Mexico Tax Alert - February 8, 2008 - International Tax

By Héctor Esquivel, Rodrigo Ochoa and Daniel Salazar

The flat tax, which replaced the old asset tax, is designed to operate as an alternative minimum corporate tax. As from 1 January 2008, individuals and corporations (including permanent establishments of foreign entities) must pay the sum of the income tax computed under the Mexican Income Tax Law (“income tax”) and the excess of the IETU. Tax liability is calculated on a cash-flow (rather than accrued) basis, with the base determined by reducing taxable revenue (mainly only income derived from the sale of goods, the provision of services and the leasing of tangible goods) with authorized and limited deductions (that do not include wages/payroll, interest, royalties, etc.). The flat tax liability is computed by applying the flat tax rate (16.5% in 2008, 17% in 2009 and 17.5% thereafter) to this enlarged tax base.

The IETU may violate the equitable treatment and proportionality principles set forth in section 31 of the Mexican Constitution. Specifically, the following provisions may be unconstitutional:

Disallowance of a deduction for interest and salaries/wages, and royalties paid to related parties;

Limitations on the deduction of certain items, such as investments, land and inventory purchased before 2008;

Disallowance of a credit for tax loss carryforwards, and the general absence of carrybacks and carryforwards; and

Taxpayers are not necessarily taxed on their actual revenue or wealth.

As a result, affected taxpayers may be able to challenge the IETU by filing a constitutional lawsuit (“amparo”) before the competent courts. The deadline to initiate a constitutional lawsuit is 15 working days after the day the first estimated monthly payment is filed (the deadline to file the January estimated payment is 17 February).

For additional alerts, visit the Global Tax Alerts archive.