Mexican Tax Laws and Arrangements

8/6/2019 Mexican Tax Laws and Arrangements

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14 : Dinero m i é r c o l e s 1 8 d e m a r z o d e 2 0 0 9 : eXcelsior

Prevén difícil añopara manufactura

industria

Enfrentan el retode trabajar conmenos activos einventarios, segúnfirma consultora

POr aLiCia [email protected]

S bn t un ftqu tnán qu n-fnt pnuftu n gunt ñ

nun n -qu n ntn-n, p tnn t tbj n n tv n-vnt y u tv-

nnv put.l nt n m-h ltug, t gn TBm cnutng Gup mx, p qu nt un ón -nó gb, nuftu -bn bu n tv pt nnnt tn-t nó.

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en t n ntó qu

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a futu guá n tt-v fb n mx p tn , nut v-n nt y cnt a,ggó.

a pgunt xp eup Jpón y t n qu

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México, baja participaciónciudadana en presupuesto

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Foto: AFP

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a n tn tub ju-

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Exigen al SAT certidumbre

La PObLaCin COLOmbiana, La ms i ntErEsada En rECaudaCin

El aí fe el eevalad de Améa

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eaal.

Foto: Javier Otaola

Los ciudadanosno saben cómo se

asignan el gastopúblico: BID

POr VErniCa [email protected]

en t n p g-n puput púb, xn tán p bj p a ltn, n-fó Bn intn d (Bid).

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en unn -

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á bt , mxgtó 88.1 punt, n ut j p n-n un.

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tá nt á bj n u-ón put.

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u put ntn but (PiB)p ng , p bj f bñ 19.79 p n-t, y ch, n 21 p nt.

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VidEOCOnfErEnCia

FMI pronostica una recesión de 0.6%

POr VErniCa [email protected]

e Fn mnt intn-n (Fmi) nunó qu n-í un ntá 0.6 pnt unt 2009.

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mnt ognón p- cpón y d- enó (ocde) y Bn- mun (Bm) nn uní PiB gb hn.

2.3por ciEntoe el fmi qececeá l ecooíl e 2010

a n n, Fmi p-ntó qu ní uní 0.5 p nt. P h , stu Khn tóqu vón PiB “tí ”.

l nt tó tbnqu et Un ntá n -ón, v u PiB 2.6 pnt, n 2009, 0.2 p ntunt ñ qu vn.

l n u á gón áft, gún Fmi, y pn-tá un PiB 3.2 p nt tñ, p nú jn 2010, n un g nnt 0.1 p nt.

d t atánt, r-n Un qu vá á -gt u ní, nt3.8 p nt. aá, guá nón póx ñ, n unntón 0.2 p nt.

P Jpón p un í- n p nt, uy pbj 2.5 qu nunó h- . P 2010, gún tn, ní átá gn pí tn.

“ét un v gb, ptn n t pt un y n pí ntnt g ”,ggó.

0.2por ciEnto

ceceá el Pib eEo uo el

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Pctic Meic T Sttegies © WTe Eectie, Ic. 2008

RepoRt on tax planning foR inteRnational Companies opeRating in mexiCo

cotid o pag 2

cotid o pag 4

In ThIs Issue

November/December 2008Volume 8, Number 6

VATTax practit ioners grapple withcontroversial rules for input andexport VAT. For example, only recentlyhas the Mexican Supreme Courtsettled the issue that it is not necessary

to claim an income tax deduction inorder for the input VAT paid to becreditable. On the export side, customshas approved a new type of exportsales for maquiladoras, but there is noprovision in the VAT law calling foran exemption for these newly devisedsales.Page 1

employ Laig i MxicoRecent developments suggest that

Mexico’s federal government is takinga tougher stance regarding employeeleasing companies , a commoncomponent of the corporate and taxstrategy used by multinational rmsdoing business in Mexico.Page 1

Mxica Forig TrtStrategies takes a look at the treatmentof foreign trusts under Mexican taxlaw.Page 3

Mxico’ Flat TaxStrategies discusses the treatmentapplicable to interest paid by Mexicancompanies to banks for purposes of the business at tax.Page 8

Tabl of Cott o Pag 2

www.wtexec.com/tax.html

The International BusinessInformation SourceTM

WorldTrade Executive, Inc.

PRACTICAL MEXICAN TAX STRATEGIES

WTE

VAT – Credit of Input VAT andFurther Lobbying for Exports

By JaIME GonzálEz-BéndIkSEn and luIS C. CarBaJo(BakEr & MCkEnzIE)

In an earlier article we mentioned that VAT is a consumption tax and that assuch it is to be borne by the end consumer only, by you and me out in the street buying groceries, automobiles, paying for services, etc. All other participants

in the manufacturing and distribution of goods and services chain are entitledto recover whatever input VAT they pay with whatever output VAT they col-lect, or via refunds.

Since exports will not be consumed in the country of export but rather inthe country of importation, the exporting country should not charge VAT onthe exported goods and services. It will be the importing country who will levyconsumption taxes on such goods and services.

Is Your Employee LeasingCompany at Risk in Mexico?By ESTEBan G. dalEhITE, Ph.d.

Recent developments suggest that Mexico’s federal government is taking atougher stance regarding employee leasing companies, a common componentof the corporate and tax strategy used by multinational rms doing businessin Mexico. In April 2008, Mexico’s House of Representatives approved a billamending the Social Security Act (Ley del Seguro Social) which places controlson employee leasing. However, this bill is still under discussion in the Senatewhere it has developed opposition and has not yet been approved.

In June 2008, Mexico’s Tax Administration Service (known for its Mexicanacronym SAT) announced a joint auditing program with the Mexican Instituteof Social Security (known for its Mexican acronym IMSS) and the Institute of the National Worker Housing Fund (known for its Mexican acronym INFO-NAVIT) to combat tax evasion through employee leasing companies with aninitial target of 455 rms.

In October 2008, the SAT announced an information exchange agreementwith the Mexican Department of Labor and other agencies for the same pur-pose, and the House of Representatives hosted a congressional hearing wherethe General Director for the IMSS was repeatedly questioned about tax evasion



2 © WTe Eectie, Ic. 2008 nembe/decembe 2008

Table of Contents

P ractical M exican t ax StrategieS Published by WorldTrade Executive, Inc.

Editorial Staff Editor: Strategies is edited by Jaime González-Béndiksen at Baker & McKenzie with content prepared by many major law and accounting

rms, and other tax specialists.

WorldTrade Executive, Inc. staff involved with Strategies includes:

publisheR: Gary A. Brown, Esq.; Development eDitoR: maRy anne CleaRy;

ContRibuting eDitoR: Scott P. Studebaker, Esq.; assistant eDitoR: Dana Pierce

WorldtradE ExEcutivE intErnational tax adviSory Board

richard E. andErSEn, ESq., a rnold & Porter

Sunghak Baik, ESq., e rnSt & Y oung

William c. BEnjamin, ESq., W ilMer cutler P ickering H ale and dorr llP

john i. forry, ESq., u niverSitY of n avarre (S Pain ), fordHaM l aW ScHool and u niverSitY of S an d iego

jaimE gonzálEz-BéndikSEn, ESq., B aker & M c k enziejorgE groSS, P riceWaterHouSecooPerS llP

john m. kElly, P riceWaterHouSecooPerS llP

marc lEWiS, SonY uSa

hoWard m. liEBman, ESq., J oneS d aY (B ruSSelS )

liSa c. lim, e rnSt & Y oung

kEith martin, ESq., c HadBourne & P arke

yongjun (PEtEr) ni, e rnSt & Y oung

antoinE PaSzkiEWicz, ESq., k raMer, l evin , n aftaliS & f rankel (P ariS )

criStian roSSo alBa, roSSo a lBa, f rancia & aSSociateS (BuenoS a ireS )

daniEl ryBnik, e nter P ricing (BuenoS a ireS )

john a. SalErno, P riceWaterHouSecooPerS llP

michaEl j. SEmES, B lank roMe

michaEl f. SWanick, P riceWaterHouSecooPerS llPguillErmo o. tEijEiro, n egri & t eiJeiro a BogadoS

miguEl valdéS, ESq., M acHado & aSSociateS

PaBlo WEjcman, e rnSt & Y oung

Practical Mexican Tax Strategies is published six times per year by WorldTrade Executive, Inc., P.O. Box 761,

Concord, MA 01742 USA. Tel: (978) 287-0301; Fax: (978) 287-0302. Electronic Mail: [email protected].

Home page: http://www.wtexecutive.com. Subscriptions: $726 per year; $776 non-U.S. addresses.

Unauthorized reproduction in any form, including photocopying, faxing, image scanning, or electronic distribution is prohibited by law.

Copyright © 2008 by WorldTrade Executive, Inc.

Foreign Trusts:Treatment of Foreign Trusts Under Mexican Tax Law ..................................................................................p. 3

Flat Tax: Mexican Flat Tax: Interest Payments Made to Financial Institutions ..........................................................p. 8

Leasing:Is Your Employee Leasing Company at Risk in Mexico? ..............................................................................p. 1

Transfer Pricing:Transfer Pricing Adjustments in Mexico .........................................................................................................p. 5

VAT:VAT—Credit of Input VAT and Further Lobbying for Exports ....................................................................p. 1




Foreign Trusts

International tax treaties and Mexican do-mestic law establish various tax benets which,in order to be enjoyed, compel compliance withcertain requirements. This is the case with Article195 of Mexico’s current Income Tax Law (Ley delImpuesto Sobre la Renta), concerning the applicablewithholding rate on interest paid by a Mexicantax resident to a foreign entity, when such interestpayment is derived from a working capital loanor trade nance loan. In this case, the incometax will be calculated and withheld with theinterest income received by the foreign resident being subject to the general 21% rate, with no

deductions. However, such rate may be reducedsignicantly to 4.9% if an applicable tax treatyexists, in which case the foreign entity taxpayermay receive the reduced rate if it is registered inthe Registry of banks, nancial institutions, pen-sion and retirement funds and foreign investmentfunds maintained by the Mexican Department of Finance and Public Credit (Secretaria de Hacienda

y Crédito Publico).Lenders interested in obtaining such registra-

tion are required to le an application with Mexi-can tax authorities and submit various documents,including proof of the legal existence of the foreign

entity by showing a copy of its current bylaws orarticles, copies of ofcial documents issued by au-thorities in the country of residence of the foreignlender, and a certicate of tax residence issued bycompetent authorities.

Notwithstanding the above, in some cases theMexican tax authorities have denied registrationof certain foreign entities , concluding that suchhave not demonstrated their status as an “entity”(sociedad) for purposes of Article 195 of the In-come Tax Law. One such typical case involvesU.S. trusts, which do not have a comparable legalform in Mexico and, when translated into Span-ish literally, can lead one to conclude that trustsare a trust agreement (contrato de deicomiso)as understood under Mexican law, which doesnot make a trust an “entity” for Mexican legalpurposes. In accordance with U.S. Law, undercertain conditions a trust may be considered asan entity with a legal existence independent of the members comprising such trust.

Treatment of Foreign Trusts Under Mexican Tax Law

By rEnE CaChEaux and MIrIaM naME(CaChEaux, CavazoS & nEWTon, l.l.P.)

I om ca t Mxica tax atoritiav did rgitratio of crtai forigtiti, cocldig tat c av otdmotratd tir tat a a “tity”(ocidad) for prpo of Articl 95 of tIcom Tax Law.

The above rule adversely affects those entitieswhich, in their country of origin, are consideredunder domestic law as entities with their ownlegal existence, but which in Mexico are not con-sidered to be legal entities under Mexican law.As a consequence of the denial of registration inthe Registry of banks, nancial institutions, pen-sion and retirement funds and foreign investmentfunds, and specically in book I, section IV, whichrefers to the registration of entities that grant loansfor nancing the acquisition of machinery andequipment, and in general for business workingcapital, such rules directly impact the interest rate

withholding on interest paid to a foreign, non-Mexican lender.

The above scenario shows an implied vio-lation of international law by Mexico’s taxauthorities since, in accordance with currentlyapplicable law, institutions and entities that arenot recognized under domestic law must qualifythemselves and be regulated by the legal provi-sions of the country in which such institutions orentities were created. This means that, in the caseof U.S. trusts, a determination on the existence of such entities must be made in accordance withU.S. law, where the trust was created. Mexicomay not qualify or disqualify the nature of a trustnot created in Mexico using a law other than theapplicable law of the jurisdiction where the trustwas created.

Another complication involving institutionsand entities not recognized by Mexican domesticlaw is the existence of institutions and entitieswhich appear to be “similar” to existing Mexicanentity forms, but which in reality are essentially

cotid o pag 4




Foreign Trusts

different. The U.S. trust is one such case of aninstitution or entity that appears to be similar toa Mexican form (Fideicomiso). In the U.S., a trustmay or may not be an “entity” in accordance withapplicable state law, while in Mexico the institu-tion that is similar, a Mexican trust, is always

merely a contract and not an entity. Another er-ror commonly made by Mexican tax authoritiesis the application of rules pertaining to Mexicantrusts in order to conclude that a U.S. trust is notan entity simply because Mexican law does notafford entity status to Mexican trusts. In reality,the differences between Mexican and U.S. trustsare more numerous than the similarities betweenthe two forms.

While a Mexican trust (Fideicomiso) is by na-ture a contract under Mexican law, which does nothave or create legal personality, a “trust” that has been formed in accordance with title 12, chapter

38, subchapter I, subpart 3801 of the DelawareCorporate law shall have its own legal personality,which must be recognized in Mexico, as stated insuch provision. A statutory trust is formed at thetime of the ling of the initial certicate of trust inthe ofce of the Secretary of State or at any laterdate or time specied in the certicate of trust if, ineither case, there has been substantial compliancewith the requirements of this section, a statutorytrust formed under this chapter shall be a separatelegal entity, the existence of which as a separatelegal entity shall continue until cancellation of thestatutory trust’s certicate of trust…”

Consequently, in accordance with Article 13of the Federal Civil Code, institutions and legalentities validly created under domestic law out-side Mexico must be recognized. In addition, theterm “disregarded entity” (institucion descono-cida) nds support in Article 14, section III of theFederal Civil Code, which expressly states that“[t]he fact that Mexican law does not provide forinstitutions or procedures applicable to the essen-tial elements of a foreign institution shall not bean impediment to apply foreign law if analogousinstitutions or procedures exist (in Mexico); …”

Further, Article 2746 of the Mexican FederalCivil Code, with respect to foreign entities in theprivate sector, establishes that “the existence,capacity to hold rights and obligations, function-ing, transformation, dissolution, liquidation andmerger of private foreign corporations shall begoverned by the law of the jurisdiction wherethey were created, which is understood as thestate in which such foreign entity complies with

the elements of form and substance required forthe creation of such foreign entity.”

From the above one can gather that, althoughMexico commonly considers a “trust” (Fideicomi-so) to be a contract, it is important to analyze anentity in light of the law applicable to where the

entity was created, because even though there may be similarities between the gures of a “trust” anda Mexican deicomiso, they are not identical orsimilar since a “trust” may be a legal person withits own legal personality and should be recognizedfor what it is.

In these terms, having created an entity inconformity with the laws of a foreign jurisdiction,the same entity must be recognized as legal personwith its own legal personality in Mexico, so thatthe benets enjoyed by any other entity, such asthose referred to in Article 195 of the Income TaxLaw, apply to foreign entities and may be regis-

tered in the Registry of bank, nancial institution,pension and retirement fund and foreign invest-ment funds.

In a hypothetical case such as the one de-scribed above, failure to recognize the “trust” asa legal entity serves to negate a substantial benetestablished under Mexican law, even though theentity is duly created in conformity with the for-eign jurisdiction’s law where it originated. Thedifference between recognition of such personal-ity and non-recognition results in a signicantlynegative tax impact requiring a Mexican incometax withholding of 21% on interest income to be

paid to the foreign “trust,” instead of withholdingthe reduced 4.9% rate.

A practical recommendation for those foreigntrusts that seek to register in the Registry men-tioned above in order to apply for the 4.9% with-holding rate on interest income, is to accompanythe application for registration with a legal opin-ion signed by an attorney authorized to practicelaw in the entity’s country of origin providing anopinion concerning the legal creation and opera-tion of the trust, concluding that such is an entityin accordance with legal positions in force in thecountry of its creation, and transcribing the textof the applicable foreign legal authority.

Rene Cacheaux ([email protected]) and MiriamName ([email protected]) are Partners at Cache-aux, Cavazos & Newton, L.L.P. (www.ccn-law.com)with ofces in the United States and Mexico.

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Pctic Meic T Sttegies © WTe Eectie, Ic. 2008 5

Transfer Pricing

cotid o pag 6

Despite the fact that transfer pricing ruleswere introduced in Mexican legislation over a

decade ago, nowadays there are still unexploredtopics such as the secondary adjustments.

Following is a brief description of some gen-eral concepts regarding transfer pricing adjust-ments, and a review of the Mexican case as wellas the impact of transfer pricing adjustments inother taxes in Mexico.

International FrameworkA primary adjustment exists when a tax

authority, derived from a transfer pricing audit,determines that the income and/or deductions of a taxpayer were not established according to the

arm’s length principle.Generally, a primary adjustment ends up in

higher taxable income and, thus, in an omittedtax. Consequently, and in order to avoid doubletaxation, the related party of the entity that per-formed the primary adjustment should perform acorresponding adjustment diminishing its taxableincome. This adjustment should be recognized by the tax authorities of the residence countryof the related party, as long as they consider thatthe primary adjustment is justied in principleand in amount.

Transfer Pricing Guidelines for MultinationalEnterprises and Tax Administrations (OECD1 Guidelines) in connection to paragraph 2 of Article9 of the OECD Model Tax Convention mentionthat corresponding adjustments may be made by(a) recalculating the prots subject to tax for therelated party using the relevant revised price or(b) by letting the calculation stand and giving therelated party relief against its own tax paid for theadditional tax charged to the entity to whom theprimary adjustment was determined.

As observed, primary transfer pricing adjustments and their corresponding adjustments

change the allocation of taxable prots of a mul-tinational group for tax purposes but they do notalter the fact that the excess prots (represented by the adjustment) are not consistent with theresult that would have arisen if the controlledtransactions had been undertaken on an arm’slength basis.

Thus, secondary adjustments consist in de-termining a secondary transaction, whereby theexcess prots resulting from a primary adjustment

Transfer Pricing Adjustments in Mexico

By rICardo rEndón (ChEvEz, ruIz, zaMarrIPa y CIa., S.C.)

Accordig to t Mxica lgilatio, aprimary adjtmt may b rcogizdfor Icom Tax prpo trog t taxrcociliatio.

are treated as having been transferred in some

other form and taxed accordingly. Ordinarily,the secondary transactions will take the form of constructive dividends, constructive equity con-tributions or loans.

Article 9 of the OECD Model Tax Conventiondoes not contemplate the secondary adjustments,therefore, does not forbid or oblige the tax authori-ties to perform said adjustments.

Mexican LegislationMexican Income Tax Law (MITL) establishes

that, for purposes of said law, taxpayers that carry

out transactions with related parties have to de-termine their income and deductions consideringthe prices or consideration that would have usedwith or between independent parties in compa-rable transactions.

On the other hand, article 217 of the MITLestablishes a mechanism by which taxpayerscan perform a corresponding adjustment whentheir related party resident abroad has been de-termined with a primary transfer pricing adjust-ment, and the Mexican authorities agree with saidadjustment. This mechanism consists in ling anamended tax return to recognize the correspond-ing adjustment. Said adjustment does not compute

for tax return submission limitation purposes2

.It should be noted that said article only allowsthe performance of corresponding adjustmentsderived from primary adjustments determined by tax authorities of countries with which Mexicohas entered into a tax treaty.

Furthermore, the Mexican tax authoritiesare allowed to forgive, totally or partially, inter-est surcharges from a primary adjustment in




Transfer Pricing

Mexico, when said forgiveness derives from aMutual Agreement Procedure (MAP) with aforeign competent authority and said authorityhas reimbursed the related tax without payinginterest.3

As observed from the abovementioned

rules, the MITL recognizes the application of corresponding adjustments. Notwithstanding, itdoes not contemplate the secondary adjustments,which is consistent with article 9 of OECD ModelTax Convention. That is, article 215 of the MITLstates that taxpayers who carry out transactionswith related parties are required “for purposes of this law” to compute these income and deductionsunder the arm’s length principle.

As a result based on the wording of the MITLa taxpayer may very well decide to recognize theadjustment only for Income Tax purposes throughthe tax reconciliation without a need for secondary

adjustment recognition that involves cash ow.A transfer pricing adjustment could have

some implications in the other federal taxes inMexico such as the Value Added Tax (VAT), FlatTax (IETU), Excise Tax (IEPS) and Custom Duties.Following is a review of the possible implicationsin the taxes mentioned.

VATAccording to the VAT Law, the VAT is com-

puted on a cash ow basis. Furthermore, said Lawestablishes a specic procedure for presumptivedetermination from the tax authorities, which

does not consider the arm’s length principle andis not referred to the transfer pricing methods of the MITL.

When a primary adjustment is performed, thetaxpayer modies its taxable income and, conse-quently, its Income Tax. Notwithstanding, therecould exist a situation where the taxpayer per-forms the primary adjustment only for Income Taxpurposes through the tax reconciliation. This is,the taxpayer does not charge or pay to its relatedparty the difference in the original considerationand the arm’s length consideration determined by the tax authorities. If this is the case, a transferpricing adjustment would not impact the VATcomputation, unless a Secondary Adjustment thatinvolves cash ow is recognized.

However, an adjustment for excess in pur-chases, expenses or investments might modifyVAT creditable amounts because there is a generalrestriction establishing that in order to credit theVAT, this tax has to correspond to goods and ser-vices deductible for Income Tax purposes.

Flat Tax (IETU)Flat Tax Law, as well as the MITL, establishes

that taxpayers that carry out transactions withrelated parties have to determine their incomeand deductions considering the prices or consid-erations that would have used with or between

independent parties in comparable transactions4

.To comply with this requirement, taxpayers haveto apply the transfer pricing methods establishedin the MITL in the order mentioned therein.

In general terms, Flat Tax, as well as the VAT,is determined on a cash ow basis. Thus, when thetaxpayer performs a primary adjustment for In-come Tax purposes through the tax reconciliation,said adjustment should not have an impact on attax unless a secondary adjustment that involvescash ow is recognized. However, an adjustmentfor excess in acquisitions or expenses mightmodify the deductible amount (corresponding to

the non-deductible portion for Income Tax).

Excise Tax (IEPS)Excise Tax is imposed on the production and

sale as well as importation of gasoline, alcohol, beer and tobacco. Said tax, as well as the VAT, isan indirect tax and is computed on a cash ow basis.

Due to its similarity to the VAT, Excise Taxhas a similar treatment regarding transfer pricingadjustments. That is, adjustments should not havean impact on the Excise Tax unless a secondaryadjustment that involves cash is recognized.

Excise Tax Law provides for specic proce-dures for presumptive determination of the pricesat which the taxpayers sold the products (object of the tax). Price determination should be accordingto the following methods:

I. Current prices or appraisals.II. Cost plus a gross margin.III. Sale price of the subsequent seller less a

presumptive prot margin.IV. Difference between the maximum price

to the public and the maximum prot marginauthorized.

As observed, MITL and Excise Tax Law es-tablishes diferent methodologies to determinemarket value.

Custom DutiesCustoms Law establishes that Import and

Export Taxes are computed on the customs value.When the customs value cannot be determinedin accordance with the transaction value of thegoods imported, it shall be determined throughthe application of the following methods:

Trafr Pricig from pag 5




Transfer Pricing

I. Transaction value of identical goodssold.

II. Transaction value of similar goods sold.III. Value of the unit sales price.IV. Reconstrued value of the imported mer-

chandise.

V. Value determined aplying the above-mentioned methods, in a successive order and byexclusion, with greater exibility and reasonablecriteria.

Primary adjustments should not have animpact on Import and Export Taxes unless asecondary adjustment is recognized. If it is thecase, taxpayers could rectify their “Pedimento”value to reect the arm’s length price. Therefore,taxpayers may end up with a refundable amountor an additional tax payable, in which case theywould have the possibility to request the refundor to pay the ommitted tax.

ConclusionsAccording to the Mexican legislation, a pri-

mary adjustment may be recognized for IncomeTax purposes through the tax reconciliation. If thisis the case, a transfer pricing adjustment would

not impact the computation of the VAT, Flat Tax,Excise Tax and Customs Duties. Notwithstanding,an adjustment for excess in purchases, expenses orinvestments might modify VAT creditable amount because there is a restriction establishing that inorder to credit the VAT, this tax must correspond to

goods and services deductible for Income Tax pur-poses. Likewise for Flat Tax purposes an adjust-ment for excess in acquisitions or expenses mightmodify the deductible amount corresponding tothe non-deductible portion for Income Tax.

1 Organization for Economic Co-operation and De-velopment.2 Article 32 of the Federal Fiscal Code establishes that,as long as verication faculties have not been exercised

by the authorities, taxpayers cannot modify their tax re-turn for more than three times. In certain specic cases,modications are allowed for more than three times.3 Article 21 of the Federal Fiscal Code.

4 Article 18, section III of the Flat Tax Law.

Ricardo Rendón ([email protected]) is Partnerwith Chevez, Ruiz, Zamarripa y Cia., S.C. in MexicoCity. The author wishes to thank Carolina Alexandresand Oscar Campero, associates of the rm.

15 de Mayo No. 1410 Pte.MonterreyNuevo LeónMéxico, 64000Phone: 81.8342.2000Fax 81.8342.2000

www.martinezmartinez.net

DO YOU NEED TO DO

BUSINESS INMEXICO?

“Our goal is, tranquility and legal security to all our clients”

Martinez Martinez Molina Lozano and Associates Ltd. is com-

prised of assessors, scal lawyers and nancial auditors spe-

cializing in taxes, providing services since our foundation in 1991.

Currently our rm comprises of a wide range of scal specialists,state of the art technical capability and a modern ofce facilityamply equipped to supply quality nancial services to the businessworld of both Mexico and the American continent.

Visit our web site - www.martinezmartinez.net



© WTe Eectie, Ic. 2008 nembe/decembe 2008

Flat Tax

The purpose of this article is to discuss thetreatment applicable to interest paid by Mexicancompanies to banks for purposes of the BusinessFlat Tax (at tax).

To this effect, I will rst start with a brief de-scription of the tax regime set forth in the MexicanFlat Tax Law. Later on I will explain the main attax issues that Mexican companies should takeinto account if interest payments have to be madeto Mexican and non-Mexican banks.

Background

The Flat Tax entered into effect on January1, 2008 to replace the asset tax as a minimum oralternative tax. Nevertheless, the new tax includesvery different characteristics from the asset tax,since it is presented as a direct tax. Provisions have

joyment of property plus any amount charged orcollected from the acquirer for taxes, fees, regularor penalty interest, contractual penalties or anyother item, including advances or deposits, withthe exception of taxes that are shifted in accor-dance with the law (i.e. value added tax).

Nonresidents with a permanent establishmentin Mexico are obliged to pay the at tax on thepreviously mentioned income when attributableto such permanent establishment.

The at tax is calculated at the rate of 17.5%on the amount determined by subtracting from

aggregate income generated from the activitiespreviously referred to, the deductions allowed by the law. A transitional provision indicates thatduring tax year 2008 the tax rate of 16.5% shallapply, while for tax year 2009 the tax rate of 17%shall apply.

Taxpayers may deduct expenditures incurredfor the acquisition of property, the contracting of independent services or the temporary use or enjoyment of property utilized for the performanceof activities consisting of the sale or disposition of property, the rendering of independent services orthe granting of the temporary use or enjoyment

of property, or for management of the aforemen-tioned activities or in the production, marketingand distribution of property and services thatgive rise to income subject to the at tax. Severalrequirements must be fullled in order to claimthe deductions set forth in the Mexican Flat TaxLaw.

A credit procedure has been established thatallows taxpayers to pay the at tax only on theexcess over the income tax liability. That is, attax is payable whenever it is higher than theincome tax.

In general, the new tax is determined based

on cash ow, decreasing the income obtained fromthe sale or disposition of property, the renderingof independent services and the granting of thetemporary use or enjoyment of property by the ex-penditures required to carry out such activities.

A transitional provision establishes the obli-gation for the Ministry of Finance to carry out astudy on the advisability of repealing the incometax in respect of regimes applicable to entities andindividuals obtaining income from business and

Mexican Flat Tax: Interest Payments Made to FinancialInstitutions

By ErnESTo TorrES (ChEvEz, ruIz, zaMarrIPa y CIa., S.C.)

Tr ar vry good argmt to pporttat itrt paid by Mxica compai toMxica ad forig bakig itittiodrivd from loa gratd may b dmda ddctibl itm i accordac wit tproviio cotaid i t Flat Tax Law.nvrtl, t Mxica Tax atoritimay diagr wit ti poitio, t mot

likly ti i may av to b olvd i atax cort.

been established to regulate the transition from theincome and asset taxes to the Flat Tax.

Individuals and entities resident in Mexico, as

well as nonresidents with a permanent establish-ment in Mexico, are obliged to pay the at tax onincome from the sale or disposition of property,the rendering of independent services and thegranting of the temporary use or enjoyment of property, regardless of the place where such in-come is generated.

For these purposes, taxable income is the priceor consideration paid to the seller or transferorof the property, the provider of an independentservice or the grantor of the temporary use or en-




Flat Tax

cotid o pag 0

professional activities, from leases and, in general,from granting the temporary use or enjoymentof property, so that these persons would only besubject to the at tax. This study must be submit-ted to the Finance and Public Credit Committeeof the Chamber of Deputies (lower house of con-

gress) no later than June 30, 2011. Activities thatmay generate at tax shall be understood to bethe sale or disposition of property, the renderingof independent services and the granting of thetemporary use or enjoyment of property; thesesame are considered as such by the Value AddedTax (VAT) law.

Accordingly, acts or activities that are not subject to the VAT law are also not subject to the attax. The law also establishes that payments madein respect of such items would not be deductible.However, there are certain cases of activities thatmay be deemed as not subject to the at tax that

cause concern, such as interest payments made byMexican companies to Mexican and non-Mexican banks.

In the next section of this article I will providecertain comments with respect to the treatment ap-plicable to interest paid by Mexican companies toMexican and foreign banks, particularly regardingthe deduction of such interest.

Tax Provisions and CommentsAs previously mentioned in this article, the

general rule set forth in the Flat Tax Law providesthat it is understood as the rendering of indepen-

dent services the activities treated as such by theVAT law.

In this respect, the VAT law establishes that therendering of obligations of doing performed by aperson for the benet of another, regardless of theact that originates them or the name or classica-tion given to such act by other laws, is consideredthe rendering of independent services.

In this particular case, the granting of creditconstitutes the rendering of independent servicesin accordance with the previously mentionedprovision, because banking institutions in theirposition of lenders assume the obligation toplace at the disposal of borrowers the amountsgranted as nancing in exchange for the paymentof interest.

However, the Flat Tax Law establishes as ageneral rule that interest-bearing nancing or loantransactions, where interest is not considered aspart of the price under the terms previously men-tioned in this article, are not considered within theactivities referred to in such article, that is to say,the rendering of independent services.

Therefore, as a general rule it can be assertedthat nancing or lending transactions do not con-stitute taxable activities for purposes of the FlatTax Law; consequently, the payment of interestderived from these transactions is not deductiblefor determining this tax.

Nevertheless, in the case of nancing transac-tions carried out by, among other, banking institu-tions for which they charge or pay interest, the FlatTax Law establishes that it shall be considered asindependent services the nancial intermediationmargin that corresponds to these transactions.

In other words, even though the general rulein the case of interest-bearing nancing transac-tions is that such transactions are not consideredthe rendering of independent services and, as aconsequence, are not taxable for purposes of theFlat Tax Law and, as a result, the payment of in-terest derived from these nancing transactions is

not deductible for determining this tax, in the caseof nancing transactions where banking institu-tions grant interest bearing loans to their clients,among other cases, such transactions qualify asthe rendering of services insofar as the nancialintermediation margin is concerned, which im-plies that these activities are in fact taxable forpurposes of the at tax.

Due to the above, there are very good argu-ments in order to sustain that payments of theinterest mentioned in the preceding paragraph(nancing transactions where banking institutionsgrant interest bearing loans to their clients) could

be deemed as deductible items for Mexican attax purposes.

The interpretation set forth in the preced-ing paragraph is further supported with theprovisions of the Flat Tax Law that provide thedeductions that taxpayers can claim for purposesof this tax, as well as the requirements that suchdeductions must fulll in order to be deemed asvalid deductions.

On the one hand, the Flat Tax Law establishesthat taxpayers are entitled to deduct only thosedisbursements incurred on the acquisition of prop-erty, the rendering of independent services or thetemporary use or enjoyment of property utilizedfor the performance of the activities referred to inthe Law (sale or disposition of property, renderingof independent services or the temporary use orenjoyment of property) or for the administrationof these activities or in the production, marketingand distribution of property and services, that giverise to income subject to the at tax.

In accordance with the aforementioned provi-sion, it can be inferred that taxpayers may deduct




Flat Tax

Flat Tax from pag 9

disbursements incurred as a result of the render-ing of services utilized to carry out the sale ordisposition of property, render services or grantthe temporary use or enjoyment of property, ad-minister the activities set forth herein or produce,market or distribute property or services, that give

rise to income subject to the at tax.Consequently, in the case of disbursementsincurred by Mexican companies as a result of in-terest on loans contracted with Mexican residentand foreign banking institutions, it is reasonableto assume that such interest normally gives riseto income with respect to which such companiesare obliged to pay the at tax under the terms of the law.

Moreover, this interpretation is reinforced by the provisions of the Flat Tax Law regardingthe requisites for deductions for purposes of thistax by establishing that deductible expenditures

should correspond, among others, to the render-ing of independent services in respect of which

ditures should be afforded the same treatment asthat applicable to deductible expenses incurredin Mexico.

The above assertion may be interpreted inthe sense that if the expenditures were earned bya resident in Mexico similar to the foreign resi-

dent in question (in this case a Mexican bankinginstitution), the requirement to claim the deduc-tion is that the “theoretical” Mexican residentshould be subject to the at tax on the same typeof income.

Therefore, according to this last provision,payments made to foreign residents with nopermanent establishment in Mexico, includinginterest derived from loans granted to Mexicancompanies by foreign banking institutions withno permanent establishment in Mexico, wouldcomply with the requisite to be deductible.

In this manner, based on a harmonious inter-

pretation of the tax provisions in question, it ispossible to sustain that interest paid by Mexicancompanies to banking institutions may be deduct-ible for Mexican at tax purposes, to the extentthat this interest generates income on which suchMexican companies will be required to pay theat tax, and, correspondingly, that the bankinginstitutions resident in Mexico (including foreign banking institutions, if the expenses were incurredin Mexico) will also be required to pay the attax on such interest, with respect to the nancialintermediation margin of the payments receivedand made.

In view of the foregoing, in summary, there arereasonable arguments to sustain that expenditureson interest paid by Mexican companies to bank-ing institutions resident in Mexico and abroadcan be deemed as deductible items for purposesof the at tax.

Nevertheless, it is worth noting that basedon the wording of the Preamble to the Law andof the Report issued by the Finance and PublicCredit Committee of the Chamber of Deputies, itseems that the intention of the legislator was toconsider as non-taxable (and non-deductible as aconsequence) all the rendering of services consist-ing of nancial or loan transactions.

In this respect, it is worth mentioning thatcertain Mexican federal tribunals have sustainedthat the Preamble to the Law or the CongressionalRecords are not part of the law, taking into accountthe legal provisions, as it is inferred from the courtprecedent transcribed below:

PREAMBLE TO THE LAW AND DISCUS-SIONS OF THE LEGISLATOR. THEY DO NOTFORM PART OF THE LAW. The preamble to the

Tr ar crtai ca of activiti tat may

be deemed as not subject to the at tax that

ca cocr, c a itrt paymtmad by Mxica compai to Mxica ado-Mxica bak.

the provider of the services (the banking institu-tion in the case set forth herein) is obliged to paythe at tax.

This implies that in order to treat an expen-diture incurred on the rendering of independentservices as a deductible item for at tax purposes,it is indispensable that the provider of the service(the recipient of the applicable consideration, inthis case the interest) be subject to the at tax onsuch service.

Under this interpretation, in principle, forpurposes of the at tax, Mexican companies mayonly deduct interest on loans granted by Mexican banking institutions, since foreign residents withno permanent establishment in Mexico are notconsidered subject to this tax.

However, the same article of the Flat Tax Lawalso provides that in the case of expendituresincurred abroad or paid to foreign residents withno permanent establishment in Mexico (as in thecase of many foreign banking institutions thatgrant loans to Mexican companies), such expen-




Flat Tax

law contained in a bill, as well as the legislator’sdiscussions arising from the approval thereof, donot form part of the legal body of a ruling and,consequently, lack legislative value, taking intoconsideration the following elements: a) Article14, second paragraph of the Constitution that es-

tablishes the principle of legal security, providesthat nobody may be affected in its legal sphere, but only through a suit submitted before the pre-viously established tribunals, where the essentialformalities of the proceedings are met and in con-formity to the laws issued before the event; thatis to say, such constitutional provision makes noreference to the remarks and justications stated by the author of the bill nor to the argumentsindicated by the legislators to approve, change,derogate or abrogate a rule of general statute; b)Regarding publishing of the statue, that is carriedout through the Government media in charge of

disseminate the statue in their respective jurisdic-tions, such as the Ofcial Daily of the Federation,Gazettes or Ofcial Gazettes, in general, publishonly the content of the laws or articles approvedthrough the legislative process or, if applicable,they indicate which are the statutes that have been abrogated or derogated, but they do notusually print the bills and discussions that gaverise to the same. Consequently, it is not possibleto appeal to a right or obligation by the mere cir-cumstance that such right or obligation is inferredfrom the preamble to the law of the bill or fromthe legislator’s discussions, if it was not expressly

stated in the articles of the corresponding statute;where it is not logical the argument that the sub- jective or exegetic teleological interpretation of the legal provision would allow the introductionof elements contemplated during the legislativeprocess, but not reected in the body of the law because such means of interpretation requires thatthe interpreter of the statue resorts to the preambleto the law, discussions or preamble that gave riseto a law or international treaty for interpretingone or various ambiguous or vague provisions, being fully conscious that issues that are alien tothe provision are taken into consideration and,consequently, do not form part thereof.

SEVENTH COLLEGIATE TRIBUNAL ONADMINISTRATIVE MATTER OF THE FIRSTCIRCUIT.

Direct Amparo 1987/2003. Chris K. Kowalskiet al. September 3, 2003. Unanimity of votes. Mov-ant: F. Javier Mijangos Navarro. Secretary: CarlosAlfredo Soto Morales.”

For this reason, there are several argumentsto sustain that Mexican companies may deduct,for Flat Tax purposes, the expenses incurred oninterest paid to banking institutions resident inMexico and abroad.

ConclusionThere are very good arguments to supportthat interest paid by Mexican companies to Mexi-can and foreign banking institutions derived fromloans granted may be deemed as deductible itemsin accordance with the provisions contained in theFlat Tax Law. On the one hand, this interest wouldnormally generate income for which such Mexicancompanies would be required to pay the at taxand, on the other, due to the nancing transactionsthat the banking institutions carry out, specicallywith respect to the nancial intermediation mar-gin, they also constitute taxable activities (or that

would be taxed in the case of foreign institutions)for purposes of the at tax.

Nevertheless, the Mexican Tax authoritiesmay disagree with this position, thus most likelythis issue may have to be solved in a tax court. Asof today, there are no court precedents (againstor in favor) dealing specically with the issueanalyzed in this article. Therefore, it will be veryimportant to closely follow the evolution of thisissue.

Ernesto Torres ([email protected]) is Partnerwith the rm Chevez, Ruiz, Zamarripa y Cia., S.C.,

in Mexico City.

Invitation to PublishSince 1991, WorldTrade Executive,

Inc. has published periodicals and spe-cial reports concerning the mechanicsof international law and finance. Seehttp://www.wtexecutive.com. If youhave authored a special report of interestto multinationals, or compiled data, wewant to hear from you.

By publishing with WorldTradeExecutive, Inc. you establish your rmas a thought leader in a particular prac-tice area. We can showcase your work to the many corporate leaders and theiradvisers who turn to us for insights intocomplex international business prob-lems. To discuss your project, contactGary Brown, 978-287-0301 or editor @wtexec.com.




VAT

VAT from pag

Under Mexican VAT law, however, this is notabsolutely true.

Credit of Input VATFirst, there are a number of requirements

that must be satised for input VAT to be credit-

able, such as that the VAT is itemized in Mexicanprescribed invoices issued by the vendor, that theVAT is actually paid, that VAT was withheld, whencalled for under the law.

One requirement that has been the subject of discussions, tax assessments and litigation is thatVAT pertains to purchases of goods or services orto rentals that are strictly indispensable. Strictlyindispensable is dened as the correspondingexpenses being deductible for income tax pur-poses. This language has given rise to conictinginterpretations.

Oftentimes the VAT taxpayer is not subject to

Mexican income tax, such as the case of a foreignentity selling in Mexico through a truly indepen-dent commission agent. While VAT is triggeredunder these circumstances and the foreign prin-

the provision should be interpreted by negativeimplication, in the sense that, when the disburse-ment is, by denition of Article 32 of the IncomeTax Law, not deductible for income tax purposes,then the VAT paid thereon is not creditable. Thiswould be the case, for example, of the purchase

of a recreational home or a recreational boat or bar consumptions. These items are expresslynot deductible for income tax purposes. Andthe VAT paid thereon should not be deductible.Here the logic is that the lawmaker does notwant to recognize tax attributes to certain listeddisbursements that it considers are not related tothe taxable activities of the taxpayer, such as thosementioned above, and thus it denies an income taxdeduction, and also the possibility to credit VATon such disbursements.

This discussion was ongoing between thetax administration and taxpayers for a number

of years, until recently. In December of 2007 theMexican Supreme Court settled the issue by rul-ing:

The historic study of the foregoing provision, es-tablishing, among other requirements, that in order forvalue added tax shifted to be creditable, the expenses,investments, purchases and, in general, any other dis-bursement must be deductible for income tax purposes,shows that it is not necessary for the individual or legal entity to be a payer of both taxes or, thus, tobe liable to income tax in accordance with the basesset forth in Articles 3, rst paragraph, and 4, secondto last paragraph, and, therefore, it is not possible to

hold, if it is an exempted taxpayer, if it receives exemptincome or if for any other tax benecial situation it isunder no obligation to pay income tax, as these aspectsare irrelevant for purposes of this credit, given thatthe ordinary lawmaker only utilized the system of deductions in this latter tax but not the rules thereinregarding when tax is due and who is liable to that tax;however, in order to comply with the above requirement,the rules regarding deductions for income tax purposesmust be observed, among which those regarding pro-portions, limits or maximum deductibility percentagesare salient, given the existing consistency between bothtaxes and observing the uniformity principle that theordinary lawmaker sought to apply though the aforesaidArticle 4 of the Value Added Tax Law. [Free transla-tion. Emphasis supplied.]

In essence, the decision holds that it is notnecessary to claim an income tax deduction inorder for the input VAT paid to be creditable. Allthat is necessary is that the disbursements meetthe deduction requirements in the income taxlaw (and, of course, that they are not dened asnon-deductible).

Tr ar a mbr of rqirmt tat mt

be satised for input VAT to be creditable,

c a tat t VAT i itmizd i Mxicaprcribd ivoic id by t vdor,tat t VAT i actally paid, tat VAT wawitld, w calld for dr t law.

cipal is required to report and pay in the outputVAT, this principal does not have a permanent es-tablishment in Mexico and, as such, it is not liableto income tax in Mexico. Yet, it may have incurredexpenses in Mexico where it was required to payinput VAT, such as the commission of the agentitself, advertising of products, renting warehousesetc. Under the rule described above, as interpreted by the tax administration, this taxpayer would

have to report and pay in the VAT collected, butit could not credit the input VAT paid, because,since it is not an income tax taxpayer, it cannotdeduct the corresponding expenses.

Your author has always disagreed with thisinterpretation. In our view, the provision hasto be interpreted logically. What interconnec-tion is there between VAT and income tax thatwould justify that no VAT credit can be takenwhere an income tax deduction is not taken forthe corresponding disbursement? None! Thus,




VAT

cotid o pag 4

This decision is what we call “jurisprudence”in Mexico, which means that it is mandatory forall lower courts to follow.

While formally it is not mandatory for the taxadministration, acknowledging that any mattertaken to the courts would follow the decision,

the tax administration has begun reversing taxassessments where credit of input VAT was beingdisallowed because the taxpayer had not claimedan income tax deduction.

Export of Goods and ServicesRegarding resident taxpayers, VAT law pro-

vides that only the following goods and servicesthat are exported are entitled to a 0% VAT rate:

• Denitive exports in terms of the Customslaw.

• Sale of intangible property by residents tononresidents.

• Temporary use or enjoyment, outside of Mexico, of intangible property furnished byresidents.

• The following services rendered by residents,where the benefit is received outside of Mexico:

— Technical assistance and technical servicesrelated thereto, as well as know-how.

— Maquila and submaquila operations.— Advertising.— Commissions and mediations.— Insurance and reinsurance, as well as bonding

and re-bonding.

— Financing operations.— Filming or recording.— Telephone call centers.

• International cargo transportation carried on by residents.

• Cargo port activities related to exports.• International air passenger transportation

carried on by residents.• Hotel and related services to foreign tourists

attending congresses, conventions, exposi-tions or fairs.

• Independent personal services rendered bynon-merchantsFor many years there were questions as to

when the listed services were exported.The law simply required, with respect to the

physical exportation of goods, that the goodsare denitively exported in accordance with theCustoms Law.

Regarding services, the law provided and con-tinues to provide that the benet from the servicesshould be received outside of Mexico. But this,

in turn, begs the question of when the benet isreceived outside of Mexico.

The regulations issued in 2006 contributedgreatly to clarify the point by laying down a prin-ciple to the effect that the benet from services isconsidered received outside of Mexico when they

are contracted for and paid by a nonresident withno permanent establishment in Mexico, providedpayment is made by means of (i) a check to theorder or (ii) of fund transfers to the account of the service provider in nancial institutions or brokerage houses, both originating from nancialinstitutions outside of Mexico. Some special rulesregarding specic services were also included.

The issue, however, continues to be the factthat only listed services qualify for the 0% ratewhen exported. Services not included in the listdo not enjoy the preferential treatment.

One might argue, on Constitutional grounds,

that all services that are exported should not besubject to VAT. But this would require extensivelitigation, on a case-by-case basis, or at least untilour higher courts issue ve consecutive decisionsholding that all exports qualify for the 0% tax rateand thus form “jurisprudence”, mandatory on alllower courts as mentioned earlier. It would bepreferable if the law were to expressly set forththese principles. Lobbying efforts are necessaryif this goal is to be achieved.

Nonresidents also face VAT issues when ex-porting from Mexico, as, unlike the rules for resi-dent taxpayers, there is no general rule exempt-

ing or granting a 0% tax rate to sales consideredexports under the Customs Law.

A specic issue in this respect was faced,for example, of export sales made by the foreignowner of the production of Mexican in-bond man-ufacturing entities (known as maquiladoras).

The foreign owner of the production wouldeither physically export goods destined to foreign buyers or would transfer the goods to other Mexi-can maquiladoras, whether sold to a nonresidentor to the maquiladora itself, under special customsrules that provide that such transfers constitutevirtual exports when documented with virtualexport manifests or pedimentos by the transferormaquiladora and with virtual temporary importa-tion pedimentos by the transferee maquiladora.Before 2003, there were no rules of law relievingthese export sales from VAT. As mentioned, therule mentioned above regarding ä 0% rate fordenitive exportations in accordance with theCustoms Law, applies to resident sellers only, notto nonresident sellers.

T tax

admiitratio abg rvrig

tax amtwr crdit of

ipt VAT wabig diallowdbca t

taxpayr ad otclaimd a icom

tax ddctio.




VAT

VAT from pag

At the end of 2002, the author conceived and,through our lobbying practice, lobbied throughCongress a rule that expressly exempts from VATsales, between nonresidents or sales from a non-resident to a maquiladora and other entities withspecial customs regimes, of goods imported tem-

porarily by the maquiladora, provided the goodsremain in Mexico under temporary importationor are exported.

But as maquila operations continue to de-velop, a new rule has arisen from a customs stand-point, where the maquiladora production can be virtually exported on a permanent basis andvirtually imported on a denitive (not temporary) basis by any entity or individual in Mexico, whono longer needs to be a maquiladora or someonewith a special customs regime. The rule is greatfrom a customs standpoint but the problem is thatthere is no provision in the VAT law calling for

through employee leasing companies. Finally, inDecember 2008, the SAT again announced that,at its request, an arrest warrant had been issued

against a tax consultant which, according to theSAT, had pioneered aggressive tax schemes in thearea of employee leasing.

an exemption from VAT for these newly-devisedexport sales.

So, here again, interested companies mightwant to lobby for specic VAT exemption for thesetransactions. And, for that matter, it would bedesirable to lobby for an exemption for all types

of exports made by nonresidents, to cover for anynew developments and also for the very simplecase where a nonresident owns a given propertyin Mexico and later sells and exports the property,without any maquiladora involvement. No ex-emption is in place today for these sales either.

Jaime González-Béndiksen and Luis C. Carbajo areprincipals with Baker & McKenzie Abogados, S.C. amember of Baker & McKenzie International, a Swissverein. They can be reached at [email protected] or [email protected] © 2008 Baker & McKenzie

Leasing

through employee leasing. The purpose of thisarticle is to shed light on these questions.

Employee Leasing in a NutshellEmployee leasing is a strategy wherebyemployees of a client rm are transferred to orhired by a separate entity which then leases theseemployees back to the client rm. Hence, depen-dent services are transformed into independentservices. In addition to the potential economiesderived from the outsourcing of human resources,the strategy can have two legitimate tax andlabor benets. First, the client rm transfers tothe employee leasing company the mandated 10percent prot sharing requirement with regards tothese employees, which now share in the prots

of the latter. This can be benecial for employeesor not, depending on which of the two —client oremployee leasing rms— have the most prots.Second, the client rm buffers the labor risksassociated with the employees by placing theleasing company as a layer between itself andthe employees. Ultimately however, according toarticles 13 through15 of the Federal Labor Law, the beneciary or client rm is jointly responsible forlabor obligations related to the leased employees,

Laig from pag

employ laig i a tratgy wrbyemployees of a client rm are transferred

to or ird by a parat tity wic tla t mploy back to t clitrm.

Given the extent of employee outsourcingstrategies implemented by multi-national rmsin Mexico, this recent string of developmentsraises concern and questions about the scope of the Mexican Government’s program, its denitionof the line between tax evasion, avoidance andplanning in this area, and the legal powers that itmay have to combat what it perceives as evasion




Leasing

cotid o pag 6

of the Social Benets Fund (Fondo de PrevisiónSocial), as well as partners that do not considersuch amounts as income on which income tax isowed.

III. Who advises, counsels, participates orprovides services for the carrying out or imple-

mentation of any of the aforementioned prac-tices.This interpretation is applicable to general

partnerships (sociedades en nombre colectivo) andlimited partnerships (sociedades en comanditasimple).”

The preceding citations offer the followinginsights about the government’s employee leasingtax evasion program. First, it is targeting strategiesin which employees are formally given the statusof partners in employee leasing rms, deriving

if the employee leasing rm does not have theresources to comply with these obligations.

There is a third benet typically associatedwith employee leasing companies which how-ever can be construed as aggressive or unlaw-ful. Employee leasing companies are sometimes

used to lower the workplace risk classicationof employees for purposes of determining socialsecurity taxes owed. For instance, employee leas-ing companies often classify their activities as“administrative services” which may entitle themto a lower risk premium than the classicationthat would apply if the work actually performed by leased employees were considered.

Scope of the Employee Leasing AuditingProgram

In principle, federal authorities have statedtheir acceptance of human resource outsourcing as

a basic strategy to gain competiveness in a globalmarket, and thus concerns about a general attack on human resource outsourcing should be put torest. This position can be found, for instance, inthe declarations made by the General Directorof the IMSS to the House of Representatives onOctober 30, 2008.

Rather, the net cast by federal authorities ap-pears to be directed to what it considers aggressivestrategies carried out through specic vehicles. Ina June 16, 2008 press release, the SAT dened itstarget as follows: “The evasion behavior consistsof transferring employees to cooperative entities

(in Spanish: sociedades cooperativas), partnerships(in Spanish: sociedades en nombre colectivo) andintegrator and integrated corporations (in Span-ish: empresas integradoras e integradas) with thepurpose of avoiding prot sharing, federal andstate taxes, and well as social security taxes”. Thistarget is associated with the following amendednon-binding interpretation published by the SATin the Ofcial Federal Gazette (Diario Ocial de laFederación) on January 9, 2008:

“05/ISR. Cooperative entities. Salaries andsocial benets ( previsión social)

The following commit unlawful tax prac-tices:

I. Who, to omit total or partial payment of a contribution or to obtain a benet in detrimentof the federal treasury, establishes or contractsdirectly or indirectly with cooperative entitiesthe provision of identical, similar or analogousservices to those rendered by its employees orother service providers, current or past.

II. Cooperative entities that deduct theamounts paid to their partners which come out

I pricipl, fdral atoriti av tatdtir accptac of ma rorcotorcig a a baic tratgy to gai

comptiv i a global markt, ad tcocr abot a gral attack o marorc otorcig old b pt tort.

tax benets therefrom. On the one hand, sociedadescooperativas have a privileged regime under theSocial Security Act; while they are required to paysocial security taxes on their partners, those coop-erative entities registered with the IMSS by June30 1997, receive a 50 percent subsidy on a segmentof their social security taxes owed. On the otherhand, sociedades en nombre colectivo and sociedadesen comandita simple , have no formal obligation topay social security taxes on their industrial part-ners, and thus, by formally transforming employ-ees into partners, can omit payment of mandatoryemployee social security taxes.

Second, federal authorities are targeting

strategies that fall in the tax evasion category andothers that fall in the tax avoidance category whereit may not have the powers or legal grounding toeffectively combat undesired practices and wherechanges in laws may be necessary. For instance,in Section II of non-binding interpretation 05/ISRcited above, the SAT is going after what appearson its face to be an unlawful practice; i.e. notwith-standing that employees are now formally part-ners, some cooperative entities appear to be taking




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Leasing

Laig from pag 5

deductions, and partners taking exemptions, thatrequire formal employee status on behalf of thosereceiving the payments. Even courts have ruledthat this deduction and exemption are illegal.

A similar tax evasion scheme that the SATis combating pertains to “food” deductions. Ac-

cording to the General Business Entities Act (LeyGeneral de Sociedades Mercantiles), the industrialpartners (i.e. those that contribute work) of a So-ciedad en Nombre Colectivo are allowed to receivepayments for food which are charged against theentity’s prots. However, in the practice of someentities, it appears that these payments are beingdeducted as cafeteria services for employees, andthen treated as exempt payments for the industrialpartners. The SAT reasonably opposes both, con-tending that only “food” payments as dened bythe Civil Code are exempt for these partners. Suchpractices also fall under what can be considered

aggressive or unlawful practices by said entities.In addition, however, the SAT is also pursuing

what can be considered to fall under the categoryof tax avoidance (as opposed to tax evasion). InSection I of said non-binding interpretation, theSAT appears to be stigmatizing certain vehiclesas inherently unlawful for purposes of employeeleasing without consideration given to the actualfacts of each case. It should be noted that socie-

dades cooperativas , sociedades en nombre colectivo ,and sociedades en comandita simple are legal waysof conducting business in Mexico. They may havenot been designed as a loophole for avoidingtaxes, especially social security taxes, and the useof these vehicles for this purpose may be undesir-

able. However, taking action in this regard mayrequire changes in statutes to fully legitimize andsustain effective government action. The strategyfollowed by the SAT to combat these operationsacross the board appears to be that of construingemployee leasing through the abovementionedvehicles as “simulation”. To be successful un-der this strategy, the SAT must prove that thesevehicles are deliberately used to hide employer-employee relationships in detriment of the federaltreasury. Simulation, however, has been difcult toprove in the past and this case may be no excep-tion, as entrepreneurs may validly argue that they

are free to choose the corporate form or structurethat best suits their business goals under existinglaw. Any determination made by tax authoritiesmust be based on the actual facts of each case andapplicable statutes.

Finally, it must be noted that this program isrelatively new and little information is available.With time, more information on its objectives,scope, premises, and results should surface asit unfolds and matures. In addition, changes inthe legal system may be forthcoming. The bill of amendments recently approved by the House of Representatives, but not yet by the Senate, con-

tains the following changes: (1) The joint obliga-tion of beneciary client rms to cover any socialsecurity taxes owed by the employee leasingrm; (2) the obligation of the employee leasingrm to report on beneciary rms and the leasedemployees; (3) the obligation of the beneciaryrm to register with the IMSS, report on employeeleasing rms as well as leased employees, allowinspections, and provide solicited information onservices performed, and (4) the obligation of theemployee leasing rm to classify its workers in thehighest workplace risk category that correspondsto work performed by its employees. However, theend result may differ and the legislative processmust continue to be followed.

Esteban G. Dalehite, Ph.D., is a tax attorney and con-sultant with his own private practice in Mexico. Hecan be reached at [email protected]



11th Annual Latin American Tax ConferenceThe Biltmore Hotel, Coral Gables, FL March 10-11, 2010

Value Added Tax in Argentina

Martin J. Barreiro



Contents

1. General Comments .................................................................................................................1 2. Taxable Events.......................................................................................................................1

3. Taxable Base..........................................................................................................................1

4. Tax Rates...............................................................................................................................2

5. Exemptions ............................................................................................................................2

6. Imports ..................................................................................................................................3

7. Imports of Services.................................................................................................................4

8. Exports ..................................................................................................................................4

9. Exports of Services.................................................................................................................4 10. Refund of Excess Credit Positions ...........................................................................................6



Baker & McKenzie Value Added Tax in Argentina 1

1. General Comments

The Value Added Tax (in Spanish Impuesto al Valor Agregado ) is a Federal Tax on consumption createdby Law 20,631, enacted on 12/27/1973, as amended by Law 23,349, which replaced the old sales tax thatwas in force during the period 1935-1973.

The Argentine Value Added Tax is similar to the European Union’s Value Added Tax. It consists of a taxdebit and credit levied on the sale of goods located within the country or placed within the country, theprovision of most services, leases or works and imports of movable goods and services.

2. Taxable Events

According to Section 1 of the Value Added Tax Statute, the following events are considered to be taxable:

• Sales of goods located or placed within the Argentine Territory;

o Transfers of real estates are not subject to Value Added Tax.

• Provisions of services within the Argentine Territory;

o Certain transfers or assignments of rights made in connection with or in relationto certain provisions of services.

• Imports of goods to the Argentine Territory; and

• Imports of services.

3. Taxable Base

The taxable base on which basis Value Added Tax applies is the net price charged for the sale of goods orthe provision of services including, but not being limited to, readjustments, interest and finance chargeson deferred payments and the cost of insurance, freight and import duties in the case of imports.

The Value Added Tax regime currently in force in our country imposes Value Added Tax at each stage of the production and commercialization processes on a non-cumulative basis. This accumulation is

prevented by deducing from the taxpayer’s Value Added Tax liability through the deduction of the ValueAdded Tax such taxpayer has previously paid when acquiring goods or services to be used on its ownactivities subject to Value Added Tax.

During each calendar month, the taxpayer determines the amount of its Value Added Tax debit (outputValue Added Tax payable to the Federal Tax Administration) and reduces such amount in the amount of its Value Added Tax credits (input Value Added Tax paid to the taxpayers’ suppliers of goods or servicesor upon the import of goods or services).

In case there is an excess credit position, the taxpayer is entitled to request a refund or to use such creditto pay other federal taxes or event to transfer such excess credit positions to third parties, as long as such




excess credit position derives from the incidence of certain Value Added Tax withholding or collectionregimes.

In case of Value Added Tax credits (input Value Added Tax) deriving from goods or services which havebeen used in a process related to the export of goods or services, such Value Added Tax credits arecapable of being refunded to the taxpayer, if certain requirements are met.

Value Added Tax paid on the purchase, import, or rent of automobiles can be claimed as tax credit only tothe limit resulting from applying Value Added Tax on an acquisition or import costs no greater thanar$20.000. Certain exemptions apply.

4. Tax Rates

In accordance with Section 28 of the Value Added Tax Statute, this tax applies at the following rates,

among other cases:

• The general rate is 21%;

• An increased 27% rate applies on the provision of certain utility services;

• A reduced 10,5% rate applies on the provision of certain services -such as theconstruction industry, in as much as it relates to construction of housing units- and on thetransfer of certain assets, whether imported or manufactured locally. A list of customstariff numbers is used to determine whether the transfer of a given good is subject to thisspecial regime. The excess credit position generated by in the hands of the seller,originated as a consequence of these transactions, is subject to refund, under certain

conditions;

• The sale of magazines, newspapers and other frequent publications are also taxable at therate of 10.5%

• A reduced 10.5% rate also applies on interest and commissions paid on loans granted bylocal financial entities or banks or financial entities located in countries the Central Banksor equivalent organizations or which have adopted the international standards of bankingcontrol established by the Basle Bank Committee.

5. Exemptions

In accordance with the Value Added Tax Statute, the following items are released from taxation, amongothers:

• Books, pamphlets, periodicals, magazines, and so forth);

• shares and other securities:

• sale of bread, milk and ordinary water in its natural state to final consumer; and

• sale of medicine for human use by wholesale druggists and pharmacies




• life insurance, retirement insurance.

• short distance passenger transport,

• property rentals, commercial property rentals when the monthly payment is equal to orless than $ 1,500,

• educational services,

• health services related to the public healthcare system,

• stock exchange transactions,

• admissions to sporting events and artistic events or performances.

6. Imports

Import of goods into Argentina is governed by the Customs Code (Law No. 22,415), its regulatory DecreeNo. 1001/82 and other regulatory provisions issued by the Customs Authority. Import duties generallyrange from 0% to 25% calculated on the C.I.F. value of the goods. By means of Law No. 24,425Argentina approved the World Trade Organization Agreement (“WTO”) and Uruguay Round of theGATT, including the valuation rules.

In addition to the import duties, an importer is required to pay: (i) a charge called statistics fee of 0.5% of the customs value (normally C.I.F. value) of the imported products. However, the statistics fee is subject

to maximum amounts, depending on the value of the imported goods (e.g., where the value of importedgoods exceeds US$100,001, the applicable statistics fee is US$ 500); (ii) Value Added Tax, at theapplicable rates, depending on the tariff classification number of the merchandise to be imported, on theaggregate of the C.I.F. value of the products, the import duties and the duty for statistics; (iii) plus a 5%,10%, 20% or 21% advanced Value Added Tax payment and plus a 3%, 6% or 7% advanced income taxpayment applied on the basis described in (ii); and (iv) plus a 2.25% advance Gross Receipts Tax.

The following formula shows how to calculate the total import duties and taxes for a shipment importedinto Argentina. This calculation does not include brokers and non substantial additional import fees.

Import duty + statistics fee + Value Added Tax + advanced Value Added Tax payment + advancedincome tax = total import duties and taxes.

1. Import duty = (value of merchandise + freight + insurance) x (duty rate, 0% to 25%)

2. Statistics fee (if applicable) = [0.5% of (value of merchandise + freight + insurance)]

3. Value Added Tax = [(value of merchandise + freight + insurance) + import duty + statistics fee]x 21% or 10,5%, as applicable

4. Advanced Income Tax = [(value of merchandise + freight + insurance) + import duty + statisticsfee] x 3%, 6% or 7%, as applicable




5. Advanced Value Added Tax = [(value of merchandise + freight + insurance) + import duty +statistics fee] x 5%, 10%, 20% or 21%, as applicable

6. Advance Gross Receipts Tax = [(value of merchandise + freight + insurance) + import duty +statistics fee] x 2,25%

7. Imports of Services

Services rendered outside of the Argentine territory for use or consumption within the Argentine territoryby an Argentine resident taxpayer who is a Value Added Tax registered taxpayer are considered taxableunder the Value Added Tax statute.

Use or consumption is generally considered to take place where the service is utilized or their economicalconsequences are enjoyed or exploited.

This Value Added Tax is not payable or imposed on the provider of the service but rather on theconsumer -recipient- of the service.

The recipient self assesses, for instance, a 21% Value Added Tax on the amount paid to the provider of the service and such recipient of the service pays such Value Added Tax to the Federal TaxAdministration.

The month following the month in which said Value Added Tax payment was made, the recipient of theservice is entitled to claim a Value Added Tax credit (input Value Added Tax) equal to the Value AddedTax paid to the Federal Tax Administration.

8. Exports

In general, exports are subject to export duties varying from five per cent (5%) (manufactures) to twentyper cent (45%) (commodities) of the FOB value of the pertinent goods (oil and certain derivatives frompetrol may be subject to higher export duties). Resolutions 11/02 and 35/02 from the Ministry of Economy established additional export duties of 20%, 10% and 5% to certain goods. Such additionalduties will be added to the existent export duties.

The exportation of goods is exempt from Value Added Tax and Gross Receipts Tax. Argentine exportersare subject to Exchange Control Regulations and to the Criminal Exchange Control Regime. Exporters

must bring foreign currency proceeds from exports into Argentina in the mandatory terms prescribed bythe Central Bank. Foreign currency must be sold by the exporter in the free single exchange market.

9. Exports of Services

Value Added Tax applies on services rendered within the Argentine territory. However, servicesrendered in Argentina, but which are effectively used or consumed abroad, are not considered as servicesprovided within the territory of the Argentine Republic.

In order to determine whether a given service is used or consumed abroad, it is advisable to take intoaccount the resolution passed by the Federal Tax Administration (Administración Federal de Ingresos




Públicos - Dirección General Impositiva) by means of Communication No. 1288 (DGI), whereby theFederal Tax Administration held that: “... in order that ...hirings and provisions of services...beconsidered as exports ... must be made in the country and must be effectively implemented or developed in

a foreign country, irrespective of the place or territory where the supplier or employee is located, but taking into account the place where the service is performed or implemented. Thus, all soles

arrangements, intermediations, or representations made on behalf of companies residing in a foreigncountry, related to activities developed by them within /hu,4rgon//no territory, are subject to the tax,

because they are performed or carried out in the country.”

Therefore, according to the position of the Federal Tax Administration, services consisting on salesarrangements, intermediations or representations provided by Argentine taxpayers, within the Argentineterritory, to foreign companies, are considered as “effectively implemented or developed in the country”, provided said foreign companies “develop activities within the Argentine territory”.

In this sense, although it may be firstly held that services rendered outside of Argentina do not fall within

the scope of the terms of the Communication No. 1288 passed by the Federal Tax Administration, on thegrounds that such services are, in fact, provided outside the territory of the country, this conclusion mightbe considered hurried, in light of a recent judicial precedent.

In fact, in the matter of “Tecnopel S.A. on appeal - V.A.T.”, the Federal Tax Administration basicallysustained the view that, since the services of sales arrangements, intermediations or representationsprovided by Tecnopel S.A. to a foreign company consisted of exports that said foreign company made toconsignors residing within Argentina, the Federal Tax Administration considered such services as subjectto Value Added Tax.

This conclusion was based on the criterion according to which the activity of the foreign companies waseffectively implemented in the Argentine Republic as a consequence of the services of sales

arrangements, intermediations or representations and, therefore, it had to be considered that said foreigncompanies carried out activities within the country.

The criteria sustained by the Federal Tax Administration was not accepted by the Argentine Tax Court(Tribunal Fiscal de la Nación), which held that: “It is now worth pointing out that, according to the

criterion of this Court, it may be not be inferred from the above mentioned rule, as seemed to be done bythe Tax Authorities, that the mere existence of a sales arrangement in termediation or representation,without adding any other circumstances justifying so, allows affirming the existence of an activity of the

foreign company within this country, since, if such were the case, the clarifying rule would lack alllogical grounds, which evidently sets forth different cases in which two conditions must be met: 1) The

existence of the hirings and the provision of services, and 2) That they shall have been provided for companies simultaneously performing activities within the territory of this country.”

Based on the criterion arising from the previous paragraph, Chamber A of the Argentine Tax Court heldthat the services provided by Tecnopel S.A. are Value Added Tax - exempt and that, moreover, ValueAdded Tax credits related to such services are subject to refund by the Federal Tax Administration.

To reach said conclusion the Tax Court considered the following facts:

a) They were services of information and support tasks invoiced to foreign companies that, by virtueof the obtained information, exported the products directly to an importer of the country;

• The foreign beneficiary paid a commission for the rendered services;




• The foreign companies did not perform activities directly within the territory of thiscountry;

• Tecnopel S.A. did not participated in the performance and implementation of the saletransactions originating the imports;

• Tecnopel S.A. restricted its performance to arrange sales as a representative “of theproducts”, without assuming any liability for the effective implementation of the saletransaction;

• Tecnopel S.A. did not take part in the sales transaction, because it was directly madebetween the foreign exporter and the importer from this country;

• Tecnopel S.A. did not assume any liability for the quality of the product nor for defects ornon-deliveries, nor for any other reason between the exporter and the importer;

• The collection of its commission was subject to the effective performance of exports.

10. Refund of Excess Credit Positions

Value Added Tax debit (output Value Added Tax) arising from taxable transactions carried out byexporters may be offset against Value Added Tax credits (input Value Added Tax) charged to suchexporter for goods and services effectively used for or connected with Value Added taxable transactions.

Where Value Added Tax credits related to export transactions exceeds Value Added Tax debits derivedfrom other taxable transactions, the excess may be used to cancel other Federal Tax liabilities of the

taxpayer, if any.

In case there is an excess credit position, the taxpayer is entitled to request a refund or to use such creditto pay other federal taxes or event to transfer such excess credit positions to third parties, as long as suchexcess credit position derives from the incidence of certain Value Added Tax withholding or collectionregimes.

In case of Value Added Tax credits (input Value Added Tax) deriving from goods or services which havebeen used in a process related to the export of goods or services, such Value Added Tax credits arecapable of being refunded to the taxpayer, if certain requirements are met.

To use such credits to cancel other Federal Tax liabilities or to request the refund or transfer of such

excess credit positions, the Taxpayer who performs export transactions must comply with therequirements established by General Resolution 616 of the Federal Tax Administration.

An anticipated refund or transfer may be requested by the taxpayer in relation with export transactionsconcluded within the preceding six months as from the filing date and a security of repayment must begranted in the benefit of the Federal Tax Administration in order to cover any disallowance of a tax creditthe amount of which has been refunded in advance.



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11th Annual Latin American Tax ConferenceMiami, FL | March, 2010

VAT in Venezuela

José P. Barnola, Jr.(Caracas)

Ø



Table of Contents

I. Events Subject to VAT ...........................................................................................................1

II. Tax Rates...............................................................................................................................2

III. Tax Base................................................................................................................................2

IV. Exemptions, Exceptions and Non-Taxation ........ ....... ........ ....... .. ....... ....... ........ ....... ... ..... .... .....3

V. Obligations of VAT Taxpayers................................................................................................3

VI. Government Entities......... ......................................................................................................4

VII. Payment.................................................................................................................................4

VIII. Recovery of VAT...................................................................................................................4

IX. Non-Domiciled Suppliers........................................................................................................5 X. Export Services................................ ................................................................... ...................5

XI. Other Indirect/Excise Taxes ....................................................................................................7

XII. Special Rules..........................................................................................................................7



Baker & McKenzie VAT in Venezuela 1

Introduction

This paper will discuss value-added tax (“VAT”) in Venezuela. The information provided is necessarilygeneral in nature.

Venezuela is a democratic republic, divided into twenty-three states and one Metropolitan District

(Caracas), some three hundred and thirty five municipalities and a number of federal dependencies. It is afederal State, but with several limitations regarding the powers of the states and municipalities. All threeterritorial levels have taxing powers. The Constitution assigns the VAT to the national (federal)government, although the national government redistributes 15% of the VAT revenue to the states and

municipalities.

I. Events Subject to VAT

According to Article 3 of the Value-Added Tax Law, published in the Official Gazette No.38.632 of

February 26, 2007 (“VAT Law”) the following events are subject VAT liability: (i) the sale of movabletangible property, including any fractional rights on the property of any such goods, as well as the

withdrawal, separation or detachment of any movable goods; (ii) the importation of movable tangibleproperty; (iii) the provisions of independent services, performed or enjoyed within Venezuela; and (iv)

the exportation of goods and independent services.

For VAT Law purposes, the following meaning will be given to each of these terms:

(1) Sale: the conveyance of property on movable assets performed on an onerous title, regardless of

whatever other denomination should be given to the transaction by the parties involved; and willinclude those sales where the ultimate conveyance of the title on the said property is subject toany condition. A sale will also comprise the delivery of movable goods whereby assigning

property-like rights over these, and in general every onerously conferred consideration, where thegreater part of the operation should consist of the obligation of the supplier to give or to provide

certain movable goods.

(2) Movable goods: personal chattels and assets which may be carried from place to another whetherby themselves or by extraneous power, provided they are corporeal or tangible and excluding allfinancial papers (securities).

(3) Withdrawal, detachment or separation of movable goods: the exclusion of any movable assets

from the inventories of products, purported for their sale and effected by the taxpayer for his ownuse or consumption or for that of his associates, directors or corporate personnel or for other

purposes, such as lotteries, raffles, or the free distribution with promotional goals, and in generalfor any reason other than the normal disposal of the good by means of its sale or delivery to thirdparties on an onerous title. It will be deemed withdrawn or detached and will hence be taxablehereunder, any goods missing in the inventories and whose exclusion can not be justified by the

taxpayer, at the discretion of the Tax Authority.

When the withdrawal of movable goods is used or consumed in the activities carried out by thetaxpayer, used to be incorporated into the fixed assets of the taxpayers, or be incorporated to the

construction or repair of a building used for the carried out activities of the company.




(4) Services: any independent activity where the main obligations involved are obligations to perform

(“Obligaciones de hacer”). It will be construed as services all building contracts involvingmovable or immovable property even when the contractor should provide for the material; the

supply of water, power, telephone and waste disposal; the lease of movable goods and anyonerous conveyance of the use of any such goods or rights; the lease and assignment of goods in

commercial establishments located within the country and the lease or assignments for the use of intangible goods such as trade marks, patents, copyrights, artistic and intellectual works, scientific

and technical projects, researching works, instruction manuals, computer programs and all othergoods comprised and governed by the Law on Industrial, Commercial and Intellectual Property or

Transfer of Technology. Also, the lotteries activities, the distribution of lottery, casino andbingos tickets; and the activities realized by social and sportive clubs. Race track activities and

the public lotteries activities are not subject to VAT liability. The lease of real property when it isused for purposes other than residential use is subject to VAT liability; while the lease of real

property for residential purposes is not subject to VAT liability.

(5) Definitive importation of goods: the introduction of foreign merchandise into the country with thepurpose of its definite keeping within the national territory, subject to the payment, exemption orexoneration of the respective duties and customs taxes, and prior compliance with the formalities

set forth in the corresponding customs regulations.

(6) Export sales of movable tangible goods: any sale under the terms hereof whereby enabling theexit of movable goods out of the country, provided that the sale is effected definitively and that

the use or consumption of the goods is effected outside the national territory.

(7) Exportation of services: the supply of services under the terms indicated above, when theeffective beneficiaries are not domiciled in Venezuela, provided that these services areexclusively used o enjoyed outside the country.

Services rendered outside Venezuela will be subject to VAT liability to the extent the beneficiary of theservices uses the services in Venezuela. In that case the beneficiary of the services will be liable for

assessing and paying the applicable VAT.

II. Tax Rates

At the present moment the general tax rate is 12%. The tax rate applicable to the exportations of goodsand services is 0%. There is a reduced 8% tax rate for certain goods and services. Luxury items are

subject to an additional tax rate of 10% (i.e. cars with a price above USD30,000, motorcycles with morethan 500 cc, arcade and slot machines, helicopters and airplanes used for to sportive or recreational

purposes; bullfighting bulls, gated horses, caviar; and jewels whose price is more than USD500).

III. Tax Base

The VAT rates apply to the taxable base. Pursuant to Article 20 of the VAT Law, in the case of sale of personal property, whether cash or credit, the amount subject to taxation will be the price stated in the

respective invoice, provided that said price is not lower than the current market price of that same assets,in which case the taxable base will be the latter.




In case of the importation of goods, VAT will be levied on the customs value of said goods plus any

duties, surcharges, compensatory fees, antidumping tariffs, late payment interest and other expensescaused by importation of the goods, excluding the VAT and any other applicable national taxes (i.e.

alcohol or liquors tax, cigarettes or tobacco taxes).

In the case of services, the taxable base will be the total consideration invoiced. If said considerationincludes the assignment or the supply of movable goods or the incorporation of these into any immovable

goods, the value of the movables will be added to the taxable base in each case.

IV. Exemptions, Exceptions and Non-Taxation

Articles 17, 18 and 19 of the VAT Law contain several provisions pursuant to which importation and

sales of certain services or goods are exempt from VAT, such as (i) importation of goods under duty-freepermits; (ii) importation and sale of hen eggs, chicks and chicken for breeding; (iii) r ice, (iv) bread and

pastas; (v) white cheese; (vi) hostel services for students; (vii) tickets or access fees to cinemas, theaters,cultural and sports events; (viii) water supply; (ix) electric residential supply, (x) garbage collection; (xi)medicines; (xii) fertilizers; (xiii) operations performed by financial institutions, (xiv) passenger

transportation within the territory of Venezuela.

Pursuant to Article 16 of the VAT Law, the following are not subject to VAT: (i) all non-definitiveimports of movable goods into the country, as provided for in the respective customs regulations; (ii) the

sale of intangible or incorporeal movable goods, such as fiscal credits, shares, bonds, mortgagecertificates, commercial papers, endorsed drafts, corporate bonds, and other certificates and securities ingeneral, whether public or private, representing cash values, credit or rights other than copyrights onchattels and any other instrument representing transactions not subject to VAT; (iii) monetary loans; (iv)

transactions and services generally performed by banks, credit institutions and other corporations

governed by the Banks and Financial Institutions General Law, including leasing operations and moneymarket funds. Likewise, not subject to taxation are: operations conducted by commercial banks andfinancial institutions ruled by separate special legislations; those by the savings and fund associations,

pension funds, retirement funds and social security funds, cooperatives, stock exchanges and by anysavings and loan institutions; (v) insurance, reinsurance and other operations carried out by insurance and

reinsuring companies, insurance agents, brokers and firms as defined in the respective legislation; (vi)services rendered under the status of employment as described in the Organic Labor Law; and (vii) the

activities and transactions effected by entities created by the National Executive Power in compliancewith the Organic Tax Code, with the purpose of ensuring the efficient administration of the excises withintheir taxing power. Likewise, the activities and operations carried out by the entities created by State and

Municipal Authorities for similar purposes.

On the other hand, the Executive has granted the exoneration of VAT to several activities, normally of public interest. This is the case of the project for building a bridge over the Orinoco River, projects

related to the creation of universities and projects related with bauxite and aluminum mills.

V. Obligations of VAT Taxpayers

VAT taxpayers are required to issue invoices for each sale or service and all other taxable operations

effected. These invoices should separately state the amount of VAT involved. In cases of transactionsthat are assimilated to sales, and that, due to their nature, do not cause the issuance of an invoice, the

seller will provide the purchaser with proof of payment whereby evidencing the VAT caused in thatparticular transaction.




Also, the taxpayers are obliged to keep special purchases and sales books, records and any additional filesthat should be required, and will open special accounts in order to ensure the fulfillment of the legal

requisites herein described and of all other relevant regulations. Most particularly, taxpayers will book alltheir transactions, including those not taxable under the VAT Law and all new invoices or similar

documents and any credit or debit notes issued or received. All transactions will be booked in thecalendar month considered as that of their execution, whereas the credit and debit notes will be entered,

according to the case, in the calendar month of the issuance or the reception of the documents generatingthem.

VI. Government Entities

According to Article 7 of the VAT Law, state entities established in the form of corporations, autonomous

institutions and other decentralized entities not comprised within the Powers of the Republic, the States orthe Municipalities, as well as the entities created by them, will qualify as ordinary or occasional taxpayerswhenever incurring in any of the transactions subject to VAT as described herein, even when exempted or

exonerated from other taxes by other laws or municipal ordinances.

The provision of independent services or the sale of tangible movable property by VAT taxpayers togovernment entities is subject to VAT liability. Therefore, the government agency will be required to pay

the applicable VAT as if it were a final consumer.

VII. Payment

All taxpayers are required to file a monthly VAT return and pay the corresponding tax within the first 15days of each month. The VAT is based on a credit and debit system. In this respect, the amount to be

paid shall be the difference between the output VAT or tax debits (i.e. the VAT charged bay the taxpayerto its clients for the services rendered or personal property sold in the country) and their input VAT or tax

credits (i.e. the VAT paid by the taxpayer to its suppliers and service providers or on the importation of goods and services).

The VAT due on definitive imports of goods and services will be determined and paid by the taxpayers atthe time of filling the customs declaration. All VAT due on imported services will be determined and

paid by the taxpayers once the taxable activity has occurred or arisen.

VIII. Recovery of VAT

Exporters of goods and services are entitled to recover any fiscal credit arising from the VAT paid in

inputs used in their export activities. Additionally, all persons developing industrial projects whosedevelopment should require more than six fiscal periods (the fiscal period is equal to one month), destined

essentially for their export and those generating income in foreign currencies, subject to the approval of the Tax Authority, may exercise their option to recover any VAT borne on account of the transactions,provided any such transactions are carried out during the preoperative stages of development of therespective projects.




IX. Non-Domiciled Suppliers

According to the Article 9(1) of the VAT Law, both the purchaser or acquirer of the movable goods andthe receiver of the services will be held accountable for the payment of the VAT, whenever the seller or

service provider is not domiciled in Venezuela. When services are rendered outside Venezuela by non-domiciled entities or individuals the local beneficiary of the services is liable for self-assessing and

paying the VAT applicable to the services. Article 3 of the VAT Regulations establishes several formalobligations that should be fulfilled by the licensee whenever the licensee qualifies as a VAT taxpayer. Inthis regard, the beneficiary will have to prepare an invoice on behalf of the provider of the service and paythe corresponding VAT on behalf of the latter. The invoices issued by the licensee must state that they

are issued in accordance to Article 9 of the VAT Law, and should refer to the invoices issued by theprovider of the service. Payments and invoices issued on behalf of the provider of the service, must also

be recorded in the beneficiary’s special purchases and sales books, but separately from the registration of the operations and invoices of the beneficiary.

The VAT will constitute input VAT for the beneficiary if it qualifies as an ordinary VAT taxpayer. Theprovider of the service will be required to issue an invoice to the beneficiary. The invoice will be ruled

by the applicable statutory provisions of the country of incorporation of the provider of the services, but if the beneficiary intends to use the invoice as evidence of the expense of the license fee for Venezuelan

income tax purposes, it must include the following information:

(i) Full trade name and domicile of the provider.

(ii) Itemized description of the compensation.

(iii) Date of issuance and total amount of the transaction.

(iv) Full trade name and Venezuelan taxpayer information number of the beneficiary.

X. Export Services

According to the VAT Law, an export of services exists when: (a) the service is provided in Venezuela.In this respect, the Fifth Superior Tax Court has held that export services require that the services areprovided in Venezuela because otherwise “we would not be in presence of a transaction subject to theterritorial application of the corresponding Law, but an extraterritorial activity, out of such scope of

application” (3Com International, Inc., Sucursal Venezuela v. Treasury, decision of August 25, 2004).1

As a corollary, it is clear that, under Article 15 of the VAT Law, services provided outside Venezuela to a

non-domiciled beneficiary that uses the services outside Venezuela qualify as extraterritorial services,irrespective of the fact that the provider of the service is a company domiciled in Venezuela. Therefore,

extraterritorial services do not qualify as export services under the VAT Law; (b) the service is providedto a beneficiary non-domiciled in the country; and (c) this service is exclusively used or enjoyed abroad.

1It is important to highlight that, although this decision was partially revoked by the Administrative

Chamber of the Supreme Court of Justice through decision of January 16, 2008, the Supreme Court did

not dispute the holding of the Fifth Superi or Tax Court in connection with the fact that services must be

rendered in Venezuela in order to constitute an export of services.




Normally requirements (a) and (b) are easy to determine. The doubt would arise regarding the third

aspect, considering that neither the VAT Law nor its regulations define what must be understood by“exclusively used or enjoyed abroad”.

The Integrated National Service of Customs and Tax Administration (“Servicio Nacional Integrado de

Administración Aduanera y Tributaria”) (“SENIAT”) has considered that the use and enjoy of the exportshall be analyzed with respect to the provider of the service, in order to conclude that, when a VAT

taxpayer provides services in Venezuela, the service will not be considered as an export, regardless thatthe beneficiary from the service uses or enjoys it of outside Venezuela (Ruling No. DCR-5-629 of April

29, 1998). This reasoning is wrong since, logically, only the beneficiary of a service can use or enjoy it.

On the other hand, an unpublished ruling (No. DCR-5-1053B of 2001) SENIAT analyzed the case of aVenezuelan company that was dedicated to provide telecommunications’ services that consisted of

connecting a foreign caller with a local recipient. Although the description of the facts is not very clearfrom the wording of the ruling, SENIAT concluded that services provided by the Venezuelan company

did not qualify as an export of services because at least one portion of the services was used in Venezuela,although SENIAT did not analyze why the service was used in Venezuela.

Nonetheless, a decision of Venezuelan tax courts on these matters (Case C. Steinweg Venezuela, C.A. vs.National Treasury, Fourth Tax Court, decision of November 10, 2003) discussed for the first time the

definition of export of services to the VAT effects. In that case, C. Steinweg Venezuela, C.A.(“Steinweg”) was a company domiciled in Venezuela that provided services of inspection, verification,

pack, load and storage of Venezuelan merchandise for export, which were bought by foreign companies.Steinweg applied a VAT rate of 0% to the invoices of the services for considering that it was an export of

services. SENIAT considered that the services were subject to the VAT because Steinweg waseconomically beneficed from them in Venezuela. In the judicial tax appeal that Steinweg filed against thedeficiency assessment, Steinweg alleged that the services were enjoyed and used in their totality outside

Venezuela, since no benefit was obtained by the clients in Venezuela, since the material was not stored,treated or sold by these clients beneficiaries in Venezuela, therefore, there were no connection betweenthe services provided and their using of enjoy in Venezuela.

According to the Court, the system adopted by the Venezuelan legislation on the matter of goods and

services is the principle of imposition in the destiny country. According to this principle, the VAT mustbe caused and paid in the country in which it is consumed, independently that their origin is national orimported. The Court considered that an export of services must comply with the following characteristicsaccording to the VAT Law: (a) services must be provided in Venezuela; (b) the address or residence of the recipients or beneficiaries of the services must be located abroad; y (c) services must be exclusively

used or enjoyed abroad. Regarding the first condition, the Court indicated that the service must beprovided or executed in Venezuela on order to qualify as an export of services.

Regarding the “use” or “enjoyment” of the services, the Court concluded that “use” or “enjoyment” of theservices by the beneficiaries happens outside Venezuela since the beneficiaries have economicallyincorporated o used the services abroad. This was because the services took of the country

simultaneously with the exported merchandise, and then the goods were processed and commercializedabroad. Since the beneficiaries of the services were domiciled abroad, the court concluded that the

services provided by the Steinweg complied with the three legal requirements and, inconsequence, theservices qualified as an export of services subject to a VAT rate of 0%.

The commentators follow the same position, clarifying that the benefits of services must be consideredenjoyed in the jurisdiction where the economic center of the recipient of the service is located, in whichthe service is addressed to the commercial activity that it is made in and from that establishment




(PAREDES, Carlos. Territorialidad de los Servicios en el Impuesto al valor Agregado Venezolano, en

Imposición al Valor Agregado (IVA) en Venezuela. AVDT, Caracas 2004, p. 588).

XI. Other Indirect/Excise Taxes

Others indirect taxes included in the Venezuela tax system are: (i) spirits and alcoholic’s beverages tax;(ii) cigarettes and tobacco manufacture tax; and (iii) the salt and oysters tax (this tax corresponds to theStates).

XII. Special Rules

According to the Orders Nos. 0056 and 0056-A issued by SENIAT, special taxpayers and the National,

State and Municipal Public Entities have been designated as VAT withholding agents. In consequence,the special taxpayers are obliged to withhold the 75% of the tax rate applicable to the transaction.Specials taxpayers are those designated by SENIAT because of their level of income or activities they are

engage in. VAT withholding has caused sever cash-flow problems to taxpayer.

A simple example will illustrate the basic operation of VAT withholding and the cash-flow problemsindicated above. In the example we have assumed that the applicable VAT rate is 12%.

Example

We have assumed that in a given month the taxpayer has bought or imported movable property and

services for VEF100 and paid VEF12.00 as VAT to its suppliers or upon importation (which will generate

fiscal credits). In the same month it has sold movable property and services in Venezuela for VEF200,charging its clients VEF24.00 as VAT (which will generate fiscal debits). In this case the VATwithholding for sales is VEF18.00 [i.e. (VEF200 x 75%) x 12% = Bs.18.00] and that the taxpayer is

allowed to deduct the VAT withheld:

Purchases (VEF)

Price Paid 100.00

VAT (12%) +12.00

Total 112.00

Sales (VEF)

Price charged 200.00

VAT (12%) +24.00 (Bs.18 withheld)

224.00

VAT due by the Taxpayer (VEF)

24.00 (fiscal debits in sales)

- 18 (VAT withheld)

- 12.00 (fiscal credits in purchases)

-6 (excess VAT to be carried forward to the following three months)

The VAT paid by the taxpayer to its suppliers of goods and services would constitute a fiscal credit forthe taxpayer. Thus, the taxpayer must pay to the Treasury the difference between its fiscal debits,

constituted by the VAT charged to the clients (less the 75% withholding) and its fiscal credits constitutedby the VAT paid to the suppliers. In this scenario it is very likely that the 75% would exceed the




difference between taxpayers’ fiscal debits and credits (as evidenced in the example above), and,

therefore, taxpayer would pay, through the withholding mechanism, VAT in excess of the VAT due if there were no withholding (“Excess VAT”). The VAT Withholding Order provides that Excess VAT

may be carried forward for three months. If, after the three months, there should remain a surplus notdeducted, the taxpayer may elect to recover the Excess VAT from SENIAT by filing a recovery request.

Although SENIAT should respond the recovery request within the following 30 business days, SENIATis notoriously late in delivering the response. For example, delays on recovery procedure have ranged

from three months to even more than one year.

Under the Organic Tax Code, the Excess VAT could not be used by VAT taxpayers to offset theobligation to pay other federal taxes (e.g. , income tax) nor could it by assigned to other taxpayers in the

absence of a law allowing such offset. However, the amendment to the VAT Law of 2004 included a newsection in Article 11 pursuant to which, once SENIAT approves the recovery of the Excess VAT, the

VAT taxpayer may, alternatively: (i) await for the reimbursement through the Special Certificates of TaxReimbursement, which must be issued by the Venezuelan Central Bank; (ii) offset the credit against the

obligation to pay other federal taxes (e.g., income tax); or (iii) sell the credit, normally at a discount, toother taxpayers for their use. The first option has always been disregarded by taxpayers because, unlikeother jurisdictions, the Venezuelan Central Bank is also notoriously late in issuing the certificates. The

second option is attractive for the taxpayer if it has other federal taxes to pay. The third option isattractive for the taxpayer because, although discounted, it generates cash flow, and it is attractive for the

buyer because the credit can be used at face value. The new provision of the VAT Law constitutes animportant recent change that may somewhat ameliorate taxpayer’s cash-flow problem described above..



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Mexican Tax Laws and Arrangements

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