In December, Mexico enacted the 2014 tax reform package, which will have immediate and ongoing income tax accounting consequences for many organizations. Companies with operations in Mexico should determine the impact of the new legislation on their financial statements under either US Generally Accepted Accounting Principles (US GAAP) or International Financial Reporting Standards (IFRS).
In December of 2013, President Enrique Pena Nieto signed the 2014 Mexican tax reform package and it was then published in the Mexican Official Gazette. Although the measures are effective as of January 1, 2014, organizations will need to consider the tax accounting implications to their financial statements as of the first reporting period which includes December 2013.
Under the Mexican tax reform package, the current corporate income tax law is repealed – including the flat tax regime and tax consolidation. The main income tax aspects of the new law include changes to future income tax rates, modifications or limits on certain deductions, modifications to the maquiladora regime, and the addition of a new mining royalty.
For additional details on the 2014 tax reform package, reference: http://www.publications.pwc.com/DisplayFile.aspx?Attachmentid=7028&Mailinstanceid=28641
Under US GAAP, organizations are required to use the tax law in effect at the balance sheet date of the relevant reporting period. The impact of enacted tax law changes should be assessed on both existing deferred tax balances and current year activity. For existing deferred tax balances, the associated impact would be included as a discrete item in the interim period in which the changes are enacted. To the extent the tax law change related to current year activity, the impact would be reflected in the estimated annual effective tax rate (AETR). The effects, both current and deferred, are reported as part of the tax provision attributable to continuing operations, regardless of the category of income in which the underlying pre-tax income or expense or deferred tax asset or liability was or will be reported.
Under IFRS, organizations are also required to use the tax law in effect at the balance sheet date of the relevant reporting period and tax law changes need to have been substantively enacted by the balance sheet date for deferred tax balances to be adjusted, or for the impact to be reflected in the estimated AETR, if applicable. Organizations should 'backwards trace' the effects of a law change upon existing deferred tax balances in order to determine the portion of the adjustment that is recognized as part of the tax provision attributable to continuing operations or otherwise recognized as part of the tax provision that is allocable to other comprehensive income or equity.
Previously, Mexican corporate tax law included a scheduled rate reduction to 29% in 2014 and 28% in 2015. This rate reduction is repealed and the corporate income tax rate of 30% will be maintained. As such, for both US GAAP and IFRS filers, temporary differences expected to reverse from January 1, 2014 onward should be recognized at 30%.
The elimination of the flat tax will cause some organizations to re-calculate their deferred taxes using the regular tax regime and record a resulting 'true-up' adjustment. Specifically, they will need to calculate the temporary differences that arise in the determination of regular income tax and recognize those temporary differences at the regular income tax rate of 30%, subject to assessments for realizability of deferred tax assets. This will include the write-off of any deferred tax assets for flat tax net operating loss (NOL) carryforwards, which cannot be applied to offset regular income taxes.
The repeal of the income tax and flat tax laws eliminates the maquiladora regime tax reduction benefits granted by Presidential decrees. As such, this has the effect of increasing the effective tax rate on maquila profits from 17.5% to 30%.
The Mexican tax reform includes a new mining royalty at the rate of 7.5%, applied to a profit calculated by subtracting certain allowed deductions from gross earnings generated by the sales attributable to of extractive activities. Companies should further analyze this tax to determine the appropriate accounting model to apply.
The repeal of the existing consolidation regime will require organizations to carefully assess:
Taxpayers may elect to apply for a new simplified tax consolidation regime, which would allow a three-year income tax deferral period.
Other modifications that may impact the effective tax rate include:
Other modifications which may impact the effective tax rate include:
Companies should carefully determine the income tax accounting implications of the enacted Mexican 2014 tax reform package. The changes in tax law will have both immediate and ongoing tax accounting consequences for many organizations.
Access a PDF copy of the article on PwC.com.
For a deeper discussion of how this issue might affect your business, please contact:
Ken Kuykendall, Chicago
Global & US Tax Accounting Services Leader
Partner
+1 (646) 471 5687
o.k.kuykendall@us.pwc.com
David Wiseman, Boston
Global & US Tax Accounting Services
Partner
+1 (617) 530 7274
david.wiseman@us.pwc.com
Marjorie Dhunjishah, Lima
LATAM & US Tax Accounting Services
Partner
+511 211-8019
marjorie.dhunjishah@pe.pwc.com
Gary F. Jones, Boston
Global & US Tax Accounting Services
Managing Director
+1 (617) 530 5663
gary.f.jones@us.pwc.com
Fausto Cantu, Monterrey
Mexico TAS Accounting Services Leader
Partner
+52 (81) 8152 2052
fausto.cantu@mx.pwc.com
Angel Espinosa, Mexico City
Mexico Tax Function Effectiveness
Partner
+52 (55) 5263 8525
angel.espinosa@mx.pwc.com