The corporate income tax rate increased from 34% to 35%. However, companies that reinvest profits can defer up to 3% of the tax, for a 32% rate this year. The deferred tax is paid at the time a dividend is paid to shareholders. Starting in 2000, companies reinvesting profits will be able to defer up to 5%. This will require maintaining a “rein-vested profits account.” When dividends are paid from the account, the deferred tax will be applied to the amount of the distribution multiplied by 1.5385. The gross-up is designed to account for the taxes already paid — in other words, it ensures that the deferred tax liability applies to the original amount of reinvested profits, not the lower, after-tax portion.

There is now also a 5% shareholder dividends tax. The company paying the dividends collects it by withholding. However, the free flow of dividends between Mexican companies has been maintained. Many companies made profit distributions at the end of 1998 to avoid the new tax.

Some benefits from consolidation have been eliminated. Starting this year, only 60% of the income or loss of a member of a consolidated group may actually be consolidated, regardless of the percentage ownership of the parent corporation. Thus, even if a parent corporation owns 100% of its subsidiary, it can only consolidate 60% of the subsidiary’s profits and losses.

An immediate deduction for the cost of fixed assets has been repealed. The withholding tax on royalties that Mexican companies pay to foreigners has increased from 35% to 40%. Import tariffs have increased by 10% for products from countries with which Mexico does not have a free trade agreement.

The tax treatment of Associations of Partnerships, or AenP’s, has changed. In the past, the active partner reported all the activity in the AenP in his tax return. Starting this year, the active partner must file a separate return for his share of the income, and passive partners will report their shares as dividends and be subject to the new dividends tax.

The Mexican Congress declined to enact a new 15% telephone service tax to be imposed on both residential and business customers. Talks on further tax reforms are expected to begin in February.