2002 FISCAL AMENDMENTS

CONTENTS

2002 ECONOMICAL PERSPECTIVES ................................................................................................... 6

Gross Domestic Product (PIB) ................................................................................................................... 8

Inflation ...................................................................................................................................................... 9

Rate of Exchange ........................................................................................................................................ 9

Interest Rate ................................................................................................................................................ 9

Oil income ................................................................................................................................................... 9

EXECUTIVE SUMMARY OF FISCAL AMENDMENTS FOR 2002

IVA (IVA) ................................................................................................................................................. 11

Tax on the of sale of luxury and commodity services ............................................................................... 11

Powers to federal entities ........................................................................................................................... 11

ISR (ISR) (INCOME TAX) ....................................................................................................................... 12

Substitute tax of credit to salary ................................................................................................................. 13

FEDERAL REVENUE FOR 2002 FISCAL YEAR

General remarks ......................................................................................................................................... 14

Federal revenue .......................................................................................................................................... 15

Extension for payment of fiscal credits ...................................................................................................... 15

Cancellation of fiscal credits ...................................................................................................................... 15

Fiscal incentives ......................................................................................................................................... 15

IVA (VALUE ADDED TAX) .................................................................................................................. 16

Power granted to the federal entities to establish tax on natural persons .................................................. 19

Power of granted to federal entities to establish tax on sales and services ................................................ 20

Tax on the sale of commodities and luxury services ................................................................................. 20

NEW INCOME TAX LAW .......................................................................................... 24

TITLE I GENERAL PROVISIONS

Permanent Establishment .......................................................................................................................... 24

System for the “maquila” industry ............................................................................................................ 25

International treaties ................................................................................................................................. 25

Transfer of property by merger or split .................................................................................................... 26

Creditable tax ............................................................................................................................................ 26

Profit-Sharing associations ....................................................................................................................... 26

Definition .................................................................................................................................................. 26

TITLE II CORPORATIONS

Tax rate ..................................................................................................................................................... 27

Settlement in payment .............................................................................................................................. 27

Distribution of dividends .......................................................................................................................... 27

Capital reduction ....................................................................................................................................... 29

Settlement (Liquidation) .......................................................................................................................... 30

Provisional payments................................................................................................................................. 30

Adjustment from inflation ......................................................................................................................... 31

Cumulative income .................................................................................................................................... 31

Gain on sale of shares ................................................................................................................................ 32

Corporate re-structuring ............................................................................................................................ 33

Deductions

IMSS dues for shares ................................................................................................................................ 34

Interest and annual adjustments for inflation ............................................................................................ 34

Deduction Requirements

General requirements ................................................................................................................................ 34

Payments made by checks ......................................................................................................................... 34

One-time deductions ................................................................................................................................. 35

Alcoholic Beverages ................................................................................................................................. 35

Interest ...................................................................................................................................................... 35

Payments for natural persons and corporate entities simplified system .................................................. 35

Social welfare benefits .............................................................................................................................. 36

Irrecoverable credits .................................................................................................................................. 36

Wages and salaries .................................................................................................................................... 37

Non-deductible expenses

Travel expenses ........................................................................................................................................ 37

Automobile rentals .................................................................................................................................... 37

PTU .......................................................................................................................................................... 37

Derivative financial transactions ............................................................................................................... 38

Dining in restaurants ................................................................................................................................. 38

Reserve for pension and retirement funds ................................................................................................ 38

Contributions to training, investigation and Technology funds ............................................................... 39

Investments

Immediate deduction ................................................................................................................................ 39

Automobiles ............................................................................................................................................. 40

Applicable rates ........................................................................................................................................ 40

Losses resulting from Acts of God or force majeure ................................................................................ 40

Obligations of corporate entities

Foreign affiliates ....................................................................................................................................... 41

Other deductions ....................................................................................................................................... 41

Financial system

Yields on inversions .................................................................................................................................. 42

Credit institutions ...................................................................................................................................... 42

Insurance institutions ................................................................................................................................ 43

Fiscal consolidation .................................................................................................................................. 43

New simplified system ............................................................................................................................. 44

Taxpayers of the system ........................................................................................................................... 45

Optional system ........................................................................................................................................ 46

Obligations ............................................................................................................................................... 46

Provisional payments ................................................................................................................................ 47

Annual tax ................................................................................................................................................ 47

Members of coordinates .......................................................................................................................... 48

Facilities for land transportation ............................................................................................................... 48

Termination of the previous simplifies system ........................................................................................ 49

TITLE III NON-PROFIT CORPORATE ENTITIES ............................................................. 50

Tax returns ................................................................................................................................................ 51

Mutual funds ............................................................................................................................................. 51

TITLE IV ............................................................................................................................................. 52

General provisions .................................................................................................................................... 52

Investments in tax heavens ....................................................................................................................... 53

Presumed income ...................................................................................................................................... 53

Exempt income

Indemnification of risks and illness .......................................................................................................... 53

Social welfare ........................................................................................................................................... 53

Saving funds ............................................................................................................................................. 54

Other payments from labor relation ......................................................................................................... 54

Sale of homes ........................................................................................................................................... 54

Interest ..................................................................................................................................................... 54

Indemnity for insurances .......................................................................................................................... 55

Donations .................................................................................................................................................. 55

Sale of stock .............................................................................................................................................. 55

Agriculture, livestock, forestry and fishing activities ............................................................................... 56

Copyrights ................................................................................................................................................. 56

Sale by settlement in payments ................................................................................................................. 56

Business or professional activities ............................................................................................................ 57

Tax return-exempt income ........................................................................................................................ 57

Chapter I Wages and Salaries

Income in services ............................................................................................................................. 57

Payment of withholdings ................................................................................................................... 58

Calculation procedure and tariffs ...................................................................................................... 58

Workers obligations .......................................................................................................................... 59

Employers obligations ....................................................................................................................... 59

Credit to salary ................................................................................................................................... 59

Chapter II Business and professional activities

Income ................................................................................................................................................ 60

Time for accumulating income .......................................................................................................... 60

Deductions ......................................................................................................................................... 61

Investments ........................................................................................................................................ 61

Requirements for the deductions ....................................................................................................... 62

Provisional payments ........................................................................................................................ 62

Adjustment to provisional payments ................................................................................................. 63

Fiscal losses ...................................................................................................................................... 63

Calculation of the annual tax ............................................................................................................. 64

Crediting of ISR against IMPAC ...................................................................................................... 64

Obligationa ....................................................................................................................................... 64

Intermediate system

Subjects ............................................................................................................................................. 65

Obligation ........................................................................................................................................ 65

Investments ....................................................................................................................................... 66

Small taxpayer system

Subjects.............................................................................................................................................. 66

Rate .................................................................................................................................................... 66

Obligations ....................................................................................................................................... 66

Aspects to be considered in regard to the system as the result of the amendment ............................ 67

Chapter III Income from lease

General Aspects ................................................................................................................................ 67

Income ............................................................................................................................................... 67

Deductions ........................................................................................................................................ 68

Provisional payments ........................................................................................................................ 68

Informative return ............................................................................................................................. 68

Chapter IV Sale of Commodities

General Aspects ................................................................................................................................. 69

Fiscal cost of shares of mutual funds ................................................................................................. 69

Deductible losses ................................................................................................................................ 69

Informative return of notaries or brokers ............................................................................................ 69

Chapter V Acquisition of properties

General Aspects ................................................................................................................................. 70

Chapter VI Interest

General Aspects ................................................................................................................................. 70

Concept of Interest ............................................................................................................................ 70

Accrual .............................................................................................................................................. 70

Loss in the inflationary adjustment ................................................................................................... 71

Interest paid by insurance companies ................................................................................................ 71

Provisional payments on interest ....................................................................................................... 72

Obligations ........................................................................................................................................ 73

Chapter VII Income from premiums

Withholding ....................................................................................................................................... 74

Payer obligations ............................................................................................................................... 75

Chapter VIII Income from dividends.

Acumulation ..................................................................................................................................... 75

Crediting ............................................................................................................................................ 75

Constructive dividends ...................................................................................................................... 76

Chapter IX Other income

General aspects ................................................................................................................................. 76

Interest .............................................................................................................................................. 76

Estimate of income ........................................................................................................................... 76

Income of insurance companies ......................................................................................................... 76

Income from royalties ........................................................................................................................ 76

Income from retirement plans ............................................................................................................ 76

Informative tax return ........................................................................................................................ 77

Derivative financial transactions ....................................................................................................... 77

Chapter X Requirements for Deductions

Non-deductible expenses .................................................................................................................. 78

Automobiles ..................................................................................................................................... 78

Salaries, commissions and fees ........................................................................................................ 78

Consumption at bars and restaurants ................................................................................................ 78

Chapter XI Annual Return

Filing date ......................................................................................................................................... 78

Personal deductions .......................................................................................................................... 78

Mortgage interest .............................................................................................................................. 78

Voluntary contributions .................................................................................................................... 80

Insurance premiums .......................................................................................................................... 80

Calculation of the annual tax ............................................................................................................ 80

TITLE V FOREIGN RESIDENTS WITH INCOME DERIVED FROM A SOURCE

OF WEALTH LOCATED IN NATIONAL TERRITORY

Parties subject to the tax ........................................................................................................................... 81

Income from fees ...................................................................................................................................... 81

Payments to members of the board, examiners, etc. ................................................................................ 82

Income from the lease of real properties .................................................................................................. 82

Income from the lease of personal properties .......................................................................................... 82

Time-shared tourist service agreements ................................................................................................... 82

Income from the sale of real properties .................................................................................................... 82

Income from the sale of shares ................................................................................................................. 82

Restructuring of companies that form part of the same group ................................................................ 83

Ingresos por operaciones de sustitución de deuda pública por capital .................................................... 84

Income from derivative financial transactions payable in cash ................................................................ 84

Income from dividends............................................................................................................................. 84

Income from interest ................................................................................................................................ 84

Royalties ................................................................................................................................................... 85

Income from construction services .......................................................................................................... 86

Premiums ................................................................................................................................................. 86

Income of artists and athletes .................................................................................................................... 86

TITLE VI TERRITORIES WITH PREFERENTIAL FISCAL SYSTEMS AND

MULTINATIONAL COMPANIES

Territories with preferential fiscal systems ............................................................................................... 86

Multinational companies .......................................................................................................................... 88

TAX THAT SUBSTITUTES CREDIT TO SALARY

Parties subject to payment ......................................................................................................................... 88

Rate .......................................................................................................................................................... 89

Annual tax ................................................................................................................................................. 89

Provisional payments ................................................................................................................................ 89

Exemption of the tax ................................................................................................................................. 89

Concept of a single corporate entity ......................................................................................................... 90

LAW OF THE SPECIAL TAX ON PRODUCTION AND SERVICES

New activities taxed ................................................................................................................................. 91

Levying of the tax ..................................................................................................................................... 91

Crediting ................................................................................................................................................... 91

General Rules ............................................................................................................................................ 92

Exports ..................................................................................................................................................... 92

Alcoholic beverages ................................................................................................................................. 92

Soft drinks and hydrating beverages

Parties subject to the tax ........................................................................................................................... 93

Exempt activities ...................................................................................................................................... 93

Exempt inventories .................................................................................................................................. 93

Telecommunications

Parties subject to the tax .......................................................................................................................... 94

Exempt activities ..................................................................................................................................... 95

Other obligations .................................................................................................................................... 95

ABBREVIATIONS ........................................................................................................................... 96

FISCAL AMENDMENTS 2002

ECONOMIC PERSPECTIVES 2002

To make a serious analysis on financial and economic expectations and indicators that may arise in 2002, the fiscal and political environments prevailing at the beginning of the year must be analyzed, as well as certain international conditions that also have an influence on the domestic market.

The main factor upon which, all the indicators depend in the rescission of the North American market. Inasmuch as our economy is increasingly interrelated with the economy of the United States of America, it would be naïve not to take into account its evolution when analyzing Mexican perspectives. Despite the announcement made just recently, in which the results of the economic growth in the U.S.A. surpassed expectations of all the analysts, there are still doubts as to when the rescission will end. The lack of confidence of the North American consumer, inventories not yet realized and the confusion generated by the unfortunate events of September 11, have not been clearly overcome to the degree as to cause a favorable reflection in the transactions of companies in the U.S.A.

Consequently, Mexican exports will not recover their favorable levels until these conditions have been resolved.

If the North American consumer had lost confidence at the end of 2000, due to the rumors of a rescission, resulting in fewer purchases, since that time, the events of September consolidated those rumors and originated even greater distrust, now related with the loss of jobs, which is why buying diminished even more, so it holds at that level as of the date of this work.

Therefore, and contrary to the initial estimates, where an economy quick recovery was expected, schematized in a “V” curve where economy grows at a speed similar to that of the rescission, now a gradual recovery should be expected represented by a prolonged “U” curve, held back by the insignificant increase in the consumers personal income.

Other international factors that must be closely observed are the Argentine crises and the Brazilian economy. Although it is likely that the crisis in Argentina has benefited Mexico, by capturing alternative investment in emerging economies, the Argentine moratorium in payments of its foreign debt could have a negative effect in Mexico, in turn driving away these investments in Latin America. To make the situation even worst, financial groups who cut their liquidity and profit in the Argentine market will offset these effects through the treasury coffers of the Mexican counterparts. On the other hand, the presidential elections in Brazil and the due dates of significant amounts of the debt in 2002 make it an important factor to be observed.

GROWTH OF THE PIB IN THE COUNTRY
COUNTRY/YEAR	1999	2000	2001	2002

U.S.A.	4.1	4.1	1.1	1.3
ARGENTINA	-3.4	-0.6	-.44	-9.4
BRASIL	0.7	4.5	1.0	1.7
Source: Bursamétrica

Another factor that will affect our economy is the tax collection spirit of the fiscal amendment, and the consequences of not having achieved political consensus to modify this spirit. As for example, the additional taxes and salaried personnel income and those who obtain small yields under investments will reduce their liquidity as consumers.

If the so desired and not received “Fiscal Amendment” approved during the first hours of the new year, achieved anything it was to cause confusion, and above all, uncertainty among Mexican businessmen. This uncertainty will prevail for a considerable length of time, so long as the SHCP (Ministry of Finance and Public Credit) continues issuing rules and clarifications through miscellaneous resolutions. As is known to all, this process takes several months, even years. The culminating results of these efforts of the legislative body will be the failure to obtain the degree of investment, which Mexico has been seeking from one of the international qualifiers, with the resulting loss of potential investment in our country. Special mention should be made of the fact that in the past some of the qualifiers did grant the qualification degree in Mexico.

Added to the foregoing, certain measures of a structural type are pending a resolution: there is no definition on the restructuring of the petrol-chemical, electric energy and sugar industries, to mention some, and it is known that these industries in turn affect others that are wholly dependent on these inputs.

Moreover internal elections for the presidencies of the political parties prevent a clear vision of leadership and political will to carry into effect important actions.

On the other hand, it may be considered that with the rejection of the Executive initiative on fiscal Amendments, specifically with respect to increase of the tax base, by taxing consumptions and thereby obtaining the expected revenue, the government is offsetting this lack with measures such as the reduction of the subsidy in the price of electric energy. In other words that which it will not receive through taxes will have to be obtained from other sources, or by cutting spending; both measures will affect the economy of families and companies, and consequently the economy in general.

The measures indicated in the preceding paragraph, the increase of public transportation in the Federal District and the permanent lack of credit options at reasonable prices will undoubtedly have an impact on the pockets of Mexicans, thereby affecting internal consumption.

Following this brief analysis on the environment, both internal and external, which will affect the Mexican economy in 2002, we proceed to the item of exportations in the main economic and financial indicators with which Mexican companies will have to struggle.

MAIN ECONOMIC AND FINANCIAL INDICATORS FOR MEXICO 2002


	BUDGET	BANCO DE MÉXICO	INVEX	BURSAMÉTRICA	BB	AVERAGE


PIB	1.70	1.50	2.20	0.50	1.20	1.42
Actual growth %
INFLATION	4.50	4.50	4.98	6.27	4.50	4.95
% Dic/Dic
EXCHANGE RATE	10.10	n/d	9.30	9.50	9.70	9.65
Average Pesos/Dóllars
CETES 28	9.70	n/d	7.00	7.81	8.50	8.25
Nominal average%
OIL	15.50	14-16	n/d	15.76	16.00	15.75
US$ average/barrel
PLATFORM	1.725	n/d	n/d	1.600	n/d	1.66
Millions barrels daily
LIBOR	n/d	n/d	n/d	n/d	2.01	2.01
Average %

Gross Domestic Product (PIB)

Due to the effects on the Tax Fare of the Amendment, the recession in the U.S.A and the low degree of the cash flow, in general, of the Mexican taxpayer, a draw in private and business consumption is to be expected as well as a draw in the investment of projects. Consequently after having closed the year 2001 with a 0.3 percent reduction, a 1.42% economic growth is expected for 2002, although it will be at a slower rhythm and even widely volatile given the various internal and external factors commented upon.

The fiscal amendment, aimed at collecting taxes to the greatest extent possible, does not help in the sense, since its inflationary effects (IEPS, Special Tax on Production and Services-Luxury Tax), will curtail the rhythm of the economy.

nse, since its inflationary effects (IEPS, Special Tax on Production and Services-Luxury Tax), will curtail the rhythm of the economy.

Inflation

In 2001, inflation was 4.4%, widely surpassing the 6-5% grow due to a great extent to the worldwide economic slowdown. The results of 2001 become even more important considering that the inflation in 2000 ended at 8.96% levels. Unquestionably, this was a great balancing factor during the year just ended. Taking into account inflationary pressures derived from the new tax rate and imposing concepts, actual salary increases given by companies in the end of last year, as well as the raise in price of basic products such as gasoline, electricity and transportation, an inflation rate close to 5% is forecast for 2002. The depreciation of the exchange rate mentioned in the respective section will in turn excerpt pressure on the inflationary effect.

Exchange Rate

The possible reduction of foreign investment because of the standstill of our qualification in respect to any of the qualifiers, the prior deficit in the current account, due to a draw in exports and the lack of transactions of a considerable magnitude such as the merger of Citibank with Banamex, will bring about a depreciation in the exchange rate in 2002. The estimate is to manage an average exchange rate of approximately $9.60 pesos per dollar. To balance this out this depreciation should help to raise the value of Mexican exports and make their price more competitive, since at the present time they represent one third of the PIB.

Interest Rates

It is estimated that interest rates will remain stable and at levels similar to those observed in 2001, although the latter had risen recently. The funds destined by the banks for loans will remain equally scarce.

Oil Income

As is tradition the dependents of the Mexican revenue from exports of Oil will play an important role in the performance of our economy. Due to the commitments acquired with the OPEP and the common blindness in respect to quotas of the member countries, it would not be surprising to find ourselves in a price war at mid year, compromising the expected project. This becomes even more serious given the growth of exporting an average of 1.725 million barrels a day, in contrast to the average daily exportation in 2001 of 1.600 million barrels.

Lastly, represent a comparative chart of the various growth indexes by industry.

PIB BY LARGE INDUSTIRAL DIVISION 2002 *

	1T	2T	3T	4T	ANUAL

MINING	-0.7	1.3	-0.5	0.8	0.2

MANUFACTURING INDUSTRY	-0.3	1.2	2.2	3.6	1.6

CONSTRUCTIÓN	-0.5	1.1	-0.7	1.9	0.5

ELECTRICITY, GAS AND WATER	1.6	1.1	1.5	3.8	2.0

COMMERCE, RESTAURANTS AND HOTELS	-5.7	-3.1	-2.4	1.2	-2.5

TRANSPORTATION, STORAGE	-0.2	-0.3	-2.1	1.4	-0.3

FINANCING, SERVICES, INSURANCE, REAL ESTATE	3.6	3.7	3.3	4.0	3.6

SERVICE BY PERSONS AND CORPORATIONS	0.3	0.7	0.6	0.9	0.6

*estimates Source: Bursamétrica

EXECUTIVE SUMMARY OF FISCAL AMENDMENTS 2002

IVA (IVA)

Payable at the time of collection

Not credited until the tax has been effectively paid

Additional requirements to be satisfied for the issue of receipts in the case of partial sales

Specific rules are sent for collection through financial factoring companies.

Tax on the Sale of Luxurious Commodities and Services

5% tax on transactions with the public in general for the sale of commodities, rendering of services, leasing of personal properties and income of certain commodities considered as luxury items.

Considered as an operation with the public in general is when IVA is not expressly and separately transferred in the receipts issued or simplified receipts.

Taxed Articles

§ Perfumes

§ Automobiles with a capacity of up to 15 passengers and a price above $250,000.00

§ Garments made of silk or leather (except shoes)

§ Various electronic articles

§ Computer equipment with a value above $25,000.00

§ Membership fees in restaurants and bars

§ Consumption in bars

§ Bars and restaurants where alcoholic beverages are sold (except for beer and table wine)

Powers to Federal Entities

· A tax may be established on income received by natural persons for their business and professional activities; likewise, a tax on sales of service to the public in general, at a maximum rate of 3%

ISR (INCOME TAX)

35% rate

Maximum rate for Natural Persons 35%

The rate is reduced gradually by one percent per year; starting in 2005 the rate will be of 32%

The option to defer the tax in reinvested profits is eliminated, as is the withholding of the 5% tax on dividends paid to natural personas and foreign residents.

Provisional payments will be monthly in every case and the semi-annual adjustment is eliminated.

New laws on the amortization of losses in provisional payments.

Requirements applicable to deductions must comply no later than the last day of the fiscal year, to which they correspond, except the requirement of obtaining the respective receipt.

Up to 50% of the food and beverages consumed at restaurants may be deducted provided that the payment is made with a credit card, debit or service card, or through electronic money machines authorized by the SAT (SAT).

As to automobiles, the requirement that they be utilitarian is eliminated as well as the prohibition of deducting certain automobiles; the deduction is limited to $200,000.00 pesos, and included in this amount is armed car equipment.

Automobile rentals are deducted up to $165,00 pesos a day.

An annual adjustment for inflation is made instead of determining interest and the accumulative or deductible inflationary gain or loss.

The exemption to earnings in the sale of shares to the Bolsa Mexicana de Valores is limited.

Only 60% of the direct or indirect stock participation owned by the controlling company in the controlling companies is consolidated.

The distinction between pure and operating controlling companies is eliminated.

The base of the simplified regime is amended; income and disbursement of cash substitute the revenues and disbursements system.

It is possible to pay taxes through other transparent corporate entities.

The following are incorporated as deductions for natural persons with certain requirements:

Premiums paid for medical expense insurance
Real estate interest on mortgage credits to be used for a residence contracted with an auxiliary credit institution or organization, (starting in 2003) and voluntary contributions to the retirement sub account
Old age severance
Old age

· Natural persons with business activity and the rendering of professional services accumulate income during the period in which the income is collected, and effect the deductions at the time when they are paid.

· Starting from this year natural persons are required to accumulate to their other income, income from dividends.

· With certain exemptions, payments made abroad are homologated to the withholding rate on gross income at 25%, and the tax on earnings at the rate of 35% for 2002, which is gradually reduced to 32% in 2005.

· A corporate entity located in a territory with a preferential fiscal system may sell shares to a company resident in the country, provided that they are of the same group and by payments of taxes applying the 1.8$ rate on the market value of the shares.

The present value of investment of certain new commodities of fixed assets may be immediately deducted outside of the Metropolitan district of the Federal District, Guadalajara and Monterrey. Excluded are intensive manual labor companies, non-polluting companies, and those that do not require any intensive use of water.

Substitute Tax of Credit to Salary

· 3% applicable on salaries and benefits paid in cash or in kind by natural persons or corporate entities

· It will be paid monthly on the same date on shareholders the income tax returns are filed

There is the option of not to pay this tax when the credit to the paid salary is not reduced against income tax.(ISR)

FEDERAL REVENUE LAW FOR THE 2002 FISCAL YEAR

General Remarks

On January 1, 2002, the Federal Revenue Law (LIF) was published and went into effect for the 2002 Fiscal Year. The publication of said law was the result of a legislative procedure which, to say the least, demonstrated a lack of analysis and discussion on the fiscal provisions the country needs for its development.

The LIF, as is the case with other fiscal provisions in force as of the first day of 2002, will generate a significant work load for our judicial and administrative courts, since various legal inconsistencies are found in them which may even lead to a declaration of the unconstitutionality of many of its provisions.

In fact, the very date on which the LIF went into effect gives rise to questioning regarding the legality of said law, since the date of its publication and the effective date thereof coincide, which is an open contravention of the provisions of article 7th of the CFF.

In the transitory articles of the LIF are found various modifications of the Value Added Tax Law (LIVA). Notwithstanding that said modifications satisfy the principle of legality referred to in article 31 section IV of our Political Constitution since they are contained in a law (both materially and formally), the fact that the modifications to the Value Added Tax were not included precisely in the law on the subject matter is subject to criticism, the result of which is a methodological confusion in the consultation of provision on the Value Added Tax (IVA), as well as a serious diminution of the legal certainty of taxpayers, since the modifications to the LIVA contained in the transitory articles of the LIF have a duration of one year.

Transitory article Eighth of the LIF establishes a new tax payable by taxpayers. It consists of a tax on the sale of commodities and services considered to as luxury. Once again, the legislators decided to establish this new tax within the LIF, consequently the duration of the tax will be annual.

As will be discussed below, this new tax contains various legal inconsistencies, as well as a complicated implementation, thus we can foresee abundant discussion regarding the legality of said tax in our courts.

Perhaps what is most subject to criticism about the amendment to the LIF is that it is a threat to the principle of legal certainty to which taxpayers are entitled. Indeed, the current amendments, in addition to their limited annual duration, which in itself is a threat to the legal certainty of taxpayers, will accept various interpretations due to the hasty and impetuous drafting thereof. We consider that the foregoing, far from helping, will discourage both Mexican and foreign businessmen to make investments in working capital in Mexico.

Set forth below is a summary and our comments on some of the most relevant provisions of the LIF.

Federal Revenue

According to the provisions of the LIF, the Federation will receive in 2002 revenue in the amount of $1,026,235,500,000.00 pesos, of which $806,200,000,000.00 pesos will come from tax collection. As is the case in previous years, the tax that will generate the most revenue for the Federation shall be (Income Tax) ISR: $356,869,200,000.00 pesos.

Lastly, it is striking that the legislators have estimated revenue for the Federation equivalent to $8,751,400,000.00 pesos for the new tax on the sale of commodities and services considered as luxury. We consider that due to the legal inconsistencies contained in the tax on commodities and services considered as luxury, it will be difficult to reach the amount contemplated in the LIF.

Extension for payment of fiscal credits

In 2002, the surcharge rate for payment of fiscal credits will be 2.0%. Said rate may be reduced according to the formula contained in LIF, which will be calculated and published monthly by the Ministry of Finance and Public Credit.

Cancellation of Fiscal Credits

In 2002, the Ministry of Finance and Public Credit will be authorized to cancel fiscal credits for assessments or exploitations when the amount of the credit at December 31 is no higher than the equivalent in domestic currency to 2,500 units of investment. When two or more credits owed by a single person jointly exceed the limit of 2,500 units of investment, the Ministry of Finance and Public Credit may not cancel said fiscal credits.

Fiscal incentives

Fiscal incentives contained in the LIF, which we have considered to be the most relevant, are as follows:

Fiscal incentive in the (Business-Asset Tax) IMPAC to Mexican resident taxpayers engaged in air or maritime transport of persons or commodities using the aircraft or watercraft they have (with a concession or permit from the Federal Government) in the terms established in the LIF.

Fiscal incentive in the IMPAC consisting of the total amount of the tax that would have been payable by the natural person taxpayers in accordance with the small taxpayers system.

Fiscal incentive consisting of allowing the crediting of the IEPS which PEMEX and its subsidiaries caused by the sale of fuel to taxpayers included in certain sectors, provided that it is used in the machinery and vehicles referred to in the LIF. Independently of the sector to which they pertain, taxpayers who acquire diesel for final consumption, which is used exclusively as fuel for fixed internal combustion machinery, open flame machinery and locomotives may apply this incentive.

Fiscal incentive consisting of 25% of the IEPS for the diesel (final consumption) acquired by taxpayers who use it exclusively for automotive purposes in vehicles engaged in the public transport of persons or freight over highways or roads.

Fiscal incentive to producers of blue weber agave tequilana and to the producers of the several varieties of agave established in the (Mexican Official Standard) NOM, when said product is sold to be used in producing tequila and mezcal. The incentive may not be higher than $3.00 pesos per kilo of agave sold by the producers. The purchasers must pay the incentive and they, in turn, may credit it against the IEPS levied on the sale of tequila or mezcal within 12 months following the acquisition of the agave.

IVA

Transitory article Seventh of the LIF contains various modifications and additions to the provisions of the LIVA (curiously, said Transitory article also refers to the “substitution” instead of the amendment of the LIVA. This fact lacks efficient legislative technique since, for the correct application of IVA, taxpayers will have to have recourse to two bodies of law LIVA and LIF. It is also mentioned that the modifications in respect to the Value Added Tax, by being established in the LIF, will have a term of duration of one year, which clearly contravenes the legal certainty to which taxpayers are entitled.

Unquestionably, the most relevant amendment in regard to the IVA is that referring the cause for taxation. As a general rule, IVA becomes a tax liability at the time the considerations are actually collected for the sale, rendering of a service and grant of use or temporary enjoyment of properties. This change is transcendental; since, contrary to what occurred in the past, the IVA will become a tax liability under a criterion of cash flow (received or paid) by taxpayers.

Exceptions to the current taxation system are:

Interest on loans granted by credit institutions, which tax, will be incurred when accrued.

Interest derived from the opening of credit or current account agreements that are disposed of by means of a card, which tax will be incurred when accrued.

The sale of titles that encompass real rights. The tax will be incurred upon the delivery and disposal of properties. It will be considered that the properties covered by said title certificates are sold at the time the price is paid for the transfer of title. If no transfer is made, the tax will be payable when the properties covered by said titles are actually delivered.

The sale of real estate through the assignment of certificates of real estate interest. In this case, the tax will be incurred at the time the titles are transferred.

As to crediting of IVA, and for consistency with the new era of taxation, crediting will be admissible only when the tax transferred to taxpayers has been actually paid, and in such case, the acquisitions effectively paid.

It is important to point out that the new rule on crediting simply establishes as a requirement for crediting that, in the case of acquisitions, that they are effectively paid. Consequently, in the case of rendering of services and the grant of use or enjoyment of properties, IVA can be validly covered without the need of paying for the services or the grant of use or enjoyment, and, in that case, the crediting of the tax will be admissible.

It is also established that any advances or deposits received by the seller, the service provider or the person who grants the temporary use or enjoyment of properties will be considered as part of the price or consideration, consequently said deposits or advances will cause IVA. On the other hand, it is established that when the advances or the deposits are refunded, the provisions relative to refunds, discounts or allowances contained in article 7th of the LIVA will apply.

On the other hand, the LIF establishes that those who are required to withhold taxes will do so at the time when the price or consideration is paid, and upon the amount actually paid.

When the price or the consideration agreed to is paid by check, it will be considered that the value of the transaction and the transferred tax were effectively paid (the time when IVA is incurred) on the date it is collected. We consider that an interpretation could be that the consideration will be deemed as effectively paid when the creditor cashes the check at the bank and thus actually receive the payment.

Another interpretation could lead us to conclude that the consideration will be deemed as effectively made at the time the exchange is made between the representatives of the borrower and the debtor of the credit instrument (check), irrespective of whether it has been cashed at the respective credit institution.

We consider that this provision will give rise to serious practical problems since, concluding in accordance with the first assumption, the debtor should not consider as paid the IVA that was transferred to it (him) until the time the creditor cashes the check at the bank. If this were the case, it is possible that this provision will be declared unconstitutional because it leaves to the will of a third party (the creditor) the possibility for the debtor to consider that IVA that was transferred to it (him) was paid. A circumstance which goes hand in hand with the right of the debtor to credit IVA that was transferred to it (him).

A contrary case would be to consider that the payment is made at the time when the check is delivered or issued since; in that case, the person who makes the payment may consider that he complied with cited requirement on the date of its issue by the physical delivery of the check.

Undoubtedly, the fiscal authorities will issue general rules stating, in their opinion, what criterion should prevail.

It also established that when the consideration is paid with documents or vouchers (in respect to which a third party assumes the payment obligation), electronic cards or any other media, it will be considered that the consideration and IVA were effectively paid on the date of receipt or acceptance by the taxpayer.

When the purchaser of a commodity or a service signs in the favor of the seller, service provider or lessor, a credit instrument other than a check, it will be presumed (proof to contrary admitted) that the same constitutes a guarantee of payment of the price, and of IVA; consequently, the considerations will not be understood as effectively collected until the credit instrument in question is cashed or when it is transferred to a third party, except when such transfer is made to an agent (in order to be collected).

In the case of taxpayers who transfer documents pending collection to factoring companies, IVA will be paid in accordance with the following rules:

1. When the taxpayers guarantee and take charge of collecting the documents, it shall be deemed tax is to be paid at the time when it is effectively collected.

2. When factoring companies make the collection and it is not guaranteed by the taxpayers, IVA will be calculated and will be understood as paid in respect to the difference between the amount collected by the factoring companies and the amount that was paid to the taxpayer, substituting for the taxpayer in the obligation to pay IVA only in respect to said difference.

3. When factoring companies sell document pending collection to a third party, the total amount of said document will be deemed to be received at the time the sale is made. To calculate and pay the tax, the provision contained in above point 2 will rule.

We consider that there is a legislative deficiency in the cases mentioned in points 2 and 3, since there is no mention whatever in the LIF of the time when it will be understood that IVA has been paid in respect to the payment which the factoring makes to the taxpayers, since it simply establishes that said companies substitute in the payment of IVA for those who effected the transfer, up to the difference between the amount collected by the factoring companies and the amount paid to the taxpayer.

In regard to invoices or receipts (hereinafter “receipt”), it is established that they must satisfy the requirements established by the CFF and its regulations. In any case, whenever the receipts cover acts or activities subject to payment of IVA, they must expressly show the tax that is transferred. In virtue of the foregoing, the option to issue receipts for the public in general in which the tax on the price of the commodities was included, has been eliminated. As we will see below, the foregoing may generate practical problems.

In addition, the receipt must indicate if the consideration is paid in a single payment or in installments. If the price is paid in installments, the receipt must show the amount of the installment, which is paid at that time, and the tax transferred corresponding to such installment.

For subsequent installments, a receipt must be issued (for each one of them) which must contain: (i) fiscal identification data of the issuer, (ii) folio number, (iii) place and date of issue, (iv) RFC code of the person to whom it is issued, (v) domicile of the premises or establishment where issued, (vi) amount of the installment covered), (vii) the tax transferred, (viii) the tax withheld, in such case, and (ix) the number and date of the document that was originally issued for the transaction.

If IVA is refunded as a result of a cancellation or a discount or allowance, a receipt must be issued and must expressly contain, separately, the consideration and the refunded tax, as well as identification data of the original receipt.

According to the LIF, the acts and activities in respect to which IVA was caused up to December 31, 2001, when taxpayers receive the respective considerations, will not cause Value Added Tax in accordance with the new amendments referred to above.

Regarding the sale of commodities on term, in respect to which payment of IVA was deferred, the tax will be paid when the payments are effectively collected. In addition, interest payable before January 1, 2002 corresponding to sales on term or financial lease agreements in which the payment of the tax was deferred, said tax will be paid on the date on which the interest is effectively collected.

For purposes of the considerations and advances on construction works of real properties derived from contracts entered into with the Federation, the Federal District, the Stated and the Municipalities, when said services were rendered prior to January 1, 2002, it is clarified that the tax will be caused when the considerations corresponding to said services are effectively collected.

For the effects of the considerations and advanced payments of building construction works deriving form agreements entered into with the Federation, the Federal District and the States and Municipalities, which have been rendering such services before January 1, 2002, it is clarified that the tax will be charged when the considerations corresponding to those services effectively have been collected.

To be consistent with the publication of the new Income Tax Law LISR, it is clarified that references to LIVA and to the repealed Income Tax Law should be understood as made to the respective provision in the new Income Tax Law (LISR).

Power granted to the Federal Entities to establish a tax on natural persons

In the transitory articles of the LIF, it is established that the States may impose a local tax on income of natural persons who engage in business and professional activities, provided that the amount of their income is not higher than $4,000,000.00 pesos in the immediately preceding fiscal year.

First of all, the fact that the Federal Entities may only impose the tax commented upon when the individuals subject to the tax did not have income higher than $4,000,000.00 pesos is subject to criticism, while those who earned more cannot be taxed, which in such case could constitute a violation of the constitutional principles of equity and proportionality.

We also consider unlikely that the Federal Entities will make use of the power commented upon here, since if they do so, they would incur in a political cost which is hard to conceive.

Powers granted to Federal Entities to establish a tax on sales and services

The law also grants the power to the Federal Entities to impose a local tax on sales and services for a maximum 3%. The purpose of this tax is very similar to that in IVA, except for the import of commodities and services: (i) sale of commodities; (ii) rendering of services; (iii) grant of the temporary use or enjoyment of personal properties.

The LIF contains the exemptions and guidelines to be followed by the Federal Entities if they take the option to impose this tax.

As is the case with income tax of natural persons who engage in business or professional activities, we consider it unlikely that the States will impose the tax commented upon herein.

Tax on the sale of commodities and services considered as luxury

The LIF establishes a new federal tax, with an annual duration, on natural persons and corporate entities who in national territory sell commodities, render services or grant the temporary use or enjoyment of personal properties, as well as the import thereof, when they are carried out with the final consumer, in respect to commodities and services subject to this new tax.

It is highlighted that the tax will be caused only when the taxed transactions are carried out with the public in general, consequently, no transaction in which IVA has been expressly and separately transferred will be taxed. This could be contradictory to the transitory provision of the LIF (LIF) in which section III of article 32 of the LIVA is substituted. From reading the new provision, it could be concluded that taxpayers will be required, when they issue receipts for commodities and services that are subject to IVA, to issue receipts always expressly and separately transferring IVA. It can be expected that the Ministry of Finance and Public Credit correct the contradiction in the future that now exists between said provisions.

The tax rate is 5%, and it must be calculated by fiscal years. Taxpayers will make provisional payments for the same periods and on the same payment dates as those established for Income Tax. It is worth mentioning that, although that is what the law actually intends, it does not establish the obligation on the part of the taxpayer to transfer it to the consumer.

Purpose of the tax:

1. Sale and import of the following goods:

i) Caviar, smoked salmon and eels.

ii) Motorcycles with more than 350 cubic centimeters of cylinder capacity, motorized water skiing, water motorcycles, jet ski and motorized surfboards, magnesium rims and sunroofs for vehicles, as well as aircraft, with the exception of air spraying aircraft for fumigation.

iii) Perfumes, fire arms, camping articles, automobiles with a capacity of up to 15 passengers that sell for more than $250,000.00, sport accessories for automobiles, silk or leather garments, except for shoes, watches that sell for more than $5,000.00 pesos, television sets with a screen of over 25 inches, flat screen monitors or television sets, sound equipment that sell for more than $5,000.00 pesos, computer equipment that sell for more than $25,000.00 pesos and auxiliary equipment, electronic directories, video cameras, video players in the form of compact disc players, audio and video equipment and players that sell for more than $5,000.00 pesos.

iv) Gold, jewelry, goldsmith and silversmith works, artistic or ornamental pieces, the price of which is higher than $10,000.00 pesos, ingots, commemorative medals and Mexican or foreign coins that are not legal currency in Mexico or in their country of origin, the minimum gold content of which is 80%, provided that their sale is made to the public in general.

For purposes of this tax, to be understood as sale, in addition to the cases stipulated in the FCF (CFF), is the deficiency of commodities in inventories of companies (this assumption admits proof to the contrary).

2. Rendering of the following services:

i) Installation of mobile sunroofs for vehicles.

ii) Those used in playing golf, in equestrian activity, for playing polo, car racing, nautical sports activities, including membership fees and other amounts required to be disbursed for engaging in these activities, as well as fees for the maintenance of the premises and for providing the equipment and animals needed to perform said activities.

iii) Membership fees for restricted access restaurants, night clubs or bars.

iv) Those of bars, taverns, discotheques, as well as restaurants where alcoholic beverages are sold, except for beer and table wine, whether on the same premises or in an annex that has a direct connection to the place where alcoholic beverages are consumed, even if both pertain to different taxpayers.

There is an assumption in the law that in cases in which establishments where lodging, food and beverages are provided for a global price, it will be considered that the value of latter corresponds to 40% of the amount charged, upon which the 5% rate will apply. We believe that this assumption will not admit proof to the contrary.

We consider that in this latter sense, said assumption could have vices of constitutionality, mainly because it admits no proof to the contrary, thereby violating the right to a hearing which the constitution grants to the governed.

For the purposes of this new tax, considered as a rendering of services are: (i) the rendering of obligations to do, made by one person in favor of another, whatever the act is that originates it or the name or classification given to said act in other laws, (ii) every obligation to provide, not to do or permit, assumed by a person in benefit of another, provided that it is not considered as a sale or temporary use or enjoyment of personal properties.

3. Use or temporary enjoyment of:

i) Aircraft except for air spraying aircraft for fumigation.

ii) Motorcycles with more than 350 cubic centimeters of cylinder capacity, motorized water skiing, water motorcycles, jet skiing and motorized surfboards.

iii) Fire arms, camping articles, automobiles with a capacity of up to 15 passengers that sell for more than $250,000.00, sport accessories for automobiles, television sets with a screen of over 25 inches, flat screen monitors or television sets, sound equipment that sell for more than $5,000.00 pesos, computer equipment that sell for more than $25,000.00 pesos and auxiliary equipment, electronic directories, video cameras, video players in the form of compact disc players, audio and video equipment and players that sell for more than $5,000.00 pesos.

To be understood as the grant of temporary use or enjoyment of personal properties, is the leas, usufruct and any other act, independently of the legal form used, whereby a person allows another to temporarily use or enjoy said properties, in exchange for a consideration.

The base of the tax should be calculated by considering the total amount of the consideration, including advances. Not to be considered in the base for the tax is the amount of IVA. In the rendering of services, the base will be the price or the consideration agreed upon, as well as the other amounts charged to the recipient of the service for any other concept. Lastly, the base for granting the temporary use and enjoyment of properties will be the price or consideration agreed upon, as well as any other amounts charged or collected for other taxes, duties, maintenance expenses, constructions, reimbursements, regular or delinquent interest, conventional penalties or otherwise charged for any other concept.

The tax will be caused when the considerations are actually charged and upon the amount of each one of them and will form a part of the base for calculating IVA.

Notwithstanding that the tax on the sale of luxury commodities and services went into effect on January 1, 2002, on January 14, 2002 the “Twenty-first Resolution of Modifications to the Miscellaneous Fiscal Resolution for 2000” was published.

Among the most important provisions contained in said publication are the following:

1. Taxpayers who issue receipts expressly and separately transferring IVA on the commodities and services subject to the tax in question, will have complied with the obligation to verify the data of the person to whom the receipt is issued when they conserve a copy of the fiscal identification credential of said person, and a writ also signed by said person stating that the value of the transaction will be made deductible for purposes of the Income Tax and that the Value Added Tax will be credited. The writ will not have to be obtained when payments are made by corporate entities by means of an electronic transfer of funds or registered check (the Federal Taxpayers’ Registration number of the drawer must be shown) and when a photocopy thereof is conserved.

2. In addition to the provisions of paragraph (a), taxpayers will conserve a copy of the voter’s credential or of the passport of the person who received the commodity or service. The foregoing will not be necessary when a credit, debit or service card makes the payment.

3. Payers of the tax must include the tax in the price of the luxury commodities and services, except in the case of automobiles.

4. For purposes of this tax, it establishes what we are to understand by perfume, camping articles and sport articles for automobiles, jewelry, goldsmith and silversmith works.

5. It is also established that for the purpose of issuing the fiscal receipt with express and separate transfer of IVA, taxpayers may take the option to alternatively comply with the requirements of paragraphs (a) and (b) by expressly and separately transferring the tax on luxury commodities. Those who take this option must maintain a specific registry of these transactions. Fifty percent (50%) of the tax that is transferred can be credited against IVA, ISR or against IMPAC.

Subject to criticism is the fact that by general rules, the Ministry of Finance and Public Credit has established additional obligations on taxpayers of the tax on deluxe items in addition to having complicated even more the implementation of said tax.

We consider that there are various legislative deficiencies in the establishment of this tax. The purpose of the tax is not completely defined in the legal text. The foregoing becomes evident by the fact that in the general rules there is a definition of what we should understand, for example, as perfume or sports articles for automobiles. Thus we consider that said argument can be asserted in an “amparo” suit, alleging the unconstitutionality of the tax by virtue of its failing to observe the principle of fiscal legality contained in section IV of article 34 of our Constitution.

The unconstitutionality of this tax could also be asserted by alleging that the legislator at no point defines the elements that led him to a consideration that the commodities and services contemplated in the law are luxurious articles. This then could lead to an affirmation that the tax threatens the principal of tax equity, also established in the Constitution.

NEW INCOME TAX LAW

On a date considered as highly overdue, the New (Income Tax Law) LISR was published in the (Official Gazette of the Federation) DOF on January 1, 2002 and went into effect the same day. With the promulgation of this new law, the former one was repealed.

The (Regulations of the Income Tax Law) RISR will continue applying so long as they do not contradict the new law, and so long as new regulations are not issued. It is pointed out that the current regulations have been in force since 1984 and have undergone practically no modifications in the last 10 or 12 years.

The fact that a new Law has been promulgated implies that any “amparo”, that was obtained in connection with the unconstitutionality of a provision of the repealed LISR, would cease to protect the taxpayer in respect to the new Law; the foregoing is by virtue of the fact that they are legally different fiscal laws, and the fact that the articles are identical to those of the former Law does not constitute an obstacle.

On the other hand, the fact that a new Law was published opens the possibility of thoroughly analyzing each provision in order to interpose the respective defense measures when it is considered that the guarantees granted by our Constitution have been affected by the promulgation of said Law.

TITLE I GENERAL PROVISIONS

Permanent establishment

The fixed base criterion is eliminated, for including its effects in what has traditionally been known as a permanent establishment. Consequently, the concept of a permanent establishment will also include a business establishment where personal independent services are rendered.

System for the “maquila” industry

Transitory articles of the new LISR contain rules applicable to companies that engage in “maquila” activities under the decrees for the promotion and operation of the “maquila” industry for export, as well as rules applicable to foreign residents who maintain a relation with said companies. Previously, said provisions were contained in general rules issued by the (Ministry of Finance and Public Credit) SHCP. We consider that it is positive that the legislators have established, within a law, provisions that formerly were left to the discretion of the tax authorities.

Now, in the transitory articles of the LISR, a “safe harbor” is established, that is, foreign residents who have legal or economic relations with “maquila” companies (except service “maquila” companies that do not engage exclusively in foreign trade activities) will not have, for fiscal purposes, a permanent establishment in Mexico and it will be understood that they comply with obligations relative to transfer prices when the “maquila” companies comply mainly with the following:

1. That they obtain in fiscal years 2002 and 2003 a fiscal profit representing 6.9% of the total value of assets used in “maquila” operations (including those owned by the foreign resident and by any of its affiliates or related parties); or that they obtain during said fiscal years a fiscal profit representing 6.5% of the operation costs and expenses related to the “maquila” operation, including those incurred by the foreign resident; or

2. That they request and obtain a specific resolution from the SHCP confirming that they comply with their obligations in regard to transfer prices.

It is established that during fiscal years 2002 and 2003 those of a safe harbor may consider that they do not a permanent establishment in Mexico (for their “maquila” activities), when they use for said activities assets owned by a foreign resident. Pursuant to article third of the Decree for the Promotion and Operation of the Maquila Industry for Export, safe harbor “maquila” companies are those that have an export program that has been approved by the authorities and which are provided with technology and productive material by foreign companies, although said foreign companies do not directly operate said projects.

International Treaties

Until last year, the benefits of international treaties for avoiding double taxation depended on the taxpayer evidencing that it was a resident of the country with which the treaty was executed and that it also comply with the requirements established in the treaty itself.

As of 2002, the benefits of international treaties for avoiding double taxation will apply provided that the following is complied with:

1. The taxpayer must evidence that it is a resident of the country in question,

2. The taxpayer must comply with the requirements established in the treaty, and

3. The taxpayer must comply with all other procedural provisions contained in the new Income Tax Law, including obligations to register, to file certifications and to designate a legal representative.

It is pointed out that the Supreme Court of Justice, by unanimous vote, resolved, through legal doctrine, that international treaties rank senior in respect to any secondary laws.

By virtue of the foregoing, it is our opinion that the fact that LISR establishes that, in order for taxpayers to benefit from the provisions of the treaties to avoid double taxation, they must comply with all other procedural provisions contained in the LISR, violates our Constitution. That is, a lower ranking law, which is the case of the LISR, establishes requirements for admissibility of the benefits that are not contained in international treaties, which is a body of laws ranking senior in respect to the LISR.

Transfer of properties by merger or split

Also eliminated, is the provision which stipulated that properties that were transferred by merger or split had the effects of a sale.

Creditable tax

Until fiscal year 2001, natural persons who engage in business activities could credit the amount of the tax paid abroad against the income tax for the fiscal period in question, provided this amount did not exceed the result of multiplying 35% by the income obtained in the foreign country. Starting in 2002, the limit will be the accrued revenue applied to the new rates of article 177. The foregoing is consistent with the amendment relative to the calculation in respect to natural persons who engage in business activities.

Profit-Sharing Associations (the Mexican equivalent to U.S. Joint Ventures)

Included in the definition of corporate persons are “Asociaciones en Participación” when business activities are carried out through them. In addition, rules are established for determining CUCA, for applying losses and for calculating provisional payments.

Definition

Eliminated from the financial system are savings and loan associations, even though by a transitory article they will form a part of the system in 2002 and 2003. Included in the financial system are workers’ financial companies, variable income mutual funds and mutual funds.

It is clarified that when the Law refers to the equity interest therein, the proven cost of acquisition will be the aliquot part represented by said equity interest.

The concept of interest on profits or losses generated in derivative financial transactions of capital and debt is eliminated, and the deduction for exchange losses is limited up to the amount that would result from considering the exchange rate for satisfying obligations as published in the Official Gazette of the Federation (DOF).

In this sense, we consider that there is an unequal treatment because this limit does not apply in the same sense for exchange profits.

TITLE II CORPORATE PERSONS

Tax Rate

The corporate rate applicable to fiscal profits obtained by companies is reduced to 35%, with a gradual reduction of one percentage point each year until reaching a 32% rate in the year 2005.

On the other hand, the possibility of deferring the ISR, to the extent that profits are reinvested, is eliminated; consequently, all provisions that define the concepts of UFIRE, UFINRE, CUFINRE, etc. disappear.

The possibility of reducing Income Tax for companies that engage exclusively in the publication of books remains, but at rates different from those that prevailed. Said benefit is eliminated starting in fiscal year 2006. The applicable reduction rates will be 40, 30, 20 and 10 percent for fiscal years 2002, 2003, 2004 and 2005 respectively. Likewise, the rules that were in force up to 2001 to determine the proportion for publishing activities and others different thereto remain the same.

Settlement in payment

The law eliminates the provision that contained an exemption for sales that resulted in settlements in payment to taxpayers who, by a legal provision, are unable to conserve the legal ownership of said properties (credit institutions); however, by a transitory article, the possibility subsists of considering as exempt settlements in payment made for the 2002 and 2003 fiscal years, provided that the conditions established in said transitory articles are satisfied.

Likewise, by a transitory provision, the exemption for restructuring of credits granted prior to December 31, 1994 subsists, complying with the requirements contained in said body of articles.

Distribution of dividends

As a result of the modification of the rate, the factors to be applied for determining the tax generated by dividend payments that do not emanate from CUFIN are adjusted.

Until the 2001 fiscal period, when income tax was generated as a result of the distribution of dividends that did not emanate from CUFIN, a tax liability could be generated, in view of the fact that a company could be distributing profits which, because of temporary differences (inventories) had not paid taxes. The foregoing generated a double fiscal burden, at the time dividends were paid and at the subsequent time when fiscal profits were generated.

Appropriately, starting in 2002, income tax paid for the distribution of dividends not emanating from CUFIN may be credited against income tax generated in the next three fiscal years. We believe that the Law should have allowed for making the credit against the income tax of the period in which the dividend was distributed.

It is established specifically that if the taxpayer does not credit the tax, in spite of being entitled to do so, he will forfeit the possibility of doing so in subsequent fiscal periods up to said amount.

In respect to the foregoing, it is established that when said crediting is effected, the balance of CUFIN for the period must be reduced up to the amount that results from dividing the credited tax by a 0.4706 factor.

On the other hand, eliminated is the concept of constructive dividends, omissions of income or purchases not made and inappropriately recorded, fiscal profits determined presumptively by the fiscal authorities and modification of fiscal profit derived from transactions executed among related parties or affiliates.

A change that we consider results from and error is the fact that the Law eliminates the case of the nonpayment of ISR until the time a reduction is made of the capital stock, in the case of dividends reinvested in the subscription or payment of a capital increase of the company within 30 days following the distribution. The foregoing could result in a premature payment of taxes when they do not emanate from CUFIN.

We consider that an error exists, since if it is considered that a dividend payment is actually made, such capital increase should augment CUCA, which does not occur.

On the other hand, the term for paying income tax generated as a result of dividends that do not emanate from CUFIN is modified, so that now payment is due the 17^th day of the month immediately following that on which the payment was made.

In regard to CUFIN, the formula for determining UFIN is modified insofar as the effect on PTU is concerned; that is, PTU which previously was deductible is not added, and PTU from the period is subtracted via non-deductibles. However, the PTU from the fiscal year is not deductible according to the Law (except for certain considerations which will de dealt with below); consequently, it will be subtracted from UFIN via this concept.

The Law provides that when the items that are subtracted for determining UFIN result in a negative balance, this will be reduced from the balance of the CUFIN existing at the end of the fiscal year or, in such case, of the UFIN determined in subsequent fiscal years until it is exhausted.

We consider that the above modification may have vices of constitutionality since a case may exist where the CUFIN that was generated in previous fiscal periods diminishes as a result of this amendment; this would be a case of retroactivity and, consequently, would violate the constitutional principles contained in our Political Constitution.

As a result of the possibility of deferring the ISR of the period, CUFINRE is eliminated; nevertheless, a transitory article continues to establish the rule that the CUFINRE generated up to December 31, 2001 must be exhausted before CUFIN. In addition, it provides that the deferred income tax that is paid in subsequent fiscal years will creditable against IMPAC.

Capital reductions

It is incorporated as a procedure for determining the ISR for capital reductions is the new legal provision with certain modifications. It establishes that the distributed profits will be obtained by subtracting from the reimbursement per share, the balance of CUCA and the balance of CUFIN per share. The differential is multiplied by the monetary amount of reimbursed shares, or those considered for said purposes.

In addition, as was the case up to the 2001 fiscal year, considered as a distributed profit is the amount of the reimbursement up to the amount that results from reducing the balance of the CUCA from the net worth minus the profit distributed per share, as indicated above, elevated to the number of shares in question. This distributed profit will be considered as an increase of CUCA in subsequent reductions, while up to the year 2001, it was added to the amount of CUFIN.

When the profit does not emanate from CUFIN, income tax must be paid on the amount that results from multiplying the distributed profit by 1.4706 or the applicable factor, depending on the fiscal period. Up to the 2001 fiscal year, this profit was not the subject of pyramiding.

CUCA is formed in the same way as it was up to 2001; however, the Law states that the amounts that are added and subtracted must be considered as such, until they are paid.

When shares are purchased in the stock market from the issuer of the shares, it continues to be a case of a capital reduction, to the extent that the shares that are purchased and those that are acquired at a later time exceed 5% of all the shares, and provided there is no replacement thereof, within a maximum period of one year.

When the issue of bonds makes the share purchase, the term will be that of the issue of said bonds.

When the above mentioned limits are exceeded, the distributed profit will be the amount obtained by deducting from the price paid for the acquisition of each one of the shares the balance of the CUCA per share, multiplying the result by the number of shares purchased. CUFIN may be reduced from the foregoing and the surplus will be subject to payment of the tax.

On the other hand, the Law states that to be considered as a capital reduction is the transfer or withholding of monetary assets that occurs in connection with a split or merger of companies, when said assets represent more than 51% of total assets, specifying that this will not apply for members of the financial system, prior authorization.

The rule to determine distributed profit in cases where capital reductions are effected by capital increases in the two preceding years subsists. We consider that this provision should establish only the case where different persons carry out increase and reduction of the capital.

Liquidation

As of January 1, 2002, the fiscal effects of liquidation will apply to those corporate entity residents of Mexico when they cease to be residents of Mexico in the terms of the Fiscal Code of the Federation, being obligated to pay the tax derived from the liquidation within 15 days following that on which the change of the fiscal residence occurs. To determine the amount of the sale, assets of establishments located abroad will be included at their market value and, when the market value is unknown, at the appraisal value determined by an authorized person.

For these purposes, a legal representative must be named in the country, which will be required, among other things, to conserve the documentation for it to be available to the fiscal authorities.

Provisional payments

The rules contained in the item of provisional payments are adjusted as a result of the inclusion, as of 2002, of the applicable rules governing the immediate deduction of fixed assets.

On the other hand, a new procedure is established for amortizing losses in provisional payments. With this, the fiscal loss that may be applied must be divided by 12 and multiplied by the number of months to which the provisional payment corresponds.

An option is contained for the application of fiscal losses in provisional payments, for those taxpayers who engage in cyclical activities, consisting of applying the fiscal laws in the percentage represented by an accumulative income in the period preceding the same period for which the provisional payment is made.

We consider that the new strategy for the amortization of losses in provisional payments could contain vices of constitutionality, in regard to proportionality, on ordering a tax to be paid in advance that may not even be caused.

New rules are established for the merger of companies regarding the provisional payments that are to be made as a result of the merger.

The adjustment to provisional payments is eliminated and the Law provides for the possibility of reducing provisional payments, prior authorization, but only those corresponding to the second semester of the year.

Adjustment for inflation

Completely eliminated is what up to the 2001 fiscal year was known as the inflationary component, to be constituted, with the new Law, in a concept referred to as inflation adjustment, similar and summarized.

In regard to this modification, taxpayers may not make monthly adjustments, but rather only one per year, which will reduce the administrative burden involved in its calculation.

To determine cited adjustment, a comparison is made of the average of debits and credits, and the result is multiplied by the inflation factor that existed in the year. To determine the average of credits and debits, the sum of the balance at the last day of each one of the months of the period is divided by the number of months of the period. Consequently, the provision that required daily calculations regarding credits or debts contracted with the financial system is eliminated.

In the event that the average of the debts is higher than the average of the credits, the result of multiplying this difference by the inflation factor of the year will be the cumulative income. The contrary exists when the average of the credits is higher than the average of the debts.

Defined as accounts receivable and payable are only those contained in the accounts of a borrower or lender company for receiving or delivering an amount in money. Consequently, not considered as account receivable or payable is when the right or the obligation must be satisfied in kind or in services.

The limitations that existed up to 2001 subsist, that is to include only certain accounts receivable, and included as accounts payable are taxes caused, without including income tax payable by the taxpayer or third parties, payments of IMPAC or contributions in the subsidized part or which originally corresponded to third parties, except in the case of dues paid to the (Mexican Social Security Institute) IMSS.

Regarding the calculation of the inflationary component, the treatment to be given to cancellations that originated a credit or debit prior to January 1, 2002 is established in transitory articles, and it is established that when transactions are canceled after the date the law goes into force, the rules contained in the regulations will apply.

Cumulative Income

The law establishes an obligation to accumulate income for debts not paid in the month in which they fall due, or in the month when the practical impossibility of collection becomes obvious.

It also provides that interest accrued in favor, will be cumulative, with no adjustment whatever, consistent with the amendment in respect to the inflationary component. It also establishes that in the case of delinquent interest starting in the fourth month, only delinquent interest actually collected will be accumulated, and when collected, it will be understood that debts with the oldest due date have been collected.

Through a transitory article it is provided that in the case of delinquent interest accrued prior to the date this Law goes into effect, such interest will be accumulated when the receipt covering it is issued, or when said interest is received in cash or in commodities or services, which ever occurs first. For the party who pays the interest, it may only be deducted when it is actually paid.

Gain on sale of shares

The calculation for determining the gain on the sale of shares is modified. Up to 2001, for determining the average cost per share, account is to be taken of the cost for the seller of the share at the time of its purchase, plus the difference of CUFINES generated in respect to the date, on which the shares were acquired, and the date on which the shares were sold.

Starting on April 1, 2002, the calculation of the average cost per share will be obtained from the result of adding the proven purchase cost, the amount of the fiscal profits and that of the dividends received, and subtracting the amount of dividends distributed, fiscal losses and capital reimbursements.

The amounts added and subtracted from the proven acquisition cost will be those only related to the last ten years.

The fact that this calculation has been modified in this way, may originate absurd calculations, which could give rise to adverse effects for some, and benefits for others; this situation must be analyzed on a case by case basis.

For example, a case may arise where both the sellers and the buyers will be adversely affected with prejudice, with the taxing of non-existent gains, and on the other hand, others may benefit with profits from which fiscal losses will not been subtracted.

On the other hand, it establishes that when the results of an arithmetic transaction of adding or subtracting a concept gives a negative result, it will be understood that the shares subject matter of the sale have no cost, and that the surplus should be subtracted from the cost of subsequent sales of shares even though they correspond to different issuers. We consider that these points may contain vices of constitutionality and that it would be worthwhile analyzing them on a case-by-case basis.

On the other hand, it establishes a simplified mechanism for calculating the fiscal cost of shares when the period during which the shares were held was eighteen months; the calculation is mandatory.

This calculation should be made by subtracting from the proven purchase cost of the shares, the reimbursements and the amount of dividends or profits paid. This simplified calculation will generate certain benefits for financial brokers, which with the passing of the Income Tax Law (LISR) are required to calculate the average cost per share in certain cases.

Notwithstanding said simplified calculation, the Law does not set forth the procedure, when the shares were purchased in different periods of time; that is, which of them could be subject to the simplified calculation and which would not be.

In addition of the foregoing, the la eliminates the provision that allowed for taking as the proven purchase cost the average cost per share that had been made in previous sales of shares in regard to which cost had been calculated.

We consider that the purpose of the foregoing is that each time, cost is calculated the shares as adjusted to the actual cost of the last ten years; however, this may result in adverse calculation effects for those who had calculated the cost in previous sales. In addition, it will originate a calculation problem, by virtue of having to consider, in every case, profits, losses, dividends, and etc. of the last ten years when the simplified calculation does not apply.

A transitory article establishes that this provision will go into effect on April 1, 2002.

Another transitory provision establishes that in the case of shares sold after January 1, 2002, when they were purchased from affiliates during 2001 fiscal year, the taxpayer will reduce from the original adjusted amount the updated fiscal losses from previous periods pending application, which the issuing company in question, had at the acquisition date.

The foregoing is an inequitable treatment for those found in a case of this kind, in contrast to those who are not.

On the other hand, also through another transitory provision a mechanism for determining the cost of shares that are listed on the exchange is established and starting from the effective date of this provision will apply.

The Law also establishes a number of rules for the merger and split of companies aimed at consistency with a new mechanism for determining the calculation of the average cost per share.

Corporate Restructuring

Included within the Law is the miscellaneous rule, which allow for shares to be sold at their fiscal cost in the case of corporate restructurings, provided that the conditions included in the legal provision are complied with.

In addition to the requirements above mentioned, the Law requires that the shares received by the petitioner for the shares he sales must remain the direct property of the purchaser within the same group, during a period of two years, starting from the authorization date referred to in this article.

Deductions

IMSS dues for workers.

Included as a deductible concept are workers dues paid by the employer, consistent with judicial resolutions that had prevailed in recent time.

Interest and annual adjustments for inflation.

The Law provides that interest will be deductible as it accrues and establishes the same requirements al contrario sensu, in regard to the accumulation of interest, for deducting delinquent interest. It also provides that the deductible annual inflation adjustment that may be considered as an authorized deduction consistent with the amendment for the elimination of the inflationary component.

Deduction Requirements

General Requirements

Established as a final date for satisfying the requirements provided in Law is the last day of the fiscal year, except in respect to evidenced documentation; receipts may be presented not later that the day on which the taxpayer is to file the returns for the period.

It further provides that when payments are made that involve withholdings and tax payments, they are to be made on the dates established in fiscal laws, and said receipts must be filed precisely on that date on which as a penalty to consider them as non-deductible expenses.

We consider that the penalty is excessive, since taxpayers already have a negative effect on being required to pay updating and charges on such taxes not timely paid, thus such provision could be qualified as a violation of Constitutional provisions.

It is also established that informative returns must be filed within the terms indicated; otherwise any attempted deduction will be rejected. The foregoing translates into the same absurdity as mentioned in the preceding paragraph.

Payments made with checks.

The Law reduces to $2,000 pesos the limit for making payments with a registered check; previously the amount was up to $6,700 pesos. In addition this will apply to all persons who pay taxes in the terms of Title II since, until 2001, it applied only to those who obtained cumulative income in an amount higher than the established limit.

The provision that allowed for using checks as a tax receipt is eliminated; in practice, it never operated. However the account statement of the credit institution may be used as tax receipt to the extent in which IVA and the consideration are reflected separately in the account statements and the credit institutions comply with the requirement provided in the CFF.

We trust that this latter provision will have a real practical effect, and that both taxpayers and credit institutions may reach agreements that will allow for using this medium upon complying with the receipt requirement.

One Time Deductions

The law establishes that deductions must be subtracted one time only, and must be duly registered in the accounting.

Alcoholic beverages

It is included an additional requirement, and it is that the containers of alcoholic beverages must be destroyed, when according to fiscal provisions there is an obligation to do so, in order for obtaining the deduction, as an acquisition of merchandise.

In practice there is doubt as to how it can be proved that the requirement is satisfied and how the destruction is to be carried out.

Interest

The Law limits the deduction of interest when loans are made to a company, partners, shareholders or workers up to the amount of the lower rate between rates agreed to with third parties, and that agreed to with partners, shareholders, or workers.

The foregoing is related to the elimination of income in services for workers, however, the penalty no longer falls on the worker but on the company that grants the loan; notwithstanding, there is no transitory article that states the effect that will occur in respect to loans granted prior to the effective date of the Law.

This limitation will not apply to credit institutions, limited purpose financial companies and auxiliary credit organizations, in the performance of their corporate purpose.

Payments to natural persons and corporative entities –simplified system

The Law continues to establish the obligation to make the payment prior to the close of the fiscal year, for payments to persons who pay taxes under the simplified system, as well as donations, in order for the deduction to be admitted. This same requirement is also established for the payment of wages and salaries; until last year, the payment could be made no later than the day the taxpayer was requested to file his returns for the period.

Surprisingly, the limitation is not included for payments made to civil companies that accumulate money when they collect their considerations, undoubtedly due to an error that the fiscal authorities will try to correct.

Social welfare benefits

The (Income Tax Law) LISR does not expressly state as social welfare concepts, that amounts paid for retirement, death, disability and medical and hospital services; the fact prevails that the provisions is illustrative and not limitative.

In terms of its nature we consider that said benefits have a nature of social welfare benefits, being similar to those expressly defined in the Law.

We consider that a different interpretation could exist; that is, that said benefits do not fall within the concept of social welfare, in which case, they will take the nature of expenses and consequently would not be subject to the limits contemplated in the Law for purposes of deduction.

Notwithstanding the deficient wording, as regards terms, the items of social welfare granted to trusted employees and others must be of the same nature; however they can be for different amounts of money for the former and the latter.

On the other hand, the new Income Tax Law (LISR) establishes the limits for the deduction of the social welfare benefits granted to trusted employees. This limit is the equivalent of 10% of all tax remunerations of said workers, and in no case will it exceed an amount equivalent to that of one minimum general wave of the geographic area corresponding to the worker, elevated to a year.

Also excluded as a social welfare benefit is the savings fund; the Law states that the requirements contained in article 109, Section VIII must be complied with in order for said savings fund to be deducted. Nevertheless, said provision establishes that in order for the exemption of this provision to be admitted, the requirement contained in Section XIII of article 31 must be complied with, subject to analysis. Consequently, according to the Law there is no requirement to comply with in order for it to be deductible.

We consider that the above limitations could contain vices of constitutionality, because they treat equals unequally and allowing some to deduct social welfare benefits with no limitation for the simple fact of employing union workers.

Irrecoverable Credits

The hypothesis contained in the RISR are incorporated in the Law to consider that there is a notorious practical collection impossibility, with certain modifications. In the first place, the provision is no longer illustrative and becomes limitative. It is considered as notorious practical collection impossibility the following:

1. In the case of credits, the main amount of which is no more than $5,000 pesos, when within a product of one year from the time the debt is unpaid and it has been unable to be collected. In this case, such credits will be deemed to be irrecoverable in the month of the first anniversary of the payment becoming overdue.

When more than two credits exist, all the credits should be added in order to determine the above-mentioned limit.

2. When the debtor has no properties that are susceptible to an attachment, if the debtor has died or disappeared without leaving properties in his name.

3. When it is evidenced that the debtor has been declared in bankruptcy or insolvency. In the former case, there must be a judgement declaring that the bankruptcy proceeding has concluded by bankruptcy payment or for the lack of assets.

Although legal certainty is granted to the taxpayer, the fact that the provision is limitative and not illustrative is highly questionable and opened to criticism. Moreover we consider that the $5,000 pesos limit may have vices of constitutionality; that is the $5,000 pesos limit for credit that have gone unpaid for more than one year.

On the other hand, the Law provides that the credits will be deemed as cancelled the last month of the first half of the period in which they are deducted, having their effects in the annual adjustment for inflation.

Wages and salaries

The Law provides that in order to make deductions from wages and salaries the conditions established in article 119 of the Law must be complied with. This requirement could have practical complications due to the amount of information that must be presented, as well as the legal proceedings that will derive there from. Nevertheless, it could be interpreted when the option is taken not to pay the substitute tax to which we will refer bellow, it would be unnecessary to comply with these obligations.

Non-Deductible Expenses

Travel Expenses

The Law establishes new limits for deducting travel expenses. The law requires that in order to deduct meals, the taxpayer must accompany proof of transportation and show that the payment is made with a credit card.

Automobile Rental

The Law establishes as the maximum deduction for the rental of automobiles the equivalent of $165.00 pesos a day; this limit does not apply to travel expenses, in which case the limit is $850.00 pesos a day.

PTU

The Law expressly establishes the impossibility of deducting the total amount of the PTU paid to workers.

Nevertheless, a transitory article establishes that the deductibility of PTU will be considered in the case where growth expectation in general criteria of economic policy for 2003 fiscal year, estimates a growth of over 3% of the Gross Domestic Product.

We consider that this provision could be interpreted in several ways, which lead to legal uncertainty for the taxpayer, since it could be concluded that provided that the hypothesis materialized, the PTU could be 100% deductible.

In regard to the foregoing, it may be concluded that the provisions is unconstitutional because it violates the principle of tax legality.

Derivative financial transactions

The Law establishes the same treatment as that for losses sustained for the sale of shares to losses sustained in derivative financial transactions of capital referred to shares or share indexes.

Considering the judicial precedents on this subject, we consider that this limitation could be unconstitutional.

Dining in restaurants

50% of what is consumed in restaurants is deductible, provided that the payment is made by a debit or credit card or by the electronic money machines authorized by SAT.

It is clarified that the limit of the other 50% does not apply when travel expenses are concerned. The Law expressly establishes that what is consumed in bars will not be deductible.

Reserves for pension and retirement funds

It is foreseen that starting in 2002, the Law requires the creation of complementary reserves, and that they are distributed uniformly in ten periods. Said calculation should be made in every fiscal year, in the month in which the reserve was constituted. In addition, the reserves that are invested in securities issued by the company itself or by affiliates approved by the CNBV (Banking and Securities Commission) may not exceed 10% or the reserve.

The Law states that the yield generated, forms a part of the fund, and that said yielding is not cumulative is expressly eliminated

On the other hand, investments making an integral part of the fund shall be assessed each year at a market price, except for investments consisting in loans for acquisition or construction of social interest housing, at its unpaid balance. Said assessment shall be compared against actuary calculations yearly and when these calculations be superior to the assessment, deduction of contributions shall not be made in said fiscal year.

Contributions to training, investigation and technology funds

The possibility to carry out a deduction of the contributions made to funds for training, investigation and technology, is eliminated, however, a credit is granted through a fiscal incentive to be applied to an investigation and technology similar to that constituted in accordance with 2001 LIF.

As a result of the foregoing, training will be eliminated from any incentive or deduction. The above is open to severe criticism since it inhibits this kind of disbursements. Moreover, as is the case with the fiscal incentive in 2001, it is subject to the issue of certain rules for application of the Inter-Institutional Committee, which did not function in the past. We trust that this incentive will have a practical effect. Its limit is not to exceed $500,000,000 pesos.

Investments

Immediate deduction

A true triumph in the new Income Tax Las (LISR), is the return of the immediate deduction of investments which has been insistently supported by the Federal Government.

The immediate deduction shall apply as of the fiscal year following that in which it begins to be used in the percentages established by the Law in each particular case. It is foreseen that the Law establishes a 6% discount rate, consequently an evaluation shall be made in each case in particular, as to whether the option is viable or not. The remainder not deducted in the period in which the deduction is applied will not be deductible.

It is unfortunate that the deduction is made starting from the period following that in which it began to be used, since an adverse financial effect could occur in the period in which the commodity in question is acquired.

The deduction is allowed only outside of the metropolitan areas of Monterrey, Guadalajara and the Federal District; however, it does establish the possibility that residents of these areas may enjoy the benefit in the case of intensive manual labor companies, companies that use clean technologies in the emission of pollutants, and that they do not require an intensive use of water in their productive processes. The Executive will issue the rules in this respect.

This benefit does not apply to investments in furnishing of office equipment, automobiles, armored cars or any fixed assets that cannot be identified with those expressly indicated in the Law.

Unfortunately the Law does not contemplate the modifications, which in matters of IMPAC should to be included, such as crediting which was given in the past in matters of IMPAC for those who made this kind of investments; in addition this kind of deduction will not apply in respect to PTU.

On the other hand, the Law provides that a specific registry must be maintained of said investments with certain characteristics contained in the Law. The description of the registration should be made no later than the day on which the taxpayer files or should file its annual tax returns. The Law also states that said registry shall be maintained for ten years following that in which the asset was eliminated, this is an excessive length of time.

Automobiles

The requirement that automobiles must be utilitarian in order to deduct the investments made in this regard disappears. On the other hand, the maximum amount deductible for automobiles is reduced to $200,000 pesos, with no other particular requirement to be satisfied.

Armored equipment will be considered as part of the automobile, which practically makes the deduction of this type of investments unfeasible.

The Law retains the provision in regard to expenses related to this type of commodity, in the sense that they will not be deductible to the extent that the investment is not deductible either; nevertheless, the Law does not indicate what type of fiscal treatment will be given to those that are partially deductible.

Applicable rates

Certain items were modified as to the applicable depreciation rate as well as the items that are comprised in the investment subject to the rate.

In railroads, investments in wagons and car wagons are deductible at 6%. The 7% rate for traffic control towers is eliminated.

The investments to which the 50% rate applies are defined, in the case of manufacturing, assembly and transformation of components for the computer industry.

Included are transmission towers and cables, except for optical fiber as assets deductible at 5% per annum, and the 6% rate that applied to electromechanical equipment of the telephone exchange used for switching calls is eliminated; it included seasonal equipment, switchboards and switching gear.

For satellite communication, the depreciation rate applicable to the satellite segment in space is reduced from 12 to 8 percent. This includes antennas for transmission and reception of digital and analog communications.

Losses resulting from Acts of God or Force Majeure

The Law establishes that in the event that the fixed assets that lose their value as a result of an Act of God or Force Majeure are not individually identifiable, the amount of said assets pending deduction is to be determined by applying a PEPS method.

On the other hand, the Law states that the term for investing the amount recovered by insurance institutions, in order for said amount not to be accrued, will be 12 months instead of three fiscal years, and said term may be extended for another twelve months with the prior authorization of the fiscal authorities.

It establishes that the amount recovered but not reinvested will be considered updated, and an accrued income such as other income of the taxpayer. Transitory articles in this regard establish the same reinvestment terms for amounts recovered in the 2000 and 2001 for 2002 and 2003 fiscal years, respectively.

Obligations of corporate entities

Foreign affiliates

A new obligation is added for transactions made with foreign resident affiliates, consisting of recording in their accounting, duly identified, the documents and information corresponding to these types of transactions, which will include a study of transfer prices.

As may be observed, it could be concluded that the documents should be registered in accounting, which is impossible, because what accounting registers are transactions. The foregoing demonstrates the ignorance of The Legislative.

Exempt from this obligation are those persons whose income in the immediately preceding period resulting from business activities or the rendering of services did not exceed $13,000,000.00 and $3,000,000.00 respectively. Until 2001, those who made quarterly provisional payments were discharged of this obligation.

Other returns

The term for filing certain informative returns is modified to February 15 of each year. A transitory article establishes that returns corresponding to the 2001 fiscal year may be filed throughout the whole month of February, while those for the 2002 fiscal period will be subject to the above mentioned term.

The Law specifically establishes the obligation of filing information relative to professionals to those who withheld taxes in the previous year. It may be stated that this obligation already existed on filing return no. 27 in February.

The obligation to file the return corresponding to customers and suppliers with whom transactions were carried out for amounts over $50,000 disappears; however, this information must be presented to the fiscal authorities upon request, and the taxpayer is given a period of 30 business days from the effective date of the requisition to submit said information. The Law expressly provides that the foregoing will not constitute the exercise of monitoring powers.

The obligation to file the informative returns relative to payments made for copyrights disappears as a result of the elimination of said preferential system.

The Law establishes as an obligation that informative returns are to be presented in every case via Internet at the e-mail address established by SAT in general provisions.

We consider that it is a measure that will simplify processing; however, in the opinion of our courts, the printing by the taxpayers of an acknowledgment of receipt issued via internet does not constitute full proof in the event of a litigation; consequently, legal certainty and security should be granted to the taxpayer via any other medium.

Financial System

Yields on investment

The Law establishes that in the case of investment in shares issued by mutual funds in debt instruments, the interest is to be accumulated at the time said shares are sold, in contrast to what occurred up to 2001, since the evaluation at the close of the month or period generated said interest.

Credit Institutions

The Law eliminates the ten-year term for deducting the surpluses from the creation, replenishment or increase of the global preventive reserves constituted as of 2002, on the basis of the Law of Credit Institutions.

The transitory articles establish that any surplus not deducted in 2000 and 2001 may only be deducted in the subsequent ten fiscal years. We consider that this measure is adequate since it emanates from a limitation included in the Law since the year 2000.

Credit institutions must first exhaust the surpluses generated up to fiscal year 1999 in order to later reduce the surpluses from 2000 and 2001, limited to cited ten years. Subsequently, the surpluses from 2002 may be deducted.

On the other hand, the Law establishes that the institutions included in the financial system that make payments for interest will file with SAT information in respect to the name, federal taxpayers’ registration number, and address of the taxpayer in question, as well as real nominal interest, the average nominal interest rate and the number of days of the investment, in respect to everyone to whom they paid interest.

This amendment is deplorable. In the first place, since it is a measure that will originate the expatriation of capitals, not because of the lack of income reporting, but as a result of the social insecurity prevailing at the present time (kidnappings, etc.).

On the other hand, it would appear that the fiscal authorities could exercise their monitoring powers with the information that is provided to them, without any further processing than the interest payment by the credit institutions and without executing the requirement established both in the FCF and in our Constitution.

The first returns are to be filed on February 15, 2003 relative to data from the second semester of 2002.

Insurance institutions

Institutions authorized to sell retirement insurance may make the deduction of the mathematical reserve on retirement funds.

In addition, when determining the annual inflation adjustment applicable as of January 1, 2002, to be considered as credits are plots of land and shares that represent investments authorized to guarantee deductible reserves.

Fiscal consolidation

The distinction between pure and operational controlling companies (holding companies) disappears; consequently, the profits and losses generated by the controlling company must be consolidated at 60%.

The Law establishes that pure holding companies that still have individual fiscal losses pending amortization generated in the period between 1999 and 2001, acknowledged at a consolidated level, will consider, as of 2002, their fiscal profits at 100%, until exhausting said losses at the level of the controlling company.

The same treatment is to be observed in respect to fiscal profits of holding companies that have fiscal losses pending amortization individually, generated prior to January 1, 1999, and acknowledged at a consolidated level.

In addition, the special consolidation items related to the sale of investments, lands, shares and equity interest made between the companies that make up the group; the sale of assets to third parties and the gains from a merger, liquidation or capital reduction; the profits or losses weighted from the sale to a third party unrelated to the group of an asset that previously had been sold between companies of the group; the losses incurred by holding companies prior to their incorporation in the consolidation system; as well as the assumption and deduction, on the part of the group companies, of losses on the sales of shares issued by holding companies, are eliminated in the new Law.

Holding companies which, prior to the effective date of this Law determined the special items mentioned above, will acknowledge the transactions that originated these items as effected with third parties, or they may continue determining them until the properties are sold to persons unrelated to the group. In this case, a notice is to be filed no later than April 30, 2002.

It is also clarified that these transactions are to be carried out by applying the rules for transfer prices, that is, at market values.

Starting in 2002, the participation that may be consolidated will be determined by applying the factor 0.60 to the daily average share interest of the holding company in the capital stock of a controlled company, while up to 2001, it applied to share participation at the close of the fiscal year.

The Law establishes that companies that are given the nature of holding companies must incorporate in the consolidation as of that date.

On the other hand, it expressly establishes that in company mergers, the merged companies will be deemed wound up, even when they merge into another group company. If the merged company is the controlling company, the Law provides that there is a de-consolidation.

The Law establishes a limit on the deduction for losses in the sale of shares obtained by the controlled companies and the controlling company, up to the amount of the gain obtained for this concept in the same fiscal period by the controlling company and the other controlled companies. If the company that sustained the loss loses the right to reduce it, the effect of the deduction taken must be reversed at the consolidated level.

In terms of the new mechanism for determining the average cost per share, a transitory establishes that for calculating the gain in the sale of shares of a company that is or was a controlling company, the consolidated fiscal results from the 1999 to 2001 fiscal years should be recalculated, in terms of a participation subject to consolidation of 100%.

In regard to IMPAC, the necessary adjustments are not made in the Law to homologate the provisions of one with those of the other. Consequently, loopholes and inconsistencies in this tax may arise.

New simplified system

Starting with the fiscal reform, a new simplified system is created, which establishes a system for determining the taxable base for ISR, very similar to that contained in the Chapter on natural persons who engage in business and professional activities.

As a result of the foregoing, the former system is abrogated, starting from the effective date of the current one, that is, the system of entries and exits disappears.

It is pointed out that the authorities issued a number of provisions to make the transition from the former system to the current one, which will be commented upon at a later time.

It is stressed that the current system incorporates integrating companies, which were regulated by the Administrative Facilities of the Simplified System, which the authorities issued every year.

Taxpayers under the system

The following corporate entities must satisfy their income tax obligations in accordance with the simplified system established in this chapter:

1. Those engaged exclusively in land transportation of freight or passengers that render a preponderant service to another corporate entity considered as an affiliate or related party, in the same way.

2. Cooperative companies engaged in land transportation of freight or passengers which are engaged exclusively in said land transportation of freight or passengers.

3. Those with agrarian rights that engage exclusively in agricultural livestock or forestry activities, as well as the other corporate entities that engage exclusively in said activities.

4. Those that engage exclusively in fishing activities.

5. Those constituted as integrating companies.

For the purposes of this system, considered as taxpayers engaged exclusively in the land transportation of freight or passengers, or agricultural, livestock, fishing or forestry activities are those whose income from said activities represent at least 90% of total income, without including income from sales of fixed assets or sales of fixed assets and lands owned by them that were related to their activity.

For the purposes of this system, integrating companies are considered as all corporate entities incorporated to perform the measures and take the action aimed at modernizing and broadening the participation of micro, small and medium companies in all the areas of national economic life, incorporated under the decree published on May 7, 1993 and the modifying decree dated May 30, 1995.

Said Chapter establishes that the provisions hereof will not be applicable to corporate entities that consolidate for fiscal purposes.

In addition, it will not apply to corporate persons who render services of a prior or auxiliary nature for the development of land transportation of freight or passengers, except in the case of coordinates.

For the purposes of this Chapter, to be understood as coordinates are the corporate entities that administer and operate fixed assets or fixed assets and lands directly related to the activity of the land transportation of freight or passengers, the members of which engage in the activity of the land transportation of freight or passengers, or activities that complement the foregoing, and that have fixed assets, or fixed assets and lands directly related to said activities.

In addition, it is mentioned that when natural persons engage in activities in co-ownership and take the option to pay taxes through corporate entities or coordinates, said corporate entities or coordinates will be the parties who will comply with the fiscal obligations of the natural persons of the co-ownership, and will be deemed as the common representatives thereof.

For the purposes of the preceding paragraph, when the corporate entities comply, on behalf of their members, with their fiscal obligations, the natural person will be considered as jointly liable with the corporate entities.

Optional system

This chapter establishes the possibility for taxpayers who pay in accordance with this system, and whose income in the immediately preceding fiscal period was not higher than $10,000,000, to satisfy their obligations according to the intermediate system of natural persons who engage in business activities.

Obligations

The corporate persons to whom this Title refers will comply with the obligations mentioned below:

1. They will calculate and pay, for each one of their members, provisional payments and income tax for the fiscal period, as well as IMPAC, according to the mechanism established in this system for such purpose.

2. The formal obligations to withhold and pay, as established in fiscal provisions and, in such case, they will be required to issue the respective receipts.

3. Cooperative companies will consider the yields and advances they grant to their members as income accruable to salaries.

Corporate entities that comply with the obligations on behalf of their members will also have the following obligations:

1. Maintain for each one of their members a registry of income, expenses and investments of operations made on behalf of each one of them, complying with applicable provisions.

2. Issue and obtain documents evidencing the income and disbursements of the transactions they carry out on behalf of each one of their members, complying with the applicable requirements.

3. The documents to evidence transactions that are issued in respect of the activities of their members will have printed on them: “Taxpayer of the Transparency System”.

We clarify that in the bill of law sent to the Chamber of Deputies, this Chapter was called “System of Transparent Corporate Entities”, consequently, the reference was not adjusted to change of name of the Chapter.

A transitory article grants the possibility for taxpayers who paid their taxes under the simplified system in force until the 2001 period, who have receipts that satisfy all fiscal requirements, and which contain the statement “Taxpayer of the Simplified System” of continuing to use said receipts until they are exhausted or until they expire. For said purposes, to be added to said statement is the following: “starting as of DD/MM/AAAA Taxpayer of the Transparency System”.

Provisional payments

Corporate entities that pay their taxes in accordance with this Title will make provisional payments monthly, no later than the 17th day of the month immediately following that to which the payment corresponds.

A transitory article establishes that the first provisional payment if this year is to be made quarterly, and not monthly, considering the data for the first quarter of 2002. However, it establishes the possibility that taxpayers who engage in agricultural, livestock, fishing or forestry activities may make semi-annual provisional payments for the income they receive from said activities.

The provisional payments of natural persons will be determined by applying to the taxable profit of the period (income less deductions and amortization of fiscal losses from previous periods) the respective rate. The 35% rate will apply to the taxable profit of the period in the case of corporate entities.

It is pointed out that in both cases the transitory provisions relative to the reduction of rates to 34% for 2003, 33% for 2004 and 32% for 2005 will apply.

Annual tax

ISR payable by members of corporate entities will be determined in the terms of the Chapter on business and professional activities; that is, on the basis of cash flow.

As is the case with provisional payments of natural persons, the rate for such purposes stipulated by the law in accordance with the established mechanism will apply to the taxable profit.

For corporate entities, the 35% rate will apply to said profit.

As has been mentioned above in regard to provisional payments, the annual reductions of rates commented upon in the preceding point will apply at the annual level.

Said provision establishes that provisional payments made by the corporate entity may be credited against the tax payable.

The tax for the fiscal year will be paid by filing annual returns by the corporate persons during the month of March of the subsequent year, except in the case of corporate entities whose members are only natural persons, in which case, the annual returns will be filed in the month of April of the following year.

In the case of those who engage exclusively in agricultural, livestock, fishing or forestry activities, the tax determined according to the preceding paragraphs will be reduced by 50%.

In the case of taxpayers referred to in the preceding paragraph who obtain income in the fiscal period not in excess of 20 times the minimum general wage of the geographic area of the taxpayer, elevated to a year, for each one of their partners or associates, in the case of corporate persons, and 40 times said minimum wage in the case of natural persons, they will be exempt from payment of the ISR.

Members of coordinates

Starting on January 1, 2002, the Law establishes that natural persons and corporate entities who participate in various coordinates (as defined above), exclusively engaged in land transportation of freight or passengers, the members thereof must satisfy their fiscal obligations individually.

It also establishes that said members may take the option of having each one of the coordinates in which they participate pay the ISR on their behalf, in respect to the income they obtained from the coordinates in question.

Once the above option has been exercised, it cannot be modified for a period of five fiscal years starting from the one in which it was first exercised.

Said persons are required to file a notice with the fiscal authorities and inform the coordinates who will exercise said option in writing, no later than the date on which the first provisional payment is required to be made.

In respect to said notice, a transitory article clarifies that said notice may be dispensed with if it was previously filed in the terms of the Resolution of Administrative Facilities in the Simplified System.

Facilities for land transport companies

Among the transitory articles, it is established that SAT will issue general rules granting taxpayers engaged exclusively in land transportation of freight or passengers facilities to prove their income and disbursements, which may establish that a withholding of income tax be made on amounts disbursed, which withholding may not be higher than 17% of the amount of said disbursement.

Termination of the previous simplified system

A transitory article establishes a mechanism to be followed by taxpayers who paid under the simplified system established in the law that is abrogated, in order to determine if payment of the tax that was deferred by virtue of said system is required.

The mechanism established is described below:

1. To the updated balance of the contribution capital account will be added the balance of the liabilities that are not reserves and the balance of CUFIN, updated to December 31, 2001.

2. The balance of the financial assets held as of December 31, 2001 will be considered.

3. If the amount referred to in paragraph a) is less than the amount referred to in paragraph b) of this section, the difference will be considered a profit subject to payment of ISR and the 35% rate will apply thereto.

4. To the result will be added CUFIN and it will be subtracted from the income tax paid.

Taxpayers engaged exclusively in agriculture, livestock, fishing or forestry will reduce the tax by 50%.

The tax so determined will be paid in the month following the effective date of the amendment in question.

Notwithstanding the foregoing, taxpayers will be allowed not to pay the respective tax, provided that they invest an amount, equivalent to the profit subject to payment of the tax, to acquire fixed assets they use in their activity. For this purpose, they will have an initial period of 30 months, which may be extended for another like period, following authorization from the fiscal authorities.

If the investment is not made within the above mentioned terms, the respective tax must be paid together with the respective updated amount and the surcharges.

It is pointed out that the authorities do not clarify the procedure to be followed in cases when a partial investment is made in fixed assets.

If the taxpayers who are required to pay the tax engage in agriculture, livestock, fishing or forestry activities, they will have the option of the 50% reduction.

If the balance of the financial assets is lower than the amount stated in point 1, the difference will be considered to be a fiscal loss, which may be reduced from the fiscal profit or added to the fiscal loss determined at a later time.

We consider that the authorities are attempting to grant a benefit to taxpayers who made investments which were unable to deduct while they were paying under said system.

A transitory article establishes that the SAT, in general rules, will grant administrative facilities and facilities to evidence having complied with their fiscal obligations to taxpayers who paid their taxes under the simplified system in effect up to the 2001 fiscal year.

Said facilities will be limited to payments to occasional workers, disbursements made in the case of transport companies for salaries to the driver of the vehicle, crew members, sundry laborers and maneuvering personnel, half-used spare parts and minor repairs, travel expenses, expenses for maintaining an image and cleaning expenses, as well as in the case of the primary sector for livestock feed and minor expenses.

Lastly, it is pointed out that the above mentioned provisions of the transition process also apply to the natural persons who paid their taxes under the same system. For purposes of these comments, they will be understood as transcribed for their purposes in the Chapter on the Intermediate System for Natural Persons with Business Activities.

TITLE III NOT-FOR-PROFIT CORPORATE ENTITIES

The name of Title III of the LISR is modified, starting on January 1, 2002 to remain as: System for Not-For-Profit Corporate Entities. We consider that the former name better reflected the type of companies that were required to comply with the requirements of the Title, since there are companies which, given their characteristics, are not-for-profit companies, however they are not included under said system.

It is considered that those corporate entities listed in cited legal provision will not be subject to the ISR. In addition, the Law includes cooperative savings and loan associations referred to on the Law of People’s Savings and Credit, authorized charitable institutions, as well as civil partnerships and associations authorized to receive donations, whose beneficiaries are low income persons, sectors and regions, who perform activities to improve the conditions of life and development of indigenous communities and groups considered as vulnerable because of age, sex or disability.

Also included are not-for-profit associations or partnerships authorized to receive donations, engaged in activities such as the promotion and dissemination of music, plastic arts, dramatic arts, dance, literature, architecture and cinematography, the recovery of the cultural heritage of the nation, as well as art of indigenous communities in all original manifestations of their own languages, uses and customs.

In addition, mutual funds specialized in retirement funds, as well as corporate entities authorized to receive deductible donations will be required to pay ISR when they receive income from the sale of properties, interest or premiums, the tax on which will be considered a final payment.

In terms of the amendments to the Law of Mutual Funds, variable income mutual funds, formerly called common mutual funds, will not be required to pay taxes when they receive income from the sale of properties or from premiums obtained.

The rate applicable to the remainder subject to distribution,, which these funds may generate, is gradually reduced to 32% as discussed above.

Tax returns

The term for filing certain informative returns relative to withholdings is reduced to February 15 of each year. No later than said date, the tax return in which it is determined the distributable remainder and the proportion corresponding to each member for this concept must be filed; these are deadlines that must be complied with in regard to obligations contemplated in the 2002 fiscal year, while for 2001, the February 28 date will remain as the deadline.

Workers’ unions and their organizations will, starting with the 2002 fiscal year, issue receipts for sales they make, for services they render or the temporary use or enjoyment of properties they grant, and will maintain accounting records in accordance with the CFF.

Mutual funds

A new system is established that will apply to mutual debt funds as well as to variable income mutual funds, the members of which are only natural persons, when they receive income from interest. In these cases, it will be considered that said funds are not required to pay income tax, rather, their members or shareholders are the ones required to pay the tax.

The Law provides that those who make payments for interest to mutual debt funds or variable income mutual funds will do so in the same terms as for interest paid by credit institutions.

The Law also provides that natural persons who receive interest from said mutual funds will accumulate the actual interest of the period in which the fund receives it, in proportion to the investment held in said fund. The mutual fund will determine the amount of the actual interest, and, if a loss exists, it may be reduced from the other income, except in the case of salaries, business and professional activities.

When the shares of a mutual fund are sold, the member will be required to accumulate the actual interest to those accrued by the mutual fund, and said mutual fund will be required to make the withholding applicable to said interest.

In the event that the natural person members or shareholders of mutual funds in debt instruments sell shares of said fund, they will accumulate to their other income received during the period, the gain obtained, which figure will be obtained from the difference between the sale price and the cost of the share.

The cost will be determined according to the new mechanism established in the Law, adding to the original updated amount of the investment, the amount of interest accumulated in each one of the whole fiscal years that transpired on the date of acquisition of the share and up to the date of sale thereof, as well as the amount of interest accumulated from the beginning of the fiscal period up to the date of the sale.

The profit generated will be considered as actual interest for purposes of payment of ISR. In the case of a loss, it may be deducted from the other income obtained by the natural person, except for salaries and business and professional activities.

Cited funds will provide, no later than February 15 of each year, to their members as well as to their financial brokers, documents containing information of the fiscal year relative to the total amount of nominal and actual interest received by the mutual fund, accrued and uncollected interest, the creditable tax and the deductible loss.

In addition, they will provide certificates with the date mentioned above. Said data must also be delivered to SAT under penalty of being jointly liable when the information is incorrect or incomplete.

TITLE IV NATURAL PERSONS

Miscellaneous provisions

Under the new annual system of inflation adjustment, the Law eliminates the inflationary gains obtained from the real reduction of their debts as a taxable income for natural persons.

However, corporate entities will be required to make the new annual inflation adjustment, since it is no longer a general provision of the law applicable to all taxpayers.

Cited adjustment will apply only in cases where the respective provisions expressly require natural persons to apply the mechanism of annual inflation adjustment.

There is a new obligation for natural persons to report in the return for the period on loans, donations and premiums obtained during the period, provided that, individually or jointly, they exceed $1,000,000.

In addition, a generic obligation is included, which requires taxpayers to report in their annual returns the amounts of income obtained which, in the terms of the law, is not accruable or is exempt, when expressly stated in the law.

The above-mentioned obligation also applies to natural persons who are not required to file an annual tax return in the terms of other articles of cited Law.

Investments in Tax Havens

The provisions applicable to natural persons that regulated their accumulation are commented upon in the new Title, which is incorporated in the law to regulate “Territories with Preferential Fiscal Systems”, which apply to all taxpayers.

Presumed income

Regarding the power granted to the tax authorities to determine presumed income of natural persons, when in one calendar year they spend more than the income they declare during the same year, the Law establishes that it may only be considered that the return was filed without income when the natural person does not file the return and ins required to do so.

It also establishes that in the case of taxpayers not required to file returns for the fiscal period for the purposes of the provision, the income, which the withholders declare that they paid to the taxpayer in question, will be considered.

A presumption is included in the Law, in the sense that if loans and donations are not reported in accordance with this new obligation, then it will be considered to be income omitted from the primary activity of the taxpayer or, in such case, other income for which the tax was not paid, which admits proof to the contrary.

Exempt income

Indemnification ofr risks and illness

The article establishes that this exemption will be admitted only when the indemnification is granted according to the laws, collective bargaining agreements or by national labor agreements. Consequently, it will not be admitted when the indemnification was granted on the basis of individual labor agreements (e.g. trusted employees).

Social welfare

The Law establishes that in case of social welfare expenses related to subsidies for disability, scholarships for workers or their children, day care centers, cultural and athletic activities, and other social welfare benefits of a similar nature, these benefits must be granted generally to all workers; that is, they must be the same for trusted employees as for the other workers.

The Law also provides that, in the case of trusted employees, the amount of social welfare benefits, excluding the deductible social security contributions, may not exceed 10% of the total taxed remuneration of said workers and, in no case, may they be higher than an amount equivalent to one minimum general wage corresponding to the worker, elevated to one year, in order for them to be deducted by the employer.

Saving funds

The law establishes that the exemption stipulated for income from saving funds will be subject to deductibility for the employer of the contributions made to the funds.

On the other hand, in the requirements set forth in the law for deductions in favor of employers, it is established that said contributions will be deductible provided that they comply with the requirements for their exemption.

As observed, these provisions are related to each other; consequently, there are no requirements in either of them that taxpayers must comply with, in order to be entitled to the exemption or the deduction, corresponding to them in each case.

We consider that the authority should clarified said confusion; by issuing miscellaneous rules or that the provision should be amended through the Congress.

Other payments derived from a labor relation

Added as exempt income for workers employed by the Federation and the States are the bonuses granted every year or at times other than monthly, and at any time during the calendar year, depending on the activities and service they perform, provided they are of a general nature including, among others, the year-end bonus and vacation premium.

It is pointed out that said exemption is included with no limitation, while for all other natural persons, said income is exempt up to