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The Supreme Court has ruled that the controversial flat-rate business tax is constitutional, answering challenges in relation to related-party royalties, interest, the recovery of asset tax and the non-deductibility of certain investments. However, the ruling that the flat-rate tax is not a form of income tax may pose a problem for foreign companies and Mexico's treaty partners: can payments be credited under double tax treaties?

The Senate - Congress's upper house - has approved the 2010 Federal Revenue Law and a package of other federal tax amendment bills, which await presidential approval. The changes include a rise of two percentage points in the corporate tax and personal income tax rates.

Personnel services companies have been used in Mexico for many years as a legal and effective means of managing labour-related risks. Unfortunately, in some cases this practice has given rise to abusive schemes in which the real nature of an employment relationship is concealed or misrepresented in order to avoid payroll-related taxes. An amendment to the Income Tax Law has clarified the legal position.

For the first three years of the Calderón government, a simple majority in the Chamber of Deputies allowed the National Action Party to implement a number of tax measures, including the introduction of a flat-rate business tax. However, the shift in power at the recent elections will make it harder for the administration to introduce the revenue-raising reform programme that Mexico badly needs.

Tax Reform in 2005

19/11/2004

Under a new tax reform bill which, if approved, will become effective on January 1 2005, the general value added tax rate will drop from 15% to 12% and the rate for the border zones from 10% to 7%. Other provisions include reducing the income tax rate for corporations from 32% to 30% in 2005, 29% in 2006 and 28% in 2007, and a new 3% tax on sales to and services for the public.

Where payments of interest or royalties are made to residents of countries with which a tax treaty is in effect, reduced withholding rates apply, but the payer must prove to the Mexican payee that it is a resident for tax purposes in that country. A payer's certificate of residence should be in place for each applicable tax year and be readily available for the tax inspectors.

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