By DAVID W. CONNELL and GABRIELA ROJAS Attorney and Accountant
We have no intention of boring you with technical legal reforms that will have no effect on you; however, there were numerous legal reforms in 2013 –especially in December- that involve you as a foreigner living in or visiting Mexico this year. Since the reforms were massive,
we will not cover each in detail. If you would like more detail about any of them, pleases do not hesitate to contact your attorney or accountant.
To begin, the Constitutional reform to allow foreigners to own land outright in the restricted zone (50 km from the beach and 100 km from borders) has not yet been made into law. It passed in Mexico’s House of Representatives in April 2013 and was supposed to be voted on in the Senate in September 2013, but that still hasn’t happened as of January 10, 2014.
The three legal reforms for 2014 that we believe will be of most interest to you follow.
1. The new “anti-money laundering law” or what is officially known as the “Federal Law to Prevent and Identify Operations with Funds of Illicit Origin” established several activities that are considered “vulnerable”, including purchasing and selling real estate, banking, construction, buying and selling vehicles (boats and planes included) and reception of donations to associations and non-profits, among several other activities.
This new law requires people to provide services related to these “vulnerable” activities, such as attorneys, accountants, real estate agents, bankers and notaries, to acquire signed statements from their clients and, in many cases, provide Mexican authorities with the information in these statements, including a copy of your passport, tax ID (Social Security number) and other personal information.
This was not required in the past and obviously will create some hesitation on your part when asked to give this information. You should only provide this information to professionals you have hired –preferably via a written agreement– who have made you aware of their obligation to keep your information confidential. Note that confidentiality is not broken when your service provider is obligated to collect and provide the required information to the Mexican authorities under the anti-money laundering law.
Providing false, altered or incorrect information in these statements comes with a penalty of two to eight years of prison. Notaries, attorneys, accountants, bankers, real estate agents and other service providers you hire ask you to fill out and sign these statements and must refuse to provide services if you refuse.
2. Among the many major changes in the tax law this year, we consider the following the most likely to affect you.
The “small taxpayer” bracket, known as repecos, was eliminated. Under the old system, repecos paid income tax based on gross income, which provided benefits such as a tax rate of only 2 to 5 percent, no need to deal with provider or client facturas and simplified accounting and filing requirements. Former repecos now must sign up under a new category and pay income tax at a rate of 0 to 35 percent (depending of income). Furthermore, the tax payer will be required to collect and give facturas, and the accounting, reporting and filing requirements are more complex. To minimize the shock of this change, the government is giving a 100 percent discount on income tax and IVA for 2014. This discount will be reduced at a rate of 10 percent each year (90 percent for 2015, 80 percent for 2016 and so on), but the IVA discount is only for 2014. If you were in the repeco category in 2013, you need to speak with your accountant as soon as possible to get set up in a tax new category.
All deductible expenses now must be documented via an electronic facture, e-factura. Paper facturas (deductible invoices) are no longer permitted –with some minor exceptions. The rules for giving or receiving e-facturas are also substantially different from the rules for paper facturas. Your business needs to be authorized to grant e-facturas, and you need to make sure the e-facturas you receive comply with the new rules.
Your email address is now also your tax address. Because the tax authority has had problems locating the physical address of tax payers to notify them of tax requirements or audits, you now must provide both a physical address and an email address. The tax authority will require an email verification of this address via a response to an email sent by them. This reform will make it easier for the government to contact you, and we foresee that tax notification via email will increase the number of requirements the government send out. Please note that just because you are sent a tax notification requiring you to provide information, you are not legally required to provide it unless their request is based on an expressed written legal statue that applies to your case. Do not just give out information without first checking to see if you legally have to provide it! Receiving a notification does start the clock ticking on the time you have to respond, so we highly recommend that you get immediate tax advice from a tax attorney upon receiving a notification. There are no more full exemptions on the sale of your primary residence. If you owned a home that was considered your primary residence in Mexico for five years or more prior to the sale, the full sales value used to be exempt from income tax. This exemption no longer exists. If you sold your primary residence prior to living in it for five years, you used to be exempt on the first $500,000 USD (approximately) of gain. This amount has been reduced to approximately $250,000 USD. Note that the house must still qualify as your primary residence in Mexico to take this exemption. Rules regarding the temporary importation of foreign cars have also changed. If you have a Visitor visa or a Temporary Resident visa, you are allowed one car in the country for the term of your visa. All other forms of visas (including Permanent Resident and Student) do not allow you to have a foreign car in Mexico under a temporary car import. If you are in the business of importing merchandise to Mexico (and are a registered importer), you can now process the importation of your goods without having to go through a custom agent. The flat tax (IETU) has been eliminated, to the delight of many real estate developers. For the last couple of years, businesses were required to pay a flat tax of 17.5 percent of gross sales if the net income tax you had on those sales was less than 17.5 percent of the sale. Real estate developers no longer can consider only payments received on a sale as income. Unfortunately, this reform will require that real estate developers show the total value of a sale in the month the sales agreement is signed as income, even if the property is paid for in partial payments over the following months or years. IVA is now 16 percent in all states of Mexico. Prior to the reform, certain areas of Mexico, including all of northern and southern Baja paid a lower IVA rate of 11 percent. In 2014 Mexican banks will start notifying the US government of US citizens who have a bank account in Mexico.
3. At first glance, most readers will not think they will be affected by the recently passed Constitutional reforms regarding Mexico’s energy sector. These reforms allow Mexico to now enter into agreements to unlock large oil and gas reserves, estimated to bring 20 billion dollars of foreign investments into Mexico each year. This type of investment and the secondary effects it produces will be felt all over Mexico, including here in Puerto Vallarta. We could see the same type of “investor boom” we saw when NAFTA passed, which has been very positive for Mexico to date. Just a few weeks after this law was passed, our firms already had begun receiving call from people in the oil and gas industry about business opportunities in Mexico.
In this article, we have touched on just some of the reforms we feel will be of interest to you, so pleases forgive us if other reforms you have heard about were not mentioned. If you are living or doing business in Mexico, we highly recommend that you set up a meeting with your accountant and possibly attorney to get a more complete understanding of how these changes will affect you.