Tax deferral of foreign exchange gains in Mexico may be possible

Tax Insights
from International Tax Services
Tax deferral of foreign exchange
gains in Mexico may be possible
March 8, 2016
In brief
The Mexican Peso has lost significant value against major foreign currencies since late 2015. Mexican
taxpayers with monetary assets denominated in foreign currencies must determine foreign exchange
(FX) gains or losses, which are taxable for Mexican income tax purposes at the end of each tax year on an
accrual basis. Devaluation of the Peso thus results in income tax volatility — Mexican entities may incur
significant tax losses or taxable income due to the change in value of the Mexican Peso from January 1 to
December 31 of each calendar year.
Based on the new regulations under the Mexican Income Tax Law (MITL-R), effective October 9, 2015,
taxpayers may be able to defer taxation of foreign exchange gains until they are realized, instead of on an
accrual basis.
In detail
MITL-R incorporated Article 12
(the New Regulation), which
allows corporations and
individuals that reside in
Mexico for tax purposes to be
taxed on FX gain when realized
instead of when accrued but not
recognized.
The New Regulation extends
this opportunity to any type of
taxpayer regardless of industry,
core business, or type of
revenue. Taxpayers should
review the facts and
circumstances of the particular
legal entity to confirm the
applicability of the New
Regulation.
Note: The tax treatment
incorporated into the MITL-R is
a broader version of the existing
Criterio Normativo, which is
non-binding but viewed
favorably by the Mexican tax
authorities.
The Criterio Normativo applies
only to taxpayers primarily
engaged in the purchase and
sale of currencies. The New
Regulation does not allow
taxpayers that act as Currency
Exchange Bureaus to defer
taxation on such gains.
Taxing FX gain when realized
allows taxpayers to determine
taxable income in a manner
more consistent with each
entity’s economic reality, as
opposed to an accrual-basis tax
on what could be considered
‘artificial’ FX gains at year-end.
The following currencies, among
others, have appreciated against
the Mexican Peso in recent
months. Companies with assets
like accounts receivable in these
currencies have accrued gains
that could be deferred:
 American dollar
 Euro
 Japanese Yen
 Swiss Franc
 Danish Crown
 Norwegian Crown
 Czech Crown
Companies also should consider
the effect of the New Regulation
in determining the taxable
inflation adjustment. This
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Tax Insights
adjustment relates to the accrual of
credit balances (assets) in foreign
currencies and considers historic FX,
which in principle would reduce
inflationary loss for the year.
The takeaway
(assets greater than liabilities), should
determine whether they will have
taxable income due to an FX gain. The
alternative under the New Regulation
would be to defer the taxation of such
FX gains until they are actually
recognized.
Mexican taxpayers with a positive
foreign currency position during 2015
Taxpayers should consider the
possible impact of the New Regulation
before filing an annual tax return. The
next tax return filing due date is
March 31, 2016, for the 2015 tax year.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
International Tax Services, United States
John A. Salerno, US LATAX Leader
+1 (646) 471-2394
[email protected]
Jose Leiman
+1 (305) 381-7616
[email protected]
Carlos Orel Martinez
+1 (646) 471-8416
[email protected]
Maria Bel
+1 (646) 471-1268
[email protected]
Lucia Echenique Fossati
+1 (646) 471-6294
[email protected]
Daniel Landaluce
+1 (646) 471-7762
[email protected]
David Cuellar
+01 (55) 5263 5816
[email protected]
Adriana Rodríguez
+52 55 5263 8527
[email protected]
Sandro Castañeda
+52 55 5263 7796
[email protected]
Lissett Tautfest
+52 55 5263 5766
[email protected]
Mauricio Hurtado
+52 55 5263 6045
[email protected]
International Tax Services, Mexico
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