Implementation issues for the Mexican nonresident income tax.

• Author: Zamarra, Randall L.

As the North American Free Trade Agreement (NAFTA) takes effect, more American companies are expanding their business into Mexico. These companies are transferring hundreds of employees to border communities like El Paso, Texas, where they are being assigned to positions in maquiladoras. (A maquiladora, or "maquila," is a factory located in Mexico, typically near the U.S. border, which enjoys certain tax and customs privileges.) These employees establish their permanent residence in the United States and commute to Mexico. The result is a growing number of U.S. resident workers earning wages in Mexico.

In reaction to the influx of nonresident workers, the Mexican government has begun to tax the portion of income these nonresidents earn in Mexico. The basic provisions of the law are: 1. The first 36,000 new pesos obtained in a calendar year are exempt. 2. The rate of 15 % is applied to income received in a calendar year that exceeds the exemption amount and is not over 290,000 new pesos. 3. The rate of 30% is applied to income received in a calendar year that exceeds 290,000 new pesos. (These new peso amounts were codified when the exchange rate was approximately three new pesos to one dollar, prior to the drastic devaluation that occurred at the end of 1994 and continued into 1995. The new peso amounts are adjusted periodically as the exchange rate fluctuates.)

Taxpayers must pay the tax within 15 days following the obtainment of the income. However, for practical purposes, taxpayers are paying the tax within 15 days of the end of the month in which the income was obtained, even for weekly and biweekly payroll periods. Although the employees are legally responsible for payment of the tax, they can delegate this responsibility to the employer. Thus, payment may be handled in one of three ways: if the employer has no permanent establishment or fixed base in Mexico, the employee makes the payments; otherwise, either the maquiladora or the U.S. firm makes the payments on behalf of all employees. Generally, it is best to have the maquiladoras pay the tax since they will have the most negotiating leverage with the Mexican government if a dispute should arise, and this arrangement is easier to administer and avoids the necessity of obtaining a Mexican tax identification number.

A worker becomes subject to the tax when he has performed services in Mexico for 183 days, consecutive or not, in a 12-month period. It is important to note that this...