1. Mexico’s Tax reform impact for the future
Lourdes M. Quinn

2. Main impact for International Companies
VAT Sales from a US entity to a Mexican resident
VAT from a National supplier to a Mexican Manufacturer
VAT payments in border cities.
VAT in temporary importation unless a credit is obtained.
VAT - IVA
Limitation to sales in Mexico
Limitations in deductions for payroll.
Incentives for Income Tax concluded
Increase administrative and internal control
INCOME TAX - ISR
ERP-MRP/ANNEX 24
Increase administrative and internal control

3. Value added Tax
Unexpected changes

4. Top Ten VAT RATES IN THE WORLD

5. Why VAT changed for IMMEX?
OCDE VAT/GST GUIDELINES:
Destination. Until 2010 the main rule was to tax the place where the last consumer was located.
Neutrality.
Definition of the place of taxation in the case of cross border trade in services and intangibles between B2B supplies.
There are pending guidelines in the case of B2C supplies for cross border

6. Impact and effects
Purchases in Mexico are recommended to be conducted by using “Virtual Pedimentos” (customs declaration without presenting merchandise for customs clearance) When they are related to products that are used for the production process.
Definitive importation will have an impact of 5% more going from 11% to 16% for consumables, spare parts, and other tools that the company is importing under definitive basis. This will have an effect in the importation of tools and other consumables under definitive basis.
Time to go back to temporary importations for tools and spare parts?
VAT
Value Added Tax Rate to 16%
Leveling of VAT tax rate in border cities from 11% to 16%.
Rates of 0% in certain products will remain the same.

7. VAT
IMMEX national companies (Ex Pitex) who were purchasing products from national suppliers will have to pay the VAT and make a credit to recover the VAT.
This change affects Mexican Manufacturers who are exporting more than a 10% of their product.
Also and as in the past, this makes a Mexican Manufacturer to find suppliers abroad since the VAT effect reduces the VAT burden.
Mexican Manufacturer’s purchases to Mexican Suppliers - VAT zero effect no longer applicable

8. VAT FOR MEXICAN MANUFACTURERS (MM) WITH IMMEX
CLIENT ABROAD
EXPORT VAT 0%
VAT 16%
SUPPLIERS
MERCHANDISE MOVING
IMMEX MM RT
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS

9. VAT TO RECOVER OR CREDIT
VAT FOR MEXICAN MANUFACTURERS (MM) WITH IMMEX BEFORE AND AFTER
VAT TO RECOVER OR CREDIT

10. VAT
The sale was exempt before, the reform obligates to follow the rule of location of the goods when they are sold (consumer location).
The incentive form the government is to pay and withhold the VAT with the following conditions:
A Virtual Pedimento has to be filed
It has to be a sale within the supply chain for exportation
A CFDI (Digital Fiscal Certificate) complementary should be issued
VAT in sales from a Foreign resident to an IMMEX now is subject to VAT, as an incentive the tax can be withheld.

11. SALE 0% SALE 16% EXPORT OF GOODS WITHHOLD VAT
CLIENT
CLIENT-SUPPLIER
ABROAD
MEXICAN SUPPLIER V1
IMMEX MM V1
EXPORT OF GOODS
WITHHOLD VAT
MERCHANDISE MOVING
SALE OF RAW MATERIAL
VAT TEMPORARY IMPO 16%
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS

12. SALE 16% EXPORT RETURN OF GOODS WITHHOLD VAT
CLIENT ABROAD
PARENT COMPANY
PARENT
COMPANY
EXPORT
IMMEX MEXICO V1
IMMEX MM V1
IMMEX MEXICO
V1-RT
RETURN OF GOODS
WITHHOLD VAT
MERCHANDISE MOVING
SALE OF RAW MATERIAL
VAT TEMPORARY IMPO 16%
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS

13. VAT SALES OF FOREIGN RESIDENT TO MEXICAN MANUFACTURERS (MM) BEFORE AND AFTER

14. VAT
The sale remains exempt as before, this put in disadvantage the MM operations. Companies are considering
Sales within corporations abroad
Virtual Pedimento only in sales between foreign residents.
Sales from a Foreign resident made the merchandise to be exported to a FTZ
Exporting inbond Juarez re-importing it by Laredo (Article 59 CFF may affect those transactions)
VAT in sales between foreign residents with transfers by IMMEX in Mexico did not changed.

15. NO VAT RETURN OF GOODS VAT TEMPORARY IMPO 2015 VAT EXEMPT V1 V1-RT
PARENT
COMPANY
PARENT COMPANY
EXPORT 0%
VAT EXEMPT
IMMEX MEXICO V1
IMMEX MEXICO
V1-RT
RETURN OF GOODS
MERCHANDISE MOVING
SALE OF RAW MATERIAL
VAT TEMPORARY IMPO 2015
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS

16. VAT
The sale remains exempt as before, is also a disadvantage for MM.
Virtual pedimento has to be filed
There is two Virtual Pedimentos
A virtual exportation for the supplier.
A virtual importation for the IMMEX
No VAT would be paid or withheld in this transaction except for the VAT related to the temporary importation.
VAT for sales from a Mexican Supplier to a Foreign resident remains to 0% using a virtual pedimento.

17. VAT 0% ? IMPORT OF GOODS EXPORT OF SERVICES
MATRIZ O
«PARENT COMPANY»
MEXICAN
SUPPLIER V1
IMPORT OF GOODS
EXPORT OF SERVICES
MERCHANDISE MOVING
IMMEX
V1-RT
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS

18. VAT VAT FOR TEMPORARY IMPORTATIONS WILL BE 16% TAXABLE IN 2015.
Conflicts on interfaces within ERP-MRP systems Annex 24.
2014 option to obtain the certification.
New type of reports to inform the credit applied and the balances pending to return
VAT FOR TEMPORARY IMPORTATIONS WILL BE 16% TAXABLE IN 2015.
Option:
Certification levels A, AA and AAA.
Or Bond.
Basic requirements:
Tax Compliance. Company, partners, shareholders, legal representatives, suppliers.
More than 10 employees
Productive process for exportation
Annex 24

19. If the merchandise is exported a VAT return can be claimed, if the merchandise is sold in Mexico the VAT is credited
VAT 16%
SUPPLIERS
MERCHANDISE MOVING
IMMEX MM
RT &/OR SALE
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS

20. EXPORT EXPORT EXPORT 0% VAT TEMPORARY IMPO 16% VAT TEMPORARY IMPO 16%
PARENT COMPANY
PARENT
COMPANY
EXPORT
EXPORT
IMMEX MEXICO V1
IMMEX MM V1
IMMEX MEXICO
V1-RT
EXPORT 0%
MERCHANDISE MOVING
SALE OF RAW MATERIAL
VAT TEMPORARY IMPO 16%
VAT TEMPORARY IMPO 16%
VAT TEMPORARY IMPO 16%
SALE OF FINISH PRODUCT
SERVICE SALE
VIRTUAL PEDIMENTOS

21. VAT 0% EXPORT IMPORT OF GOODS EXPORT OF SERVICES
MATRIZ O
«PARENT COMPANY»
MEXICAN
SUPPLIER V1
IMPORT OF GOODS
EXPORT OF SERVICES
MERCHANDISE MOVING
IMMEX V1
SALE OF RAW MATERIAL
SALE OF FINISH PRODUCT
VAT TEMPORARY IMPO 16%
SERVICE SALE
VIRTUAL PEDIMENTOS

22. Scenario 1: Examples IMPORTATION for consumption
The VAT base include all customs expenses.
Scenario 1: Examples IMPORTATION for consumption
NAFTA products don’t pay processing fee.
Note that the VAT can be credit against the VAT transferred from the clients in a sale in Mexico. Duty and Processing fee (DTA) will be deductible.

23. Scenario 2: Example Bonded warehouse (Tax Deposit) TEMPORARY IMPORTATION
Tax Deposit for general bonded warehouse was not affected by the VAT reform
Entering into the bonded warehouse for general importation will not pay VAT on the temporary importation but the merchandise is subject to the “Carta Cupo”
If the company imports the merchandise under quota they will not pay the VAT for temporary importation.

24. Certified IMMEX wont pay VAT
IMMEX do not pay VAT in 2014
Scenario 3: Example Importation by an IMMEX company – TEMPORARY IMPORTATION
IMMEX pay VAT in 2015
Certified IMMEX wont pay VAT
IMMEX pay a reduced DTA
Note that the VAT is exempted for 2014 and has to be paid in 2015, unless the company obtains a VAT certification (Trusted Taxpayer Certification)

25. Less incentives, increase of regulations
INCOME TAX
Less incentives, increase of regulations

26. VAT Income tax – VAT & Customs relations IGI Ad valorem INCOME TAX
RELATED TO DEDUCTIONS
CUSTOMS VALUATION X
TARIFF RATE
IGI
VAT
IMPORTS
Ad valorem
Tariff classification
Origin Qualification

27. SALE, RENT, SERVICES USUALLY 0%
Income tax – VAT & Customs relations
EXPORTS
INCOME TAX
RELATION WITH INCOME
COMMERCIAL VALUE X
TARIFF RATE
EXPORT DUTY
VAT
SALE, RENT, SERVICES USUALLY 0%
USUALLY 0% FOR EXPORTS FROM MEXICO

28. DIFFERENCE ON TAXABLE BASE
Fear to the Permanent Establishment.
NO TAXATION
LIMITED TAXATION
TAX EVASION/TAX FRAUD
DOUBLE TAXATION
GOVS SEEK FOR TAXATION
DIFFERENCE ON TAXABLE BASE

29. INCOME TAX – Permanent establishment
Foreign investment
Export 100%
Raw Material, Machinery and equipment owned by US resident
Transformation process
Unifies Article 33 of the DIMMEX CONTRACT
Maquila Contract
Transformation process also includes packaging, classifying other services
No sales of the finish products
Income from sale of scrap or other sources related to the IMMEX process is accepted but limited to a 10%
Grandparent clause for ownership
30% of machinery is accepted
DIEMSE

30. “New definition” of Maquila Operation
181 LISR .- A new definition for the IMMEX operation definition. :
Requirements for Raw Material
Art. 181 LISR
ART.33 DIMMEX
Raw material provided by the RA for transformation shall be imported temporarily and shall be return by direct or indirect exportation, except of waste and scrap. Raw Material can be owned by a third party client of the RA.
SIMILAR
Transformation do not include now developing of products and increasing of quality
A 100% of total income should come from IMMEX services
It was only 10% or 500K
If a national content of raw material is incorporated it should be exported

31. “New definition” of Maquila Operation Machinery & Equipment
Art. 181 LISR
ART.33 DIMMEX
M&E should be property of the foreign resident, it cannot be previously owed by the IMMEX or any other related party.
SIMILAR
Similar
Possibility to use M&E from a related party of the Foreign Resident abroad
Not included
Possibility to use M&E of the IMMEX or lease from a related party.
Through IMMEX INCENTIVES
At least a 30% of the M&E should be property of a Foreign Resident. Not applicable to IMMEX incorporated and registered before 2009.

32. Maquila options for Income Tax payment
182 LISR (Anterior 216-bis).- Reduction to two the former methods for IMMEX.
DIEMSE obligation- June of the next Tax Year.
Safe Harbor – It is considered the total profit even if it is major than the IMMEX operations.
Transfer Price Method
182 LISR
216-Bis
Mark-up + 1% M&E de RE
Not applicable
Applicable
Safe Harbor
ROA
Not Applicable
APA´s
Optional

33. Limited deduction
Payments made by taxpayers to related parties residing in Mexico or foreign residents when such payments are taxable to an income tax rate inferior than 75% of the one caused in Mexico. It will not be deductible the payments made by a Mexican Taxpayer to a related party in Mexico or in a foreign territory if such company is also making such deduction.
Mexico Received recommendations published in July 2013, related to the BEPS Base erosion and profit shifting)

34. Other modifications: Impact on additional taxes: Tax on employees
Limitation in deductions
Social security regulations reform
Notifications by electronic means
Responsibility of Legal representatives, professionals and managers on tax fraud and tax penalties.

35. The puzzler of international companies
ERP MRP Annex 24
The puzzler of international companies

36. ERP-MRP/ Annex 24
Annex 24:
ACCURATE BOM’S
CONSTANT UPDATES AND MODIFICATIONS
INCLUDING MATERIALS THAT ARE USUALLY OUT OF THE BOM’S
CORRECT CUSTOMS VALUATION
CONSIDEING ADDED VALUE
UNIT MEASURES
The control of inventories and its connection to Income Tax and Value Added Tax

37. ERP-MRP/ Annex 24 Annex 24: Why is important now?
Review of Regional Content Value for the qualification of Origin
Review of the value of transactions, assets and movements on international transactions
Source for government review on possible tax evasion in international operations
Statistics and decision making
Why is important now?
Why was important before

38. Supporting our clients on Tax Impact
Recommended Actions
Supporting our clients on Tax Impact

39. BE PROACTIVE NOT REACTIVE!
Obtain NEEC
Establishment of internal procedures
Contracts with related parties
Internal regulations and company’s policies
Tax plan for operations in Mexico
Seer for Amparo and tax defense on the following matters
Limitation of deductions
Limitation on VAT credit
Uploading of accounting records
Reviewing procedures and backup of customs valuation
Contracts and suppliers tax compliance
Annex 24 update and controls for VAT impact

40. Gracias!! Lourdes Moreno mlmoreno@bakettillymexico.com
Legal & Foreign Trade Partner
Gracias!!