Coca-Cola FEMSA: Taxes in Mexico

Coca-Cola FEMSA, a company primarily engaged in producing and bottling soft drinks under The Coca-Cola Company brands, has faced a tightening of taxes and duties in Mexico.

First and foremost, on January 1, 2019, the Mexican government eliminated the right to offset any tax credit against any tax payable (universal offset).

As of this date, the right to offset any tax credit must be made against taxes of the same nature and be payable by the same person (tax credits may not be offset against taxes paid by third parties).

Then, on January 1, 2020, a new tax reform became effective in Mexico.

As a result of that reform, there is a new interest deduction limitation equal to 30.0% of adjusted net income, which will be calculated similar to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), considering x) any interest expense less than 20 million pesos is not subject to this rule and therefore can be deducted in full and y) any deductible interest that cannot be deducted due to the 30% limit, can be considered for 10 more years.

In addition, there are stricter rules for categorizing certain foreign income and foreign subsidiaries that are subject to lower levels of taxation as compared to Mexican income tax.

Coca-Cola FEMSA

The reform also modified the per liter excise tax (IEPS) for flavored beverages from 1.17 pesos per liter to 1.2616 pesos per liter, applicable to the production, sale and importation of beverages with added sugar and HFCS (high fructose corn syrup) and beginning January 1, 2021, this tax will be subject to an annual increase based on the previous year’s inflation.

Likewise, the excise tax (IEPS) on energy drinks of 25.0% will be applicable whenever the drinks include a combination of caffeine with any other substance with stimulant effects.

Finally: the Federal Tax Code (CFF) was amended to:

• Expand the number of cases that may give rise to joint and several liability of partners, shareholders, directors, managers and any other person responsible for the management of the business.
• Incorporate a new obligation to report certain transactions to the tax authorities.
• Increase the power of the tax authorities to limit the benefits in situations where it considers that there is an absence of business reason or that no economic benefit is obtained, beyond the tax benefit.