Tax News Flash - On Wednesday, January 18, 2017, the Executive Branch published in the Official Gazette a decree granting a voluntary disclosure program (VDP) for Mexican taxpayers, for returning the direct and indirect investments maintained abroad.
In view of the economic environment
expected in 2017, the Executive Branch considers that it is necessary to adopt measures to strengthen domestic savings in order to shield and reactivate the national economy. Moreover, based on the international context observations, it is proposed to establish a scheme of facilities regarding the payment of income tax in order to encourage the repatriation of resources held abroad not reported in Mexico, including those from preferred tax regimes (REFIPRE for its acronym in Spanish).
The purpose of this scheme is to encourage the return of the capital held abroad to be applied in productive activities that contribute to the reactivation and economic growth of the country.
In this sense, following you will find a summary of the most relevant tax provisions which shall enter into force starting on January 19, 2017, and shall remain in force for six months thereafter.
In accordance with the Mexican Income Tax Law (MITL), Mexican and foreign residents with a permanent establishment in Mexico that have obtained income from direct or indirect investments held
abroad until December 31, 2016, and taxable under sections II (Legal Entities), IV (Individuals) and VI (Preferential Tax Regimes and Multinational Enterprises) of the MITL, with the exception of income that have been deducted by Mexican or foreign residents with a permanent establishment in Mexico, may choose to pay the income tax by applying the provisions set in this decree.
However, this benefit is not applicable for taxpayers who are or have been subject to a review by the Mexican Tax Authorizes (MTA), regarding the income referred above or have court proceedings in relation to the tax regime of such income.
Additionally, the provisions set forth in this decree shall not apply in the case of income obtained from illegal activities.
Income and investments subject to these benefits must be returned to Mexico and must be invested in the country for a period of two years.
From above, the resources will be considered as invested in Mexico when they are used in the following cases:
1. Acquisition of fixed assets that are deductible for income tax purposes and used by taxpayers for the performance of their activities in the country
2. Acquisition of land and buildings located in Mexico that are used by taxpayers to carry out their activities, without being able to dispose of them
3. Research and development of technology
4. The payment of liabilities with independent parties obtained prior to the entry into force of this decree, as long as the liabilities are paid to credit institutions or brokerage firms that are part of the Mexican financial system
5. In making investments in Mexico through credit institutions or brokerage firms, which are part of the Mexican financial system
The previous investment must be carried out during fiscal year 2017. For these purposes the resources returned to Mexico could be invested in any of the different alternatives previously mentioned, complying with the two year period previously mentioned.
Moreover, the alternative chosen could be changed at any time, as long as the new alternative elected is one of the previous mentioned, and provided that the investments are maintained in Mexico during the two years period previously mentioned.
The income tax corresponding to the income from investments abroad shall be determined by applying an 8% tax rate to the total amount of the resources that return to the country without any deductions.
In addition, taxpayers that apply these benefits may credit the income tax they have paid abroad against their resulting Mexican income tax; however, the credit may not exceed the amount resulting from applying the 8% rate to the total amount of the resources returned to the country.
The income tax determined shall be paid within the 15 days following the date when the resources are returned to the country. For these purposes, the resources will be considered returned when these are deposited into a Mexican financial institution.
Taxpayers must prove that the amount of their total investments in Mexico is increased by the returned amount and the returned amount in the country shall not be reduced for a period of two years. In case that taxpayers do not comply with any of the conditions set out in this decree or do not return the referred resources for their investment in the country, they will be subject to the legal provisions that proceed.
As part of their tax obligations, taxpayers that take the benefits found in this decree shall maintain the supporting documentation from the returning resources and the corresponding payment for a period of five years.
Taxpayers who take advantage of the tax benefit granted in this decree shall retain as part of their accounting the documentation demonstrating that the money is received from abroad, and that the payment of the respective tax was made in the terms provided in the decree.
Moreover, legal entities that choose to apply the benefits established in this decree, should calculate their taxable profit, corresponding to the total amount of resources returned in accordance with the MITL, for purposes of the computation of their Previously Taxed Profit account (CUFIN for its acronym in Spanish). The determined taxable profit will be reduced by the tax paid for the total of the resources returned.
The result obtained according to the previous paragraph may be added to the balance of the CUFIN set in article 77.
The taxable profit determined in accordance with the provisions of this article shall be considered (increased) for the determination of the employee profit sharing of the fiscal year (PTU for its acronym in Spanish).
Furthermore, the income tax paid under the terms of this decree will be understood to be covered by the fiscal year and for the previous years.
As previously mentioned, this decree will be in force the following six months from the day after which it was published by the Executive Branch.