FISCAL POLICY

The Mexican tax system has recently undergone a comprehensive inspection. New legislation enacted in recent years has dramatically changed the tax system, making it competitive with those of Mexico's major trading and investment partners.

Mexico's tax legislation includes specific taxes on income, capital, commercial transactions and contracts or agreements. Since 1986, tax legislation has been revised in order to place it on the same footing as that of most industrialized nations. As of 1991, corporate income tax is down to 34.0%.

Taxpayers must apply for a federal registration number. Both, subsidiaries or branches of foreign corporations are subject to taxes the same way as Mexican owned corporations, and no further tax is imposed on income already subjected to corporate income tax.

1. Corporate Income Tax: Under the Mexican Income Tax Law (LISR), a Mexican corporation is subject to corporate tax in Mexico on its worldwide net income at a rate of 34%.

2. Withholding Tax Dividends: Dividends distributed to a foreign corporation are not subject to withholding tax if distributed from the company's 'net after-tax profit account'. The 'net after-tax profit account' is comprised of the company's net after tax profit for each fiscal year, plus the dividends received by the company from other companies resident in Mexico, minus the dividends distributed in cash or in-kind from that account. The net after-tax profit for a fiscal year is the amount that results from subtracting the company's taxable income for the year: (i) the worker's participation in the profits of the company, (ii) the company's income tax liability, and (iii) its nondeductible expenses.

3. Other Withholding Taxes: Royalties, license fees or other compensation paid by a Mexican licensee to a nonresident for unpatented technology of trademarks are subject to a withholding tax at a rate of 35%. When royalties arising under the same contract are paid for both patented and unpatented technology, the withholding tax rate will be 15%

Interest payments to nonresidents are subject to withholding tax rates of 15%, 21% or 4.9% or 10% for residents of a tax treaty partner, and 35%, depending on the type of payee. In general, if the payee is a foreign bank or other financial institution registered with the Ministry of Finance, the interest payments will be subject to a withholding tax at a rate of 15% or 4.9% for residents of a tax treaty partner. If the payee is:

In any other case, interest is subject to a withholding tax at a rate of 35%.

4. Tax on the Sale of Share: The sale of shares of a Mexican company is subject to Mexican income tax, regardless of where the sale takes place. Foreign residents who sell shares of Mexican companies, are subject to a 20% tax on the gross proceeds from the sale, or, at the option of the foreign resident, if it has a legal representative in Mexico, to a 30% tax on the net gain derived from the sale. The net gain, in the latter case, is determined by subtracting from the gross sale proceeds the seller's tax basis in the shares sold, adjusted for inflation and other factors as determined in the LISR.

5. Asset Tax The Mexican Asset Tax Law, as amended on December 28, 1989, subjects Mexican business taxpayers (i.e., individuals or companies resident in Mexico engaged in business activities, individuals or companies resident abroad with permanent establishment in Mexico, and other foreign persons who own Mexican assets used in other business activities) to a tax on business assets at a flat rate of 1.8% of the value of such assets per annum. Taxpayers subject to the asset tax, may credit Mexican income tax payments against their asset tax liability for the current year. If the income tax payments exceed the asset tax liability in a given year, the taxpayer may request a refund of asset taxes paid during the ten prior fiscal years in the amount of the excess.

6. Value Added Tax: Mexico imposes a Value Added Tax (VAT) on all purchases of goods and services in the country. The general rate is 15% of the value of the product or service. The VAT normally operates by having each party in the chain of production collect the tax from its customer and pay to the tax authority the difference between the tax paid to its suppliers and the tax collected from its customers.

In the case of an exporter of goods, since they do not collect the tax from their customer, the government refunds them the full amount of the tax, which they paid in respect for the production of the exported goods.

Thus, an assembly-line industry, which exports all of its production, will be refunded any VAT paid in Mexico. In addition, a sale of goods to a maquiladora is considered an export and is therefore not subject to the VAT.

Imports are also subject to VAT at a rate of 10%, assessed on the customs value of the import plus the import duty. Because the importer is entitled to credit all VAT paid against VAT collected from its customers, the ultimate burden of the VAT is effectively passed along to the importer's customers.

7. Fiscal Policy: The strengthening of public finances has been the fundamental factor in the process of economic stabilization in Mexico. This strategy will be maintained, as public expenditures are limited, the tax base widened, and the finances of the remaining public enterprises will be improved. Fiscal discipline is considered essential to attaining a permanent reduction in the inflation rate and to laying the foundations for a sound expansion of the economy. It is involved fiscal reform, spending cuts, government down sizing, price retrain, and code changes that lower the tax rate while broadening the tax base.