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Change in Mexico's Asset Tax
International Tax Alert, January 2007
An important change affecting Mexican operations was recently passed by the Mexican Congress, effective January 1, 2007. The Mexican government has approved a major change in Mexico’s asset tax (or IMPAC)regulations. The IMPAC is similar to the alternative minimum tax (or AMT) in the USA in that the tax is intended to ensure that taxpayers pay some minimum amount of tax. As such, companies pay the higher of their calculated income tax or IMPAC.
In the past, the tax was calculated by computing the Mexican company’s net assets (gross assets less non-related party liabilities), and by multiplying that base amount by 1.8%. As mentioned above, this tax is only due when the asset tax calculated exceeds the company's income tax for the year. As such, the IMPAC did not apply to many companies since it only applied to net assets, and the reduction of the base by the company’s liabilities reduced the tax to an amount less than their income tax.
A few things have changed starting with the 2007 tax year. The positive side of the change to IMPAC involves a tax rate reduction from 1.8% to 1.25%. The bad news, however, is that the tax now applies to the net assets of the operation with no possibility of reducing the tax base for the company’s liabilities.
Download Change In Mexico's Asset Tax.pdf to see a sample calculation of the tax prior to and after the change.
The initial impact of the change affects your Mexican operation by potentially increasing the taxes they will owe, but that is not where the bad news ends. Because the IMPAC is not an income based tax, the amount paid cannot be used as a U.S. foreign tax credit—which may result in double taxation of income.
Certain strategies are available to minimize or eliminate the effect of this change.Time is of the essence related to certain options available (including a filing deadline of February 13, 2007). Please contact Lou Longo at 248.375.7315 (lou.longo@plantemoran.com) or Scott Sneckenberger 248.375.7348 (scott.sneckenberger@plantemoran.com) immediately if you have any questions or would like to discuss your options related to Mexico’s new asset tax regulations in further detail.
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