Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights Reserved

Transfer Pricing For 6.9% (on assets) for Safe Harbor election AR’s involved in the calculation denominated in Dollars are revaluated at the exchange rate corresponding to the 1 st day of every month. For 6.5% (on cost and expenses) Safe Harbor election it is expressly stated that exchange losses are NOT part of the base; NO reference to exchange gains. For transfer pricing study, since Mexican GAAP (MIFRS) must be observed, losses should be deducted from profit stemming from study and gains should be added. Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights Reserved

Conclusions Impact varies depending upon: – The nature of the intercompany balance and other dollar denominated accounts – TP election which requires different treatment of exchange G/L Time of hedging? Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights Reserved