U.S. companies eyeball higher Mexican taxes

A proposed Mexican fiscal law may impact American and Canadian companies doing business in Mexico.

NEW YORK (CNNExpansion.com) -- Companies that have invested in Mexico could be affected if the Mexican congress approves a change that would put an end to tax benefits that allow businesses to consolidate their earnings and losses, in order to pay less taxes, said specialized foreign trade consultant firm IQOM. The changes proposed by the federal government are being analyzed by Congress and could be incompatible with expropriation rules under the North American Free Trade Agreement (NAFTA) that Mexico, Canada and the United States have had since 1994.

Mexican fiscal law today allows different companies with the same parent company, to pay taxes as if they were one single company.

This means any company, foreign or domestic, can deduct the losses of one of its subsidiaries against the earnings of another, but if the Mexican congress approves the changes, 4,862 companies (domestic and foreign) with operations in the country face paying higher taxes.

The bill that changes fiscal law has already been approved by the Lower House of Deputies and is now being analyzed in the Senate, and could be approved over the next days.

The new fiscal law proposed by the Mexican federal government anticipates that if a company has not deducted all of its previously allowable losses by December 31st, 2009, it will have to pay the full amount of the tax starting in 2010. If approved, companies will have to pay 40% to begin with and the rest of what they owe in four yearly installments.

The proposal affects companies that consolidated its fiscal results prior to 2005; this means it also has a retroactive effect.

"For Canadian and American investors this could be considered a measure equivalent to an expropriation, and they could appeal to the State-Investor procedure established in Chapter XI of NAFTA and sue the Mexican Government for compensation", IQOM explained.

Section A of NAFTA's Chapter XI says: "No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation)", unless it is for a public purpose, on a non-discriminatory basis, in accordance with due process of law and on payment of compensation in accordance with paragraphs 2 through 6.

The United States is Mexico's main trading partner, over 80% of Mexican exports go to their NAFTA partners.

Over 50% of the 9.9 billion dollars of foreign direct investment Mexico received, by the end of the first two quarters, 2009, came from the United States, according to official Mexican government data.