Mexico tax issues and planning part two:

Structures for US companies operating in Mexico:  If you plan on having members of your company operate in Mexico or you plan to set up a physical business in Mexico it’s very important that you know about the different structures that US companies operating in Mexico can take on. These structures are important to consider as each of them will have their very own tax rate which could lead to a significant chunk of your income being lost.

Some of the standard structures for US companies that are commonly taxed in Mexico include:

Companies with manufacturing agreements

Standalone physical operations

Regional clusters or agents

Owned or leased warehousing facilities

Corporate tax rates in Mexico:

If you are a corporation that plans on operating within Mexico you may be interested to know that it has one of the highest corporate tax rates available in the world. Corporate tax rates in Mexico range between 28% to 30% but a payroll taxes also issued as a credit meaning that any of the employees that you need to regularly pay to work in Mexico could count as a credit against your total profits or income.

If one of your employees operates within Mexico for 183 days within a 12 month period, you could be subject to paying not only this 28 to 30% tax rate but also a tax rate in your home country about race or the country where your main headquarters are located. Be sure to consider these corporate tax rates when doing any type of business throughout Mexico.

Mexican taxation of dividends, interest and royalties:

If you are earning money off of loan interest, dividends or cash royalties in Mexico there is also a chance that you will need to pay some form of taxation. Just like any good company, investment experts and individuals will be forced to pay taxes on any of the money that they may or while they are a resident of Mexico. If you receive royalties or investment income from Mexico you may also be subject to withholding taxes.

A good example of this holding tax comes with royalties. Any royalty paid out to a nonresident of Mexico could be subject to a 25% tax or a 30% withholding tax on patents and trademarks. Unless a tax treaty is put in place and the rate is reduced, any leasing of machinery or royalties are subject to this fee. Companies that distribute dividends to nonresidents may also be responsible for paying a 10% withholding tax within Mexico. Unlike some North American nations Mexican entities aren’t subject to any type of tax treatment on capital gains but interest taxation to nonresidents could be also subject to withholding taxes. The withholding tax rate on interests ranges between 4.9% and 30%. It’s very important to keep these ideas in mind to keep your finances in order if you plan on doing business within Mexico or staying within Mexico as you work worldwide.

 

2015 Social Security Benefits Announced

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The Social Security Administration recently announced monthly social security and supplemental security income benefits (SSI) will increase in 2015 by 1.7%. This increase is based upon the Consumer Price Index over the past 12 months ending in September 2014. In addition, other figures based on the national average wage index will also be changed. A recap of the key amounts is outlined here:

2015 Key Social Security Benefits

2015 Social Security Benefits

What does it mean for you?

  • Up to $118,500 in wages will be subject to Social Security Taxes (up $1,500 or $93 in additional Social Security tax per employee and per employer)
  • The average Social Security retirement beneficiary will receive an additional $264 in 2015.
  • For all retired workers receiving Social Security retirement benefits the average monthly benefit of $1,306/mo. in 2014 will become $1,328/mo. in 2015.
  • SSI (Supplemental Security Income) is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).
  • A full-time student who is blind or disabled can still receive Supplemental Security Income (SSI) benefits as long as earned income does not exceed the student exclusion amounts listed above.

Social Security & Medicare Rates

After temporary payroll tax rate cuts that ended in 2012, the rates do not change from 2014 to 2015.

2015 Withholding Limits

Note: The above tax rates are a combination of 6.20% Social Security and 1.45% for Medicare. There is also a Medicare .9% wages surtax that began in 2013 for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please recall that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

US-Mexico tax issues and planning:

Deferral of Mexican income from US tax:

If you are planning on making a living in Mexico or setting up a new business in Mexico it’s important to recognize that any of the income that you make in Mexico can still be taxed under US taxation especially if you are a resident of the United States or your initial location is in the United States.

The nice part about the deferral of Mexican income from the US taxes that you can start paying each taxable year after income taxes deferred. This means that in six taxation years you can defer your Mexican income from the US tax so that you no longer have to pay the extra taxation fees. Although this can be a little more expensive upfront this is one of the best ways that you can enjoy less taxes on your living in Mexico. Starting off with 25% in the first two years, 20% in the third year and then 15 in the fourth and fifth year you can reduce your income taxes substantially differing your US taxable income and ensuring greater income potential.

Permanent establishment in Mexico:

Creating a permanent establishment or permanent business implores a whole new set of taxation rules. Even if your company doesn’t have a physical office or location in Mexico, if you’re performing a number of business activities there on behalf of the company you could be recognized as a permanent establishment. Any permanent establishment is required to pay taxes in Mexico.

In order to condone a permanent establishment for your business and individual working for your company will need to be staying and working within Mexico for 183 days within a 12 month period. This rule also applies if companies are sending multiple employees for the same number of days. It’s important that companies prepare for this as all income that they earn within Mexico could be heavily taxed under Mexican taxes as well as US taxes.

US foreign tax credit rules:

When it comes to making a living in a different country, any employee will fall under foreign tax rule especially when they work for a number of days or experience a certain amount of gains for their business.

Gen. foreign tax credit rules assume that if you accurate any foreign taxes, a foreign source of income or you paid any type of foreign taxes you are also subject to paying US taxes on the same income. The nice part about these taxes however is that you can receive a reduction in US taxable income which is taken as a credit because you have already paid a substantial amount of tax to another nation. While you still will have to pay some form of US tax, the credits that you receive can sometimes balance out to an overall reduction in your US taxable assets and income.

Missing a Form? Not an Excuse.

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If you don’t receive a W-2 or 1099, is this a defense to protect yourself from not reporting the income during an audit?

In short, the answer is no. You are required to report your income whether your employer or customer filed the correct form or not. So what can you do to ensure you do not find an audit surprise in your future due to a simple omission of income from a report you did not receive? Here are some tips:

  • Keep good records. Do not depend on someone else’s records to file your taxes. Keep your own records and then use them to ensure the information on your tax return is accurate.
  • Make a list. Start making a list of your employers and others you believe should be sending you a W-2, 1095-A, 1098, 1099 or other tax form. Put the list in a file and check off each name when you receive their form. Use last year’s tax return to help you create your initial list.
  • Double check. When you receive the forms, review your records to see if you agree with the information reported to you. Use your last paycheck stub to check your wage reporting, use your bank statement to confirm interest income, use your investment statements to confirm stock and mutual information and use invoices to confirm miscellaneous income.
  • Take charge. If you are missing a form or the form received is in error, contact the firm supplying you the information and get it corrected as soon as possible. If tax filing due dates are approaching, you may need to file an extension while waiting for the corrected form.
  • Record the correct information, no matter what. Record the correct information on your tax return, even if you lack the required form. Not receiving a tax form is not a workable audit defense.

If you receive a notice from the IRS regarding a possible missing item, consider filing an information request to see what the IRS has on file for you. It may help better identify the area of mismatch.