Tax Reform Bill for 2010

In accordance with the constitutional rules, on September 8, 2009, the Finance Ministry submitted to the Congress the economic and tax package for 2010.

It is important to mention that the Federal Revenues Law and the Budget of Expenditures for 2010 must be passed by no later than November 15, 2009.

In view of the eminent decrease in oil revenues, there is an apparent consensus among all political parties regarding the need for greater tax collection; however, they all similarly coincide in their refusal to absorb the political cost that approving a sales tax on food and medicines would inevitably entail.

Therefore, as Mexico faces its worst economic crisis in the last decades, what is being proposed to the Congress is not a tax reform suited to the country’s needs, but rather a mere series of isolated measures that are unlikely to overcome the problems Mexico faces in the medium and long term.

Key points of the package sent to the Congress include an increase in income tax, the creation of a federal tax referred to as an anti-poverty tax, and a rate increase for the special tax on production and services applicable to alcoholic beverages, raffles, and drawings.

Below we discuss the points we consider most relevant in the tax bill presented to the Congress, in the understanding that modifications will be made in the course of the ensuing congressional debate:

Anti-Poverty Contribution Law

This law creates a new 2% general consumption tax under the same rules as the value-added tax (VAT), with a crediting mechanism also similar to that used for the VAT, with the resulting revenue stream specifically earmarked for anti-poverty programs.

The base for the new tax will be income from sale, leasing, provision of services, and importation of goods, allowing limited exceptions, such as sale of gold, land, used goods, corporate stock, and interest, except that accrued on mortgages.

It is noteworthy that food and medicines will be subject to this new tax.


Income Tax

The income tax rate is increased to 30%, with a transition so that it returns to 28% in 2014.

The scheme of neutrality in tax consolidation is changed to one of deferral, with the obligation to pay the deferred tax after a period of 5 years.

The first payment will be for 60% of the deferred tax and 10% in the next 4 years, requiring payment of 60% of the tax deferred through 2004 in 2010.

In the case of individuals, the exemption for home sales may be claimed only once every five years, and the deduction of mortgage interest is limited to mortgages related to the acquisition of a single home.

The mechanism for withholding of the tax on interest by financial institutions is modified, and now will be a definitive payment.


Federal Tax Code

The tax domicile of the taxpayer’s legal representative is assimilated to that of the taxpayer, as a means of preventing evasion of audits: Also, to register a change of tax domicile, the taxpayer must provide conclusive evidence of the new domicile.

If a taxpayer changes tax domiciles twice in the same year, the statute of limitations for audits by the tax authorities will be 10 years instead of 5.

The requirements for tax deductible receipts are modified, requiring that when they are issued in hard copy, they must incorporate security elements.

On the other hand, taxpayers are obliged to verify the authenticity of tax deductible receipts on the SAT website, which will undoubtedly represent a disproportionate administrative burden.

Using and marketing apocryphal tax documents are defined as a tax offense.

Special Tax on Production and Services

The tax applicable to the sale and importation of beer is increased from 25% to 28%. The tax assessed on drawings and raffles is increased from 20% to 30%.

A new 4% tax on telecommunications is established, exempting only public and rural telephony and interconnection services.


Business Flat Tax

If a taxpayer has a credit because its authorized deductions exceed its income, it may only be applied against the Business Flat Tax in the next 10 years without the option to apply the credit against income tax for the same year the credit is generated.


Tax on Cash Deposits

The rate is increased to 3%, applicable on deposits over $15,000 in each month.