Taxing the Mexican moment

Apr 13th 2015 |

Mexico’s structural reform package is well underway, encouraging a sound financial sector, economic growth and investment opportunities and sparking what has been dubbed the ‘Mexican moment’ in the international press. The country already stands out in Latin America in terms of the ease of managing cash and treasury.

But some recent reforms have made life less easy, particularly in the area of tax. While Mexico follows OECD arms’ length principles on transfer pricing, having the right tax strategy in place is key.

In 2014, the Ministry of Finance set out rules to limit the deductibility of interest payments on cross border loans. This now depends on the structure of the group. Non-deductibility risk applies to royalties as well. “Cash pooling structures can be impacted,” says Juan Carlos Silva, tax partner at KPMG in Monterrey City. “Payments on behalf of could also be affected. In order for interest payments to be deductible, entities now need to demonstrate that payments come out of their own bank accounts.”

Another blow has been the rules to limit the benefits gained from fiscal consolidation. Also, withholding tax on interest income from offshore loans ranges from 4.9% to 40% depending on who the beneficiary is. Such rates may be reduced upon application of tax treaty benefits. If the loan comes from a non- Mexican bank, the tax liability is 4.9%.

Cashless roadblocks

Treasurers looking toward a cashless future may also be disappointed.

Only 30% of the population has a bank account, going down to 6% in rural areas. Some 47% of consumer purchases are in cash, leaving treasurers to face the costs and risks of handling it. The level of crime against transport vehicles is also high.

Several projects aim to reduce the use of physical cash. Mexican mobile point of sale service Sr. Pago launched a payment card system combining a smartphone chip credit card reader and reloadable debit card for the unbanked. Banamex (Citibank) and Telmex are behind ‘Transfer’, a mobile payment solution. “We have taken part in a pilot scheme, however, the problem is that all these initiatives require cash in and cash out points,” says Gisele Remy, treasurer at Belcorp. The lack of bank branches is partly addressed by networks of retail outlets that act as bank agents. But the other challenge is cultural: Mexicans have a profound distrust for electronic transactions.

“This is not surprising considering that – as mentioned in the Norton Cybercrime report – 71% of adult users in Mexico has at some point been a victim of cybercrime, against 61% at a global level,” says Nick Pane, Country Manager at Control Risks. “Eighty-six percent of this kind of crime is committed by employees.”

Treasurers should set up solid corporate governance policies to counter endemic fraud. The reform has also attempted to address this and comply with OECD Anti-Bribery Convention commitments. “Previous legislation only penalised employees, lacking elements to impose major fines on companies,” says Yves Hayaux du Tilly, partner at law firm NHG. This meant companies were left to their own internal compliance and control proceedings to avoid acts of corruption.

“Scandals such as those involving Siemens, ABB, Citibank and Walmart are a case in point. All of these were initiated as a consequence of investigations by foreign agencies and prosecutions in Mexico were limited to individuals involved in such scandals. Only individual employees were prosecuted.” The government is aware of the disadvantages of using cash and how it stunts economic development through tax evasion, money laundering and corruption.

New anti money laundering regulation requires transactions above a certain amount to be reported separately. This has moved the filters from banks to businesses, generating additional processes for treasuries and complicating daily operations. Sales of certain products have gone down as clients are reluctant to give personal information that could make them identifiable to the tax authority.

“This government’s strategy aims to record everything electronically in order to match every income. Any expense today has to be done by electronic transfer and sales have to be validated through fiscal receipts issued by the tax authority. This is positive in order to increase tax collection but it increases administration costs for us,” says Victor Gonzalez, finance manager at Volkswagen.

Tightening regulation and extra information requirements could discourage people from joining the formal economy and that the use of cash will continue.