Mexican Tax Case Study
Mexican Tax Consequences
1. As a result of the sale of the building and land, St. John Mexico will accrue Mexican income tax liability of $1. 3M (using the U.S. net book value of the building and land)/$1.7M (Using the Mexican net book value).
2. As a result of the lease, the company will be assessed an annual VAT amount of $ 93K on the annual lease payment. Additionally, St. John Mexico’s minimal taxable income will be increased by 44K due to the increase in the operating expense as a result of the inclusion of the rent expense. Consequently, St. John Mexico will incur an additional income tax liability of $13K.
3. Generally, Mexico imposes a 10% withholding tax on dividends paid to foreign parents. However, under the US/Mexico treaty the
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The maximum depreciation rate for the property is 10%. It is subsequently retired by the taxpayer as obsolete on December 31 of the third year. The deductible portion resulting from obsolescence is $350,000 ($500,000 - ($50,000 × 3)), and this amount is adjusted for inflation in order to determine the deduction for obsolescence of the property. Note that this amount does not reflect the actual depreciation deductions taken with respect to the property, which, because of inflation, will have exceeded $150,000 ($50,000 per year) over the three-year period during which the property was …show more content…
3. IRC Section 959(c)(3): remaining E&P.
Per FY ’15 Form 5471 for St. John Mexico, the company had E&P balance of MXN 42,638,230 that was previously taxed under IRC Section IRC 956. Therefore, the distribution of the net proceeds USD 4.9M (i.e. MXN 102M) come out in the following order:
1. Non-taxable distribution of USD2M (i.e. MSCN 43M)
2. Taxable distribution of USD 2.9M
IRC Section 987 requires the recognition of exchange gain or loss when distribution of property, including cash is made by a CFC or a branch. It is immaterial whether or when the remittances are converted to dollars. Gain or loss is recognized to the extent that the value of the currency when remitted differs from the value when earned.
When the previously taxed E&P of MXN 42,638,230 was earned (under IRC 956 regime), the USD/Peso exchange rate was 1:15 or less. Currently, the exchange rate is 1:20. Accordingly, the distribution of the previously taxed E&P would result in a recognition of exchange loss of $800K pursuant to IRC Section 987. Thus, the net taxable distribution will be USD 2.1M
3) Computing the net tax liability arising from the distribution of the net
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