The U.S. and Mexican governments have provided additional guidance and relief opportunities from Mexico’s new minimum tax. The new tax, called Impuesto Empresarial a Tasa Unica (”IETU”), is a replacement for Mexico’s asset based tax (”IMPAC”). The new tax is intended to ensure that all companies pay income tax or, alternatively, some tax under this ”flat tax” computation.

Mexican IETU credit for certain foreign owned manufacturing operations

The Mexican government has announced a tax credit available to IMMEX (formerly maquiladora) program participants that will significantly reduce the IETU’s impact in many cases. While the details of this decree remain in progress, the Mexican government has indicated that the credit will reduce the IETU liability of IMMEX companies to their safe harbor calculation taxable income (without credits for the 2003 Presidential Decree) multiplied by the applicable IETU tax rate for the year. An example of the application of the new decree is attached as exhibit A of this alert.

In summary, this decree will significantly reduce the impact of the IETU on many foreign companies operating in Mexico. It is important to note, however, that the operation must be eligible to utilize the safe harbor method in calculating its Mexican taxable income in order to be eligible for this credit. This generally means the Mexican entity must operate as a former maquiladora program participant (and may not own its own inventory or directly invoice third party customers).

IETU foreign tax credit eligibility for US tax purposes

The IRS announced on December 10, 2007 (via press release) that they will not challenge taxpayers who take a foreign tax credit for IETU paid under Article 24(1) of the U.S./Mexico treaty (which allows a credit for income tax paid to Mexico by or on behalf of a U.S. resident). However, the Service has also indicated they will continue to study the issue to determine a permanent stance on creditability of the IETU. Finally, the IRS indicated that any change in the foreign tax credit tax treatment of the tax will be prospective, and will apply solely to the tax paid or accrued in taxable years beginning after the date any change in stance occurs.

This alert is released in conjunction with Raul Montemayor, Despacho Freyssinier Morin Noreste, our P&M International Network affiliate from Monterrey, Mexico.