International Business Taxation: Mexico

Mexico is a country in the southern portion of North America, borders the United States to the north, the Pacific Ocean to the south and west, and the Gulf of Mexico to the east. With an area of 1964,375 square kilometers, it is the 14th largest country in the world. With a population of 123million, it is the 11th most populous country in the world. Mexico has a low latitude. The middle part is in the tropics. The climate is not hot and it is a good place for human survival.

The Mexican plateau has a mild climate throughout the year. The mountain basin is 24 degrees, and the high terrain is about 17 degrees. There is no cold in winter and no heat in summer. The precipitation is 750-1000 mm. Most parts of Mexico are savannah climates, there are no four seasons, only the dry season and the rainy season, and the rainy season concentrates 75% of the annual precipitation.

Mexico is rich in mineral resources, mainly oil, natural gas, gold, silver, copper, lead, graphite, and so on.

The main crops in Mexico are corn, wheat, sorghum, rice, soybean, cotton, and cocoa. The automobile industry has always been a pillar industry in Mexico. Mexico has now become the fifth largest automobile producer in the world. The manufacturing industry has also made great contributions to the economic and social development of Mexico. Also, the long history of culture, the unique plateau custom and cultural landscape, and the long coastline provide a unique advantage for Mexico’s tourism development.

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Mexico’s main export commodities are crude oil, automobiles, auto parts, coffee beans, vegetables, rolled steel and mechanical products. Furthermore, the marine products mainly include prawn, tuna, sardine, abalone, and so on.

The prawn and abalone are traditional export products. Imported goods are automotive materials, electrical appliances, chemical products, beverages, pulp, and textile products.  “Mexico’s annual inflation rate was unchanged at 3 percent in October 2019, its lowest level since September 2016 and matching market expectations. While prices continued to fall for energy and grew less for services; cost of housing, food and agricultural goods rose more. Inflation Rate in Mexico averaged 24.32 percent from 1974 until 2019, reaching an all-time high of 179.73 percent in February of 1988 and a record low of 2.13 percent in December of 2015”. source: Institution Nacional de Estadística y Geografía

“The Central Bank of Mexico slashed its overnight interbank interest rate for the third meeting in a row by 25 bps to 7.50 percent on November 14th 2019, as widely expected. Policymakers said that the current environment of uncertainty continues to pose significant risks that could affect the country’s macroeconomic conditions and added that will continue to monitor closely all factors that have an impact on inflation and its outlook, and will take actions if required. The Committee noted that the annual inflation rate was at 3.02% in October, as both noncore inflation and core inflation decreased over the lasts month and it will likely be below previous forecasts, although core inflation has remained persistent. Policymakers added that in the presence and possible persistence of factors that involve risks to both inflation and its expectations, monetary policy will be adjusted in a timely and firm manner to achieve the convergence of inflation to its target range.

Interest Rate in Mexico averaged 5.73 percent from 2005 until 2019, reaching an all-time high of 9.25 percent in October of 2005 and a record low of 3 percent in June of 2014”. In Mexico, the train connect to the national network by the national railway and private railway. It is free for children under 5 years old, half price from 5 to 11 years old, and is most famous for the Chihuahua Pacific Railway and the Aztec nickname. Mexico’s bus system has developed very well and the price is cheap. Before you take the bus, pay attention to whether the bus is Lokal or De Paso. Lokal means that the bus departs from your station; De Paso is a bus that departs from other stations, which cannot be purchased in advance. In Mexico, the subway is also the main means of transportation. In addition, if you have an international driver’s license, you can rent a car to any destination you want to go.

The statistic depicts the literacy rate in Mexico from 2006 to 2016. The literacy rate measures the percentage of people ages 15 and above who can read and write. In 2016, Mexico’s literacy rate was around 94.86 percent, by H Plecher, last edited June 25, 2019. “Universidad Nacional Autonoma de Mexico (UNAM) is ranked 113th in the world rankings and first in the Mexico University Rankings. Tec de Monterrey, a private institution which is now ranked 178th in the world and second in the Mexico ranking”. “In 2018, the average wage in Mexico achieved its highest level within the period presented, amounting to 16,298 U.S. dollars per year. In contrast, this value was equal to 15,905 U.S. dollars in 2000, making it the year with the lowest average wage of the period”.

Family is one of the most important elements in Mexican society, according to History. Com. Especially outside of cities, families are typically large and Mexicans are very conscious of their responsibilities to immediate family members and extended family, such as cousins and even close friends. Hosting parties at their homes plays a large part of Mexican life and making visitors feel comfortable is a large part of the values and customs of the country. Mexico’s economic freedom score is 64.7, making its economy the 66th freest in the 2019 Index. Its overall score has decreased by 0.1 point, with declines in judicial effectiveness, trade freedom, monetary freedom, and labor freedom overwhelming a significantly higher score for fiscal health. Mexico is ranked 12th among 32 countries in the Americas region, and its overall score is above the regional and world averages.

Business hours, lunch meetings, proper attire. All of these are important issues to consider before you head to Mexico to start up operations or even for a one-time business trip. Understanding the ins and outs of Mexican culture can go a long way. Most companies keep their doors open between 9 a.m. to 7 p.m. This varies slightly, however, depending on the industry and location. Lunch is the biggest meal of the day in Mexico, and many employees take a long break for it. Eating between 2 p.m. and 4 p.m. is the norm in most cities. If you are invited out for a business lunch, expect it to last at least two to three hours. Be prepared to talk about many topics besides business. Mexicans often discuss conceptual ideas during a lunch meeting and may even make a deal, but by and large the time is used to get to know each other. Most meetings in Mexico do no follow a bullet-pointed list (even if one is handed out).

Generally speaking, Mexicans tend to be creative and prefer not to be tied to a strict agenda. Don’t be surprised if the meeting seems long or you feel the group is getting sidetracked. Meetings may take longer than anticipated, but they do usually end with important decisions being made and carried out. “The Mexican tax system has been subjected to comprehensive tax reform legislation, enacted principally in 1986 and 1988. The dramatic changes are an attempt to make it compatible with the tax systems of Mexico’s most important trading and investment partners and with those of countries competing with Mexico for foreign investment. The principal taxes payable by individuals and by corporations operating in Mexico and, in certain cases, by foreign companies, are those levied by the federal government.

State and municipal governments have more limited tax powers and are not authorized to levy general corporate income taxes; some states tax employers on salaries and professional fees paid by them. The principal taxes are included federal taxes and local taxes. Taxpayers are required to use the calendar year for income tax purposes. Newly formed corporations will have a short taxable year from the date of incorporation to December 31 of that year. Similarly, existing corporations will have a short taxable year in the year in which liquidation procedures commence. Residents of Mexico, irrespective of nationality, are subject to Mexican taxation on their worldwide income of all types which must be included in an annual personal income tax return. Special treatment is given to capital gains, domestic interest and dividend income, at a graduated scale of rates reaching 35%.

Non-residents are taxed only on their Mexican source income, usually at flat rates applied separately to different types of gross income without deductions. However, under special rules they may elect to be taxed at higher rates on net taxable profits from sales of real property or shares or on short-term construction, installation, erection and similar work. No overall annual return is required of non-residents. Once a corporation has paid its income tax, after-tax earnings may be distributed to the shareholders without any further tax. However, if the corporation makes a distribution out of earnings that for any reason have not been subject to corporate income tax, e.g., book earnings not yet recognized for tax purposes, it will have to pay a corporate tax of 35% out of these distributed earnings. The income tax system seeks to tax corporate earnings only once, at the corporate level.

However, a 35% tax is imposed on the corporation on distributions which for any reason represent income that has not been subject to the corporate income tax. It is important to note that not taxing dividend distributions eliminates double taxation at the shareholder level and thus significantly reduces the overall tax burden of domestic or foreign investors’ return on investment”. “Paying income tax is fairly straightforward in Mexico. Taxes are automatically deducted from your paycheck. Unless you make more than 400,000 pesos (USD $21,500) a year, you don’t have to file any tax statement or do any paperwork whatsoever. In fact, at most companies, you won’t even receive your yearly tax statement unless you specifically ask for it”.

“Mexican resident taxpayers’ are subject to corporate income tax from worldwide sources, foreign residents are taxed on the income attributed to their permanent establishments in Mexico. Foreign enterprises established in Mexico are subject to the same tax system as national enterprises, though they do benefit from certain exemptions. Although various states have started to offer competing tax incentives to attract foreign investors, the majority of taxes in Mexico are levied at the federal level”. If I am the CEO of a company, I will not consider opening a location in Mexico. First, in every country you need to be careful about who you work with in order to avoid being cheated. But in Mexico there’s a further reason to be careful. It’s vital for your company’s legal representative to maintain a good record with the government, and having shady connections can hurt that record, Pulido said.

Second, many people consider crime as one of the greatest risks of doing business in Mexico. Drug dealers and smugglers contribute to crime in the city. Third, the case with government departments, getting permits and doing official business can take a long time, Payan said. When requesting permits expect delays. Not only can some policies be unfriendly to business, but just the fact that the entire regulatory environment is different from the United States can be a major challenge.

Works Cited

1. Trading Economics. Institution Nacional de Estadística y Geografía (INEGI)”. https://tradingeconomics.com/mexico/inflation-cpi.
2. Trading Economics. Institution Nacional de Estadística y Geografía (INEGI)”. https://tradingeconomics.com/mexico/interest-rate.
3. Sina travel. http://travel.sina.com.cn/moxige-gaishu-lvyou/.
4. H. Plecher. https://www.statista.com/statistics/275443/literacy-rate-in-mexico.
5. Accessed April 2019.
6. Quacquarelli Symonds. https://www.topuniversities.com/where-to-study/latin- america/mexico/guide.
7. Marine Pasquali. https://www.statista.com/statistics/812354/mexico-average-annual-wage/. Accessed November 2019.
8. Kim Ann Zimmermann. Live Science Contributor. July 20, 2017. https://www.livescience.com/38647-mexican-culture.html.
9. The Heritage Foundation. https://www.heritage.org/index/country/mexico.
10. Rachel Hartman. Hitting the Road. https://www.allbusiness.com/business-etiquette-in-mexico-11674032-1.html.
11. Mex Connect & respective authors. Mexcio data on-line. https://www.mexconnect.com/articles/6-taxes-in-mexico.
12. Banco Santander. https://santandertrade.com/en/portal/establish-overseas/mexico/tax-system.
13. Darren. September 18, 2019. https://ivannovation.com/blog/pros-and-cons-of-doing-business-in-mexico-should-you-go/.