A Mexican court said that companies cannot deduct profit-sharing payments to employees.

Most infrastructure projects in Mexico are owned by a project company with no employees. The employees are in a separate company that operates and maintains the project under a contract with the project company. The reason for this is Mexico requires that each company pay 10% of its profits to its workers in annual profit sharing. If most of the income is in the project company with no employees, this limits the amount of profit sharing that is required.

“The law has always said that the tax base on which corporate income taxes are computed may not be reduced by the profit-sharing amounts paid to employees,” according to José Ibarra, a lawyer with Chevez, Ruiz, Zamarippa y Cia in Mexico City. “However, several companies and their litigation advisers considered the provision unconstitutional and, thus, some went to court while others simply deducted the profit-sharing payments.” Such deductions were more common starting in 2002 because a change in Mexican law gave companies an opportunity to challenge the law in court.

The Mexican Supreme Court of Justice said on May 4 that the bar against deductions is not unconstitutional. The decision has two effects. It means higher income taxes for Mexican companies. It also means higher profit-sharing payments, since the payments are calculated as a percentage of the taxable income a company reports for income tax purposes.

Keith Martin