1. ISDA International Swaps and Derivatives Association, Inc. Derivatives and Risk Management in Mexico Tax Treatment of Derivatives José Carlos Silva

2. Background Statutory definition of “derivatives” –Right or obligation to Buy or sell Pay or collect differences –Sale of contractual rights –Includes futures, options, “coberturas”, swaps

3. Tax vs. Non-Tax Derivatives Tax –Underlying asset is publicly traded –Referred to publicly known indicators Non-Tax – all other

4. Debt vs. Equity Debt –Interest rates –Notes –CPI Equity –Other securities –Commodities –Currency –Other indicators Hybrid = debt

5. Debt vs. Equity Debt –CPI Warrants under CNBV 10-157 rules –Interest rate futures – 2019/95 BdeM –CPI futures 10-231 & 2019/95 BdeM Equity –Coberturas, currency futures 2019/95 –Warrants –Forwards –MexDer transactions OTC – underlying asset rules

6. Residents Cash settled –Gains are ordinary income –Losses may be deducted Physically settled –Capital gains rules All amounts updated for inflation

7. Residents Tax effects Equity –At maturity or when cash differences are paid –Exception: Currency derivatives – option to accrue December 31 Debt –Accrual basis

8. Non Residents Equity Taxed in Mexico if underlying assets are shares issued by a Mexican corporation AND counterparty is a resident 20% on gross income, or 40% on net profit (within 3 months) If physically settled, capital gain rules apply Even if sold to non resident

9. Non Residents Equity –Exempt if warrants on publicly traded Mexican shares –Tax havens taxed at 40% on gross

10. Non Residents Debt Taxed if counterparty is a resident Rate depends on beneficial owner –OR Physical delivery of notes issued by resident 10%

11. Non Residents Rate applied on cash leaving Mexico –Offset cash differences if possible Beneficial owner rates –Banks resident in treaty jurisdictions – 4.9% Mandatory registration –Other registered banks – 10% –Paid by Mexican banks – 21% –Other cases – 40%

12. Tax Treaties Broad treaty network Article 11 may –refer to interest “as defined in domestic legislation” Debt derivatives included E.g. USA –Contain limited definition of interest Debt derivatives not included E.g. Netherlands, Switzerland

13. ISDA International Swaps and Derivatives Association, Inc. Derivatives and Risk Management in Mexico Tax Treatment of Derivatives José Carlos Silva