Mexico's new tax code: What Americans need to know

By: José Luis Sánchez Macías

Huge changes coming on January 1st, 2014 to the tax system.

MEXICO.- While American legislators can barely keep the federal government running due to its enormous gridlock, their Mexican counterparts and President Enrique Peña Nieto had an extremely productive (or counterproductive, if one opposes what they've approved) 2013, evident in a series of reforms to the country's education, energy, political , telecom and tax laws that promise to shape Mexico for the years to come.

One reform though, will shape Mexico immediately come January. Approved more than a month ago, President Peña Nieto's tax reform was met with mixed-reactions from most, and outright anger from some.

Why?

Via the blog Yucalandia.com, Spence McMullen, a fiscal attorney in the state of Jalisco specializing in legal issues affecting American expats in Mexico, explains some of the most pressing changes to the tax code that both Americans living in Mexico, and just about any other Mexican taxpayer, need to learn about.

Most of these will come into effect on January 1, 2014, something that McMullen warns will be a problem since most accounting firms, government tax offices and lawyers are completely overrun with appointments and most people will not be able to comply with the new requirements by next year simply because of the huge amount or work needed and little time at their disposal.

VIDEO: Just some of the opposition to several aspects of the tax reform law

VAT (IVA in Spanish) and other taxes will go up on the border:

The Value Added Tax, semi-analogous to a sales tax in the U.S., will go up, from 11% in the border region, to 16% as it is nationally. This increase also includes “taxes on soda, chewing gum, and pet food throughout Mexico… So, people with pets should stock up at Costco before the New Year. Dog shelters will be especially hard hit”, concludes McMullen. Gas, by the way, will not go up on the border, still being taxed only at 11%.

Big changes to investing and real-estate:

“Mexico has caught up to many other countries and will tax capital gains”, at a rate of 10% on sale of stock and dividends as well.

Changes at customs:

“Temporary importation of certain goods will also start being taxed. That could open the door in the future for a tax on the temporary importation of vehicles. Not yet, though.” There will also no longer be a requirement to use customs agents on every good, but customs will be comparing the value of goods “more closely” with other countries, so as to avoid undervaluing imports.

Tax reform also includes new banking regulations:

Banks will no longer have to charge you a 3% tax on single deposits exceeding $15,000 pesos, but, they are now required to report to the government’s tax authority (the SAT), all deposits over $15,000 pesos, and credit card payments of over $20,000 pesos made at a time. This is done so as to compare your payments with your declared income, giving you a “certain time frame” to respond to any discrepancies. But McMullen has an important point for Americans who spend part of the year in Mexico and the rest back home: “of course, you wouldn't respond if the address they have for you is old. All of this means that it is very important for people to make sure their bank has up-to-date home addresses and email addresses. "Banks will require people to have an RFC (tax ID Number) in order to have a bank account. That RFC number comes only after getting a CURP number, reminds McMullen, adding that “many who have temporal and permanent documents do not have CURP numbers, at times immigration issued them automatically and at times not, to be sure please check at http://consultas.curp.gob.mx/CurpSP/ and if you have no record then you have no CURP number.”

Small businesses will have more paperwork to do:

Currently, small businesses report gross earnings every two months through the REPECO system. Once they report their earnings for November-December in January, they will have to report their earnings through the regular tax system like big businesses, which includes reports of deductions, invoices (facturas), etc.

No more IETU Tax

The single-rate flat tax called the IETU will cease to exist.

Everything will now be done online, or “electronically”:

The government will eliminate paper invoicing, or facturas, in favor of electronic reports. All employees will have to be given online invoicing and payroll receipts, rather than paper ones, in order for employers to deduct their wages. “That system may not be ready by January 1st, by either the SAT or the businesses, so that’s going to create a lot of problems”, warns McMullen.

Non-profits must now be registered with tax authority.

Government will register non-profits if they want to receive a preferential tax treatment and donations, similar to U.S. tax statuses. “That’s obviously going to be critical for them. They should probably start that process immediately, and try to get their major contributors to donate before January 1st.”

Capital gains tax exemption for real-estate sales:

Any gains over 3,500,000 pesos, or $700,000 USD, will be taxed. Previous limit was 1,500,000.

Also, Steven M. Fry from the Yucalandia blog also reports that all purchases above $2,000 pesos will require debit, checks or credit, not cash.

McMullen agrees that these are only just "ones that I think will affect expats the most", as there are other ways in which SAT is modifying the tax code, noting that "they did some research to determine where and why they lost tax court cases in the past, and have now plugged some of the advantages taxpayers had in court."

Most of the criticism of these new rules argue the same basic thing: they take to much from those who are already paying taxes and does little to bring in more revenue from those who pay almost nothing, mainly informal businesses and employers and big businesses who are able to effectively bring down their tax rate to almost 0%.