2009 All Rights Reserved Dealing with an unstable Exchange Rate Mexican Tax and Accounting Issues Guillermo Gómez For WMTA Breakfast September 16 2009 Background ID: 473597
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Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights ReservedSlide2
Dealing with an unstable Exchange RateMexican Tax and Accounting IssuesGuillermo Gómez
For WMTA Breakfast September 16, 2009Slide3
BackgroundExchange rate fluctuations are not new in Mexico.7,500% of
Peso devaluation
from 1910
up today.
From 2001 to 2007 average slide of 2% per year, relatively stable.
High volatility since September of 2008:Above Ps$15 to US$1 in March 2009.Depreciation of peso from 2007 average to date of 23%.
Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights ReservedSlide4
US Dollar Trend vs Mexican PesoJan 2008 to Sep 2009
Ibánez Soltero Gómez Paz y Monroy, S.C.
© 2009, All Rights ReservedSlide5
Principal ConsequencesGood news for the industry, as labor costs and other Mexican denominated expenses are worth less dollars.Significant exchange gains or losses on intercompany balances, other dollar denominated accounts and US dollar cash conversions.
Ibánez Soltero Gómez Paz y Monroy, S.C.
© 2009, All Rights ReservedSlide6
Tax and accounting issuesTax Exchange gains and losses are computed differently for income tax and flat tax purposes:Income tax – accrual.
Flat tax – cash.
VAT cash basis, NO tax effect.
Accounting
Exchange G/L recognized on an accrual basis.
Ibánez Soltero Gómez Paz y Monroy, S.C. © 2009, All Rights ReservedSlide7
Transfer PricingFor 6.9% (on assets) for Safe Harbor election AR’s involved in the calculation denominated in Dollars are revaluated at the exchange rate corresponding to the 1
st
day of every month.
For 6.5% (on cost and expenses) Safe Harbor election it is expressly stated that exchange losses are NOT part of the base; NO reference to exchange gains.
For transfer pricing study, since Mexican GAAP (MIFRS) must be observed, losses should be deducted from profit stemming from study and gains should be added.
Ibánez Soltero Gómez Paz y Monroy, S.C.
© 2009, All Rights ReservedSlide8
ConclusionsImpact varies depending upon:The nature of the intercompany balance and other dollar denominated accountsTP election which requires different treatment of exchange G/L
Time of hedging?
Ibánez Soltero Gómez Paz y Monroy, S.C.
© 2009, All Rights Reserved