International Cross-Border Tax Planning in Mexico (5 Tax Implications)
Cross-Border Tax Planning in Mexico
Mexico is one of the most common foreign countries where U.S. Citizens and Permanent Residents to do business. When doing business with a foreign country, there are many tax twists and turns to be aware of – especially on tax and reporting issues. While it may be relatively straightforward to expand a US business into Mexico, there are various tax implications and reporting requirements an American person should consider. And, just because there is a tax treaty between the United States and Mexico does not mean that US persons can avoid paying taxes on income generated abroad. Let’s take a quick look at five common issues affecting Americans doing business in Mexico.
Ignored Entity Worldwide Revenue
Generally, a taxpayer creates the equivalent of a US LLC so that they can ignore the foreign entity and avoid paying taxes in the foreign country. Two of the main types of foreign entities are Anonimous society (HER) and Limited Liability Company (SRL). With a company, depending on whether it is CFCs or not will have an impact on the immediate or deferred tax rules. If a taxpayer wishes to set up a disregarded entity in Mexico, they are (usually) subject to tax as an individual taxpayer and the worldwide income tax rules come into effect. The United States follows a worldwide income tax model for lawful, permanent US citizens. Residents and foreign nationals who meet the conditions Substantial presence test. Whether foreign tax credit are available, it may help reduce or eliminate U.S. taxation on foreign income.
** If you are operating an overlooked foreign entity, you may need to file a Form 8858 and 8832 in the first year of operation, then a Form 8858 continuing, unless an exception exclusion or limitation applies. applies.
Setting up a business in Mexico
Although there are different types of business entities that a U.S. person can form, it is important to keep in mind that not all types of foreign entities can be ignored. The United States has developed a in itself list of companies, which essentially means that certain companies identified on the list cannot be ignored under US tax law – and therefore must be treated as a corporation for US tax purposes. As for Mexico, the Anonimous society is identified as one of these types of Societies per se.
Sociedad Anonima, Form 5471 & TCJA
When a taxpayer operates a Anonimous society (depending on whether they belong to one or other of the reporting categories for Form 5471), they will also need to file various other international reporting forms. The taxpayer may have to complete Form 5471 and resolve more complex tax issues such as Subpart F income and GILTI.
US banking requirements for foreign accounts
When American people set up businesses in foreign countries such as Mexico, it is common to obtain a local bank account in order to operate in the local currency. Where a U.S. person has control or signing authority over these foreign accounts, they are required to declare them on the foreign account declaration tax forms as the FBAR and Form 8938 – when the declaration threshold is reached. Failure to report foreign bank and financial accounts can result in significant fines and penalties – although there are various offshore tax amnesty programs try to minimize or eliminate these penalties.
The United States and Mexico have several different tax treaties/agreements. While these tax treaties can help minimize certain taxes for some, usually if they are a US citizen or permanent resident residing in the United States and doing business in Mexico, the application of these benefits will be limited. Similarly, taxpayers considering relying on the US-Mexico tax treaty will always want to refer to the Safeguard clause assess whether or not a specific treaty article applies to them and whether the application of the treaty provision is limited by the saving clause and/or exempted from the saving clause. Although the tax treaty is the main treaty, other types of treaties between the United States and Mexico include:
Non-compliance of the current year compared to the previous year
Once a taxpayer misses various taxes and returns (such as FBAR and FATCA) for previous years, they will want to be careful about submitting their information to the IRS for the current year. This is because they risk making a Silent disclosure if they simply start filing forms in the current year and/or bulk filing forms from the previous year without doing so through one of the IRS-approved offshore submission procedures. Before filing untimely foreign reporting forms for the previous year, taxpayers should consider speaking to a Board Certified Tax Specialist who specializes exclusively in these types of offshore disclosure matters.