Corporations in Mexico are taxed at a rate of 30 per cent on taxable income, and dividends paid out from a Mexican company are subject to a 10 per cent withholding tax for foreign corporations. A similar 10 per cent corporate tax is applicable to profits generated by a Mexican branch (permanent establishment) of a foreign entity.
Under Australia’s taxation agreement with Mexico, no withholding tax would apply if the beneficial owner of the dividend (except for civil partnerships) directly owns at least 10 per cent of the capital of the distributing corporation. In Mexico, compulsory profit sharing, equal to 10 per cent of taxable income as adjusted for this purpose, is payable each year to employees in Mexico, which is deductable for tax purposes.
Mexican branches of foreign entities are taxed in the same way as corporations, aside from the fact that payments for interest, commissions, royalties, or fees to the home office of the same legal entity are not tax deductable. However, some branches may deduct reasonable allocations of home office expenses. Mexican law generally follows the OECD model treaty definition of a permanent establishment
Double taxation relief is given by way of (limited) credit for foreign taxes paid. Mexico has more than 50 double taxation conventions in force, including with Australia, and is continually looking to broaden its treaty network.
The first tax treaty between Australia and Mexico includes a protocol, which was signed at the same time. A limited ‘force of attraction’ rule is included in the Business Profits Article in accordance with Mexico’s reservation to the OECD Model. This rule provides that:
Where a permanent establishment exists in one country, business profits derived by an enterprise of the other country from the sale of goods directly by its head office situated in the other country may be taxed in the first country, provided that those goods are similar to the ones sold through that permanent establishment.
This rule does not apply, however, where the sale of those goods was carried out in that manner for bona fide commercial reasons and not merely to obtain a benefit under the treaty. According to the Australian Taxation office,
…the Protocol inserts a provision into the Business Profits Article to ensure that profits derived by a non-resident beneficiary through a permanent establishment of a trust can be taxed in the country where the permanent establishment is located. Another provision in the Protocol ensures that Australian residents who do not have a permanent establishment in Mexico are not subject to the Mexican assets tax. However, this exclusion does not apply to assets covered by the definition of royalties that are used by a Mexican resident.
No special tax concessions are offered to encourage foreign business to locate to Mexico. However, special tax incentives are granted to tax payers that wish to contribute qualified film and theatre projects and to taxpayers involved in the agriculture, livestock, fishing or timber industries.
The Ministry of the Economy in Mexico maintains Sectoral Relief Programs (SRP) that are designed to support domestic manufacturers by allowing them to import components, raw materials, and equipment under a preferential import duty rate, regardless of their origin, provided the items are used in the production of goods authorised by the corresponding SRP. Most duty rates granted under these programs range from 0 per cent to five per cent.
Value added tax is charged on imports of goods and services at 16 per cent but there are specific duty deferral programs in place that allow temporary imports through the government’s maquiladora program or IMMEX program.
The main benefits of the IMMEX program are that it gives companies the ability to defer taxes on goods that are temporarily imported into Mexico and the ability to consolidate import declarations.