Tax Reform Plan 2014 in Mexico: Impact on Real Estate Industry

 

As you know on September 8th, the Mexican Government presentedits 2014 economic package, which included some major alterations or modifications to current tax legislation, which affects significantly various sectors of the economy. One of the most affected is the real estate sector, where we focus on below. 

On October 31st, the tax reform 2014 was approved by the Congress. This is a definitive update to Government’s proposals back on September.  

IETU/IDE 

Due to tax simplification, one of the objectives of this proposed tax reform, and one of standards is the elimination of two taxes, flat tax and tax on cash deposits. 

First off, the proposal generates administrative benefits to taxpayers, as well as a relief to income tax burden as in the case of the Flat tax. 

In the same way, the tax on cash deposits started as a tax to combat non formal economy it is proposed it be eliminated, however, its controls intended since its establishment remain for financial institutions that would still be required to report cash deposits in excess of $ 15,000. 

APPROVED; Both taxes IETU E IDE were eliminated, also it is approved the obligation to financial institutions to report to SAT cash deposits over $15,000 pesos a month. 

REPLACEMENT OF THE CPA INDPENDENT FISCAL OPINION (DICTAMEN) 

Another example of administrative simplification for taxpayers is the proposalto eliminate the fiscal opinion of a certified public accountant, which currently is optional. However, it is proposed to present an additional informative declaration regarding the financial status of the taxpayer. 

MODIFIED; It becomes optional for tax payers that exceed any of the following limits Income over 100 million pesos, assets over 79 million pesos or more that 300 employees. If no one of the limits is exceeding the taxpayer has not obligation of dictamen. 

REAL ESTATE DEVELOPERS 

In order to stop benefits to economic sectors with preferential regulations, the Government, in its reform proposal, puts forth the following significant changes to the real estate sector: 

INCOME TAX

INSTALLMENT SALES’S PLAN 

It is common and necessary the installment plansin this type of business. Today the income tax law provides the option on installment plan for developers by only adding to their taxable income, the amounts actually received during the payment period. 

The general tax rule to add income to yearly taxable amount is, on either the following situations, if the invoice receipt that covers the price or agreed compensation is issued; when are sent or submitted the goods, or when providing the service is rendered; or when the price of acquisition is charged wholly or partly, even when proceeds from down payments. 

The reform plan seeks to eliminate such option of add income taxable only the collections, and consider it when any of the events mentioned previously occurs first. As you can see the impact can be brutal in the operations of real estate developers, and the factor that triggers the accumulation of total income is when the price is agreed, compelling from that moment as taxable income the total price of the sale.

APPRROVED; The option to add income when it is effectively collected has been eliminated, for those receivable under that scheme as of  Dec 31st 2013, there will be the option to add those collections 50% during 2014 and the remaining 50% on 2015..

For developers they will add to their income when estimations been approved or collected. 

UNIT FISCAL COST ESTIMATE

Currently LISR allows real estate developers engaged in building construction contracts. And to give an estimated fiscal cost of the work which may be deducted or can be applied towards the revenue collected in advance, from their customers and when that work comes to an end then perform the adjustment on fiscal costs and determine a difference of (ISR) income tax payable in favor.

The reform initiative aims to eliminate this option, allowing only deducting the portion of accurate cost actually paid during the year.

DISMISSED; The estimate fiscal cost will be allowed on same terms that it is allowed as of 2013.

LAND DEDUCTIONS

A productive incentive to the real estate sector today, is to allow developers to deduct during the period of acquisition all of the cost of the land where the project will be implemented. The general rule for other taxpayers in land deduction cost is that takes effect at the time of the sale thereof.
The reform plan, considers that this benefit gives unequal treatment between taxpayers, therefore proposes to eliminate the arrangement that gives rise to the current tax incentive and to deduct land cost at the time of sale.

DISMISSED; the deduction of land still available for real estate developers on the year of the purchase.

MODIFFIED; The current rule establishes that for those that apply this deduction are obligated to add to their yearly income a 3% over the value of the land, as long as the land would be sold, the new rule says that only have 4 years to sold the land if there is no sale of it, the updated amount deducted of the land will be added to the yearly income. 

 

INMEDIATE LAND DEDUCTIONS

Another LISR fiscal stimulation to motivate entrepreneurs to invest in productive assets in low-density urban areas, meaning different parts from Mexico City, Guadalajara and Monterrey, and to apply preferential tax depreciation rates for assets, that is to say, to generate accelerated tax depreciation or as commonly called an immediate investment deduction.

A quick example, construction equipment is the general rule depreciation deduction of 25% and immediate or accelerated deduction is given at a rate of 87 % .Although is not an exclusive benefit of real estate developers, many of them have been attached to the preferred rule.

 The reform initiative also aims to eliminate it, as is considered unequal, when giving different treatment to the same individual at different latitudes of the country.

APPROVED; Accelerated tax depreciation will be no longer available.

SIBRAS

A prime regimen is SIBRAS, those partnerships or corporations whose primary purpose is the acquisition or construction of real estate property intended for the lease or entitlement to receive income from the lease of the same. By having preferential treatment, regarding tax deferral it is consider the elimination of benefits granted to such companies.

APPROVED;  The SIBRAS regimen was eliminated.

HOUSE SALES

Another significant change at this time is for individuals selling their residence, is proposed the reduction of the amount of exemption from income tax.That is if you decide to sell your own house and aim for the transaction’s exempt of ISR. First, you should proof to the notary that no other house have been sold in the past five fiscal years and subsequently the amount does not exceed 1.5 million UDI, equivalent to 7.2 million de pesos, this transaction is not subject for income tax. If the amount surpasses, only the exceeding amount is required for income tax purposes.

The reform plan maintains the requirement of five years, but now suggests that the amount to be exempt is of 250 000 UDI, approximately 1.2 million pesos, any exceeding amount is then obliged to pay income tax.One of the leverage that the Government used to increase the Construction Industry was to provide a fiscal benefit to developers consisting to include as authorized deduction the cost of the land on the same year of its acquisition. The general rule for land deduction for all tax payers is that the cost of the land will be calculated and applied at the time the land’s selling.

The reform plan is dismiss the benefit, arguing that the rules for all tax payers should be the same, and this benefit provide with a fiscal edge to real estate developers, deferring its income tax for several years.

MODIFFIED; Theamount of exemption for income tax on house’ sale has moved to  700,000 UDIS, 3.5 milion pesos.

VALUE ADDED TAX (IVA)

HOUSING

The arrangements relating to the current tax on value added, establishes an exemption from this tax for the following activities:

• House Sales

• Leasing

 • Interests generated in Mortgage credits

Within the grounds of the reform presented establishes that higher-income sector of the population benefits the most from this exemption, and currently there are methods more efficient provided by the Federal Government to support the acquisition of housing which it is considered convenient to asses 16 % tax for such activities. 

The impact on real estate is noticeable because it is a direct increase in the price of housing, although this raise does not seem to affect the real estate developer directly by this tax increase, it will be transfer to the final consumer, causing a drop in sales or adjustment costs, reducing profits anyway.

DISMISSED; House sales, neither house leasing nor interest on mortgage credit will be taxed with IVA.

IVA RATE APPROVAL FOR BORDER REGION

A large negative effect expected for this proposal is to approve the current rate of 11% to 16 %   at the border regions where is included Baja California Sur, with the understanding that border zones are still vulnerable to competitiveness, mainly to U.S. market price. The current consumption rate in the American union ranges to 8 %, which is more attractive to the consumer to buy on the other side of the border, not to mention that their real estate markets and products already are more expensive by the ransactions with dollars.

APPROVED; IVA TAX rate will be 16% everywhere in the country starting January 1st 2014. 

FINAL COMMENT

With a reform initiative that seeks equality amongst the circle of taxpayers and to eliminate preferential regimes in which have been abused in the past, this reform proposal has important effects on real estate sector, who has experienced certain tax benefits to encourage economic growth through the construction industry in previous administration.

Importantly, this proposal will still have to pass through the filters of   legislation, but I suggest you stay tuned in the coming months on these key points that may affect your business.

This new tax regulations will be enter in force on January 1st, 2014. 

 

"That article may be contrary to the interpretation of the tax authorities"

 

If you need to delve some more into these issues, or any other subject related, please feel free to contact me:

C.P. Arturo Calderón //  Esta dirección de correo electrónico está siendo protegida contra los robots de spam. Necesita tener JavaScript habilitado para poder verlo.

Terán Rojas & Associates