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Mexico - Modifications to the 2003 Income Tax
Law
Background
» The
practice in the Mexican market of granting “fringe benefits” dates
from the 70’s.
» The
change in the benefits market has resulted in the fact that currently
the following benefits are normally included:
- Meal Allowance
- Savings Fund
- Life and Disability Insurance and Medical Expenses
- Pension Plan
» This
regulation remained unchanged until Fiscal Year 2002, when the
implicit definition established by Section XII of the Income Tax
Law Article 24 was “eliminated.”
» The
changes in 2002 gave rise to doubts about the nature of the deductions
that companies had traditionally made in the market. Last December
30, 2002, the tax rules for the year 2003 were published.
Thus, the purpose of the present document is to present a brief
summary of the relevant aspects that those reforms will have on
benefits, by evaluating:
- Potential risks.
- Changes and adjustments in compensation schemes..
- Areas of opportunity.
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General Considerations
“Fringe Benefits” are defined as “…expenses
borne by employers for their workers whose purpose is to satisfy
present or future contingencies or needs, as well as to grant benefits
to those workers for their physical, social, economic or cultural
improvement, allowing them to improve their quality of life and
that of their families.”
The criterion of the “generality” of
deducting fringe benefit expenses was clarified by establishing
the following alternatives:
- Benefits which do not require the application of the concept
of “generality”; that is to say, where granting the
same benefits and the same amount for unionized and non-unionized
segments is not required. Those benefits are:
- Savings fund
- Life insurance
-
Health insurance
- Pension funds
- The other items included as fringe benefits, of which the
most significant is the meal allowance, are those where the criterion
of “generality” had to be applied, which establishes
that in the “amount,” the arithmetic average of Non-Unionized
personnel benefits must be less than or equal to that of Unionized
personnel.
Except for the specific consultations with the legal advisors
that every company uses for tax matters, it seems to us that this
criterion could represent the only real challenge derived from
the 2003 tax rules.
» Savings
fund. The deduction of the expense requires that “the company’s
contribution be equal to the amount contributed by workers.”
This
restriction will NOT affect the market due to the fact that
most savings funds already establish that requirement; however,
this condition followed the integration rules for Social Security
purposes and not the Income Tax criteria.
Starting in 2003, this requirement will limit additional contributions,
eliminating the option to use the savings fund as an investment
vehicle where there would be NO accumulation of the real result
of income received.
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» Health
insurance. The deduction (unlimited) for insurance premium
payments made by the company “to the benefit of its workers” is
established. There remains a doubt regarding whether deductions
are limited for employees.
However, within the context of the law and applicable
regulations we believe that it is feasible to include ancestors
and descendents (Article 23 of the Income Tax Law’s Regulation).
The deduction is limited to the use of insurance as a vehicle
for financing. However, it is common in the market to grant medical
benefits through self-administered plans.
Therefore, we recommend confirmation with your tax advisors that
there is NO problem under this method of operation, in terms
of the contributions made.
»
Pension plans. Stipulations related to requirements for deducting
contributions to outside funds are clarified.
A redefinition is made that contributions will NOT
be deductible “…when the value of the fund is adequate
to meet the obligations established pursuant to the pension or
retirement plan.”
The reference, therefore, is NOT necessarily the accrued liability
but rather the “established obligations,” which would
allow the use of a different parameter (for example, the present
value of the total obligation), increasing the option of making
deductible contributions to the funds.
»
Retirement investment funds. Rules are established for portfolios
with the company’s own stock or the stock of related companies:
maximum limit at 10%, establishing that a “related company” is “…one
in which the direct or indirect interest of one in the capital
of another does not exceed 10% of the total subscribed capital
and provided that there is no direct or indirect participation
in the management or control thereof.”
We recommend confirming with your actuarial advisors the application
of these last two changes in your organization. |
Challenges and Areas of Opportunity
Based on the changes and modifications cited, the following would
be the principal challenges and areas of opportunity with respect
to compensation and benefits:
The accumulation of the real component of the income from personal
investments will result in the savings vehicles NOT being subject
to payment thereof being attractive for companies.
The three investment alternatives exempt from accumulation of
the real component of income that are defined by Article 58 of
the Income Tax Law are:
- Savings Funds. Limited to the stipulations of the Law itself,
that is, to 13% without exceeding 1.3 minimum salaries ($1,725.05
per month for Economic Zone I) for each of the components thereof.
Therefore, the maximum amount of savings that could be accumulated
would be $41,401 per year.
- Pension Funds. Not subject to the payment of taxes on results
generated by them in any of their forms. However, the disposition
of assets is subject to compliance with requirements related
to the employee’s age and seniority (long-term).
- Credit Unions. There are no established limits for employee
contributions, except those established by the bylaws of the
Credit Union itself.
As can be seen, the most powerful tool from [point of view of]
the exempt savings and investment and short- to medium-term option
is the Credit Union, due to the fact that in addition to the tax
benefits of NOT accumulating income, they provide an efficient
loan option, providing a two-fold benefit:
a) To those who request a loan, given that they will pay a
lower interest rate than that of any other product in the market.
b) To savers, who will benefit from a greater
yield than the market yield and will NOT be subject to accumulation
of its real component (payment of income tax).
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Other General Compensation Matters of Interest
These include a series of general interest considerations in the
Human Resources area:
- Automobile. The deduction is increased from $200,000 to $300,000,
improving the option of granting the benefit in kind with respect
to alternative options such as bonuses or leases.
- Cafeteria. The deduction is limited to 1 minimum daily salary.
- Annual Declaration. Confirmation is given that an annual declaration
must be filed when cumulative income exceeds $300,000.
- Financial Costs for Mortgage Loans. For the purposes of advising
personnel, the deduction of real interest paid for mortgage loans
up to the equivalent of 1.5 million Investment Units (“udi’s”)
is confirmed.
To supplement this information, we would like to give you
opportunity to contact us for any clarification you
might need.
Arturo.Luna@watsonwyatt.com
Jorge.Alarcon@watsonwyatt.com
Jorge.Servin@watsonwyatt.com
Segundo.Tascon@watsonwyatt.com
Pedro.Sanchez@watsonwyatt.com
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