New Mexican Tax Bill Signed Into Law
Global Services Tax Alert, Ocober 2007

Mexican President Calderon signed into law a comprehensive tax bill that was passed by the Mexican Congress on September 14, 2007. The comprehensive tax bill will increase the tax rates for most businesses operating in Mexico.

The comprehensive tax bill was a major success for President Calderon and is a first step in increasing the government's share of GDP from 11 percent to President Calderon's goal of 14 percent (still considered low for most countries). The comprehensive tax bill included increase in business taxes discussed below, a tax on deposits (to attack tax evasion), and a gasoline tax. The bill also provided relief to PEMEX, the national oil monopoly.

The law implements a new tax based on total sales. The new tax, the 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, under this “flat tax” computation.

The IETU rates that will apply to sale are phased in as follows:

• 2008 – 16.5 percent
• 2009 – 17.0 percent
• 2010 and thereafter – 17.5 percent

The IETU tax base differs significantly from the taxable income base. Full deduction for cost of goods sold, salaries, and depreciation have been replaced by credit for salaries paid and jobs created and a cash basis deduction for purchases of goods, machinery, and equipment.

The new tax law will increase taxes for many U.S. companies operating in Mexico. Estimates of the impact of the new law indicate taxes may double for a Mexican subsidiary of a foreign manufacturing operation. Since the IETU is not based on a traditional income tax base, it is unlikely that the tax will qualify as a tax qualifying for double tax relief in the United States.

Please contact Scott Sneckenberger to discuss the impact of this legislation on your Mexican operations.

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