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 a certain limit; consequently, the provision has obvious vices of constitutionality.

We consider that the foregoing, besides generating an unequal treatment for natural person taxpayers found in the same legal situation, could give rise to abuses that, unquestionably, will result in this inequality becoming even more serious.

Sale of homes

For the exemption of income obtained from the sale of a home, the law eliminates the limitation to the effect that the person was required to have lived in the home the last 2 years prior to its sale. Consequently, the sale of homes made as of January 1, 2002 will be exempt from the payment of the ISR.

Interest

The law establishes as exempt interest only that received by natural persons form credit institutions, provided that the interest derives from checking accounts or for the deposit of wages and salaries, pensions or retirement funds or savings deposits, provided that the daily average balance of the investment is not higher than five minimum general wages of the geographical area of the Federal District, taken to one year.

Also exempt is interest paid by cooperative savings and loan associations and by people’s financial societies, emanating from investments, the daily average balance of which does not exceed five annual minimum general wages.

Indemnity from insurance

The Law maintains the exemption for amounts paid by insurance institutions to the insured or their beneficiaries when the risk covered by the respective policy occurs, provided that the policy is not an insurance related to fixed assets.

In respect to medical expenses insurance, retirement and pension, the Law states that the specific provisions established in cited precept will apply, as correspond.

Donations

Under this amendment, there is a condition that the donation will only be exempt between ancestors and descendants in the following cases:

a) Between spouses or those received by descendants from their ancestors in a straight line, whatever the amount may bee.

b) Income received by ancestors from their straight line descendants, provided that the effects received are not sold or donated by the ancestor or other straight-lined. (With no limitation as to degree).

We consider that this provisions may have vices of constitutionality because it does not take into account the principle of proportionality and legality; that is, in the first place, the tax is imposed on a person who does not receive the income and, on the other hand, there is no definitive term for the holding of the shares in order for the limitation to operate.

On the other hand, the exemption of up to the equivalent of three minimum general wages taken to a year subsists, in all other cases of donations.

We consider that the amendment attempts to avoid an indirect donation among brothers and sisters, through a prior donation to an ancestor.

Sale of Stock

The amendment provides that income obtained from the sale of shares in the stock market under concession in the terms of the Stock Exchange Law (Bolsa Mexicana de Valores) is exempt, whether the shares come from Mexican or foreign issuers.

There are certain limitations for the exemption to apply in the cases of public purchase offers in which original shareholders of the company that registered the shares in the National Securities Registry participate:

1. That five years with no interruptions have expired since the date of the first placement and sale.

A transitory article states that within the five year period will be considered those that expired prior to the effective date of the Law.

2. That at least 35 % of all the paid-in shares of the issuers are placed among the public investors in general through recognized exchanges or markets.

3. That offer must include all the series of the shares of the capital stock and must be made at the same price for all the shareholders.

4. The shareholders must be able to accept more competitive offers than those they had receipt prior and during the period of the offer, with no penalty.

It further provides that not subject to exemption are sales of shares made outside the market, sales made through registry transactions, protected cross-over or transactions under any other name that prevents the persons who make the sales from accepting more competitive offers, even if the CNBV granted them the nature of transactions carried out on the Exchange.

Furthermore, the exception does not apply in sales through public offers and during the period thereof, when the persons who participate in them are unable to accept more competitive offers, and that if they accept them a penalty has been agreed to.

In the case of a merger or split, the exemption will not apply when the merged or split companies do not satisfy the conditions established in said precept.

Agricultural, live stock, forestry or fishing activities

The maximum limit of income exempt from tax received by natural persons engaged in agriculture, live stock, forestry or fishing activities is increase from 20 to 40 annual minimum wages.

Copyrights

The exemption on income received by natural persons for allowing third parties to publish their recent works in books, newspapers or magazines is limited; the limitation also applies to the reproduction in series of recordings of their musical works, to two annual minimum wages, provided that certain requirements established in the provision are complied with.

Sale by settlement in payments

The exemption granted to natural persons in the sale of real estate, housing certificates, trustor or beneficiary rights in real estate that are effected as a settlement in payment or judicial or trustee adjudication to taxpayers who, by legal provisions can not conserve the ownership of said property is eliminated.

However a transitory article establishes that this exemption will continue to apply to those credits that were obtained prior to January 1, 2002; it establishes that the purchaser will be required to declare in the acquisition deed, that he will consider as cost, when selling the property, that which corresponded to the natural person from who he obtained it.

Business or professional activities

The amendment establishes that natural persons who pay taxes under the new Chapter II named “Business and Professional Activities” will not be entitled to the exemptions established in the precept in question in respect to the following income:

1. Income derived from the sale of personal properties other than shares, equity interest, securities and investments (Section XV paragraph b).

2. Interest paid by credit institutions, cooperative savings and loans corporations as well as people’s financial corporations (Section XVI).

3. Amounts paid by insurance companies when the risk covered by the respective policy occurs (Section XVII).

4. Donations other than those made between spouses, as well as between direct line ancestors and descendents (XIX paragraph c).

5. Indemnities for damages shall do not exceed the market value of the commodity in question (Section XXI).

Tax return-exempt income

A new obligation is established in the Law making it a requirement to declare exempt income derived from per-diem expenses, sale of a home, and income received from an inherence or legacy, received during the period.

The above-mentioned exemption of income is subject to the condition that said income is declared even no tax has to be paid.

Chapter I Wages and salaries

Income in services

The Law eliminates the concept of income in services for loans obtain by workers in connection with the rendering of a personal subordinate service.

We consider that the elimination of said income is due to the fact that it was declared unconstitutional by the Supreme Court of Justice of the Nation.

Payment of withholdings

Starting on January 1, 2002, employers must make withholding from workers and as well as assimilated monthly, and must also pay them.

This amendment derives from the elimination of the option to make provisional quarterly payments, calculation

Calculation procedure and tariffs

As to calculating the tax for salaries the mechanism is the same; that is, the rate contemplated in the law will apply, reducing the subsidy that results from applying the respective table, and against the tax, the credit will be credited to the salary as corresponds according to the table.

The amendment eliminates the general credit that was granted to natural persons who pay under the assimilable system; except for the foregoing the mechanism of calculation for these persons is the same.

In regard to the rates or tariffs, the new Law contemplates a maximum rate of 32%; however, a transitory article states that said maximum rate for the 2002 period will be 35%, which will be reduced to 34% for 2003, 33% for 2004, until reaching 32% for 2005.

It is pointed out that in the new rates the ranges of income are not extended, on the contrary they are reduced which does not achieve the objective of effectively reducing ISR for natural persons; said reduction will only be seen in higher level income.

On the other hand, the new creditable subsidy is lower in comparison with the former one, which means that not only does an actual reduction of the tax do not exist, but it will be increased by said change.

Regarding the income limit that was provided in the law, in order for the employer not to be required to make the annual calculation of his workers, said limit is reduced extremely significant, remaining at the level of $300,000.00 pesos, which is consistent with the modification to the amount of income which, in the even of being higher, requires worker to file an annual return.

It is pointed out that the reduction on this limit will generate the need that a large number of taxpayers will now be required to file an annual return, which contradicts the original objective of the amendment insofar as achieving administrative certification is concerned.

Regarding payments for fees to members of the board, administrators, examiners etc, it is increased to 35%, reducing one percentage point a year until reaching the 32% rate for 2005.

Workers obligations

We consider that the most important amendments is the one related to the filing of an annual return, which obligation has been commented upon, and which originate the obligation to file an annual return when the income is in excess of $300,000.00.

Employers obligation

Regarding the filing of informative returns for payment of credit to salary provided to workers and the declaration of salaries they must be filed no later than February 15, of each year.

A transitory article clarifies that the informative returns that are to be filed in accordance with the aggregated Law, must be filed not later than during the month of February.

A new obligation is added for employers which is that of providing to their workers, no later than February 15 of each year, a recorded evidence of the total amount of per-diem expenses paid during the calendar year in question, and for which the tax was not withheld due to the amount being exempted.

Credit to salary

The obligation for employers to deliver to workers credit to the salary, which actually results, subsists, when the tax payable by the taxpayer is less than the credit to the monthly salary.

It is pointed out that the current provision limits accrediting of the credit to the salary paid, only against the ISR itself or the ISR withheld, while the obligated law allowed for the crediting against any federal tax payable by the employer.

We consider that this amendment is obviously for purposes of collecting taxes, since does not allow the employer the possibility of crediting against any other tax, considering that this obligation implies the substitution of the Federal Authorities in the payment of an amount to which the taxpayer (worker) is entitled by virtue of the Law, and respect to which the employer would not have to be the party who absorbs it.

Also incorporated are a number of provisions in order for the crediting of said delivered credit to be admissible, which are mentioned below:

a) File with the Mexican Social Security Institute with a copy to SAT the payrolls of works entitled to credit to the salary, identifying each one of them the income used as the basis for determining said credit, as well as the amount of the latter, within five days following the month in question.

b) Pay the workers in a separate payroll and on a different date from that, on which salary is paid, previously authorized by SAT.

From our point of view, these obligations are excessive if we consider that failure to comply with the obligation prevents crediting of the credit to the salary paid in cash, besides subjecting deductibility of the salary to the condition of compliance therewith, which implies a double penalty.

Chapter II Business and professional activities

As a result of the amendments, starting from the effective date of the Law, natural persons who obtain income from fees and business activities will pay the taxes under the same system.

It is pointed out that the current amendment only grants facilities for natural persons who obtain income from business activities which are not applicable for income from fees, adding to the latter an administrative burden to the one they have which we will comment upon below.

Income

Added as accumulable income to those that existed in the past in each one of the activities are the following:

1. Condonations, write-offs, or remissions of debts related to the business or professional activity, as well as the above-mentioned debts which go unpaid by the running of the statute of limitation.

2. In the case of write-offs, condonations or remission of debts granted by persons other than institutions of the financial system, the total amount will be accrued.

3. The sale of accounts and documents receivable and credit instruments other than shares related to the business or professional activity, as well as those that do not derive from the sale of shares of mutual funds, not payers of the ISR.

4. Interest derived from business or professional activities is to be accumulated for the nominal amount collected, without making the inflation adjustment.

Time for accumulating income

The Law establishes a cash flow system; that is income is to be accumulated at the time when it is actually received. This situation benefits the taxpayers under the system, allowing them to avoid the advanced accumulation of income that has not actually been collected.

Said provision clarifies that income will be understood as effectively received when it is received in cash, checks, commodities or services, even if it corresponds to advances, deposits and any other concepts, irrespective of the name given to it. It is also considered as received when the taxpayer receives credit instruments issued by the person other than the one who makes the payment.

Regarding the sale of commodities that are exported the income must be accumulated when it is actually received.

If the income is not received within twelve months following the date of the export the income is to be accumulated upon the expiration of said period.

In respect to this last measure we consider it inappropriate, since it requires taxpayers under this system to accumulate income not received, which is not consistent with the proposed cash-flow system.

A transitory article establishes that as of the effective date of the new Law, those taxpayers who paid under the business activities system, and who accumulated their income or have made deductions in accordance with the system, without actually received it or disbursed it respectively will not accumulate or deduct it, when they actually receive or disburse it, as the case may be.

Deductions

Included as deductions to those that existed in the past as each one of the activities are the following concepts:

a) Dues paid by employers to IMSS, which are payable by the workers with salaries higher than the minimum.

We consider that this inclusion is correct, acknowledging the judicial criteria in this respect.

b) The deduction of interest paid derived from the business activity for professional services, allows for deducting 100% of interest paid with not making any adjustment whatever for inflation.

We mention that there is a transitory article that allows corporate entities to deduct payments from PUT, in the event that general criteria of economic policies for the 2003 period, estimate a growth of the PIB, over 3%; this situation never grants legal security to taxpayers. The provision above was not included as a deduction in this Chapter, which we trust is an error, and one that will be clarified in due course by the fiscal authorities; otherwise the constitutional principle of equity would be violated.

Investments

The amendment establishes that taxpayer under this Title will determine the deductions of their investments, using the same provisions that apply to corporate entities; that is, those established in Section II of Chapter II, Title II of this Law.

We consider that the deduction mechanism above, is not equitable, since it is contrary to the cash-flow system established by the authorities; that is, it requires the taxpayers to apply percentages of depreciation instead of deducting 100% the amount of their disbursements in each fiscal year.

There is the option to make the immediate deduction of investments; there is, in a single period, applying the percentage established in the Law for each type of commodity; these provisions have been commented upon in the Chapter on corporate entities.

Requirements for the deductions

Added as a deduction requirement to those that existed in the past in each one of the activities are the following concepts:

1. That the disbursements related to purchases and expenses be deducted in the period in which they are actually disbursed.

2. As to acquisitions on terms of effects that do not qualified as investments the deduction will apply for the amounts of the installments actually paid in a month, or in the respective period.

3. In the case of investment fiscal effects are not given to their revaluation.

4. That not later than the last day of the period, the requirements be satisfied, established for each particular deduction

5. That the supporting documentation be compiled no later than the day on which the tax return is to be filed.

6. The date of the receipt must correspond to the fiscal year for which the deduction is made.

From our point of view the requirement mentioned in point 6 should not apply, since being a cash-flow system, the date of the receipt is irrelevant.

Provisional payments

According to the amendment, taxpayers who pay under this system must make monthly provisional payments on the account of the tax for the fiscal year, irrespective of the their income level.

Said payment will be determined by applying to the total amount of income obtained from the beginning of the period, up to the last day of the month tow which the payment corresponds, once the respective deductions corresponding to the same period have been made and the fiscal losses from preceding periods pending application, the rate corresponding to the natural persons indicated in Chapter I, corresponding to income received from salary, and in general for the rendering of a personal subordinate service.

Against the provisional payments determined installation in accordance with the above procedure, the provisional payments of the same period made at a previous time may be credited.

The new mechanism for determining provisional payments benefits only taxpayers who engage in business activities; previously they determined the tax by applying the general 3% rate.

On the other hand, the fact of having eliminated the option to make quarterly provisional payments for low income taxpayers is contradictory to the administrative simplification system, which, according to the Authorities is intended to be implemented.

A transitory article grants an extension for taxpayers who have been filing quarterly provisional payments, which consists of making the provisional payment for the months of January, February and March 2002, in a single tax return, which must be filed no later than April 17.

Adjustment to provisional payments

The obligation to make the adjustment to provisional payments is eliminated for taxpayers engaged in business activities, as an administrative simplification method.

Fiscal losses

It is pointed out that as of January 1 2002, fiscal provisions recognize that natural persons who obtain income from fees may obtain a fiscal loss in a period, for the fact that their authorized deductions are higher than their income.

On the other hand, cited laws may be amortized against profits from the periods generated during the subsequent ten periods until it is exhausted.

We consider that the measure is appropriate, inasmuch as the authorities acknowledge the possibility that a natural person who receives income from fees may, in certain years find it necessary to spend more than his income.

It is pointed out that according to the Law, fiscal losses incurred by the natural person who engages in business activities or who renders professional services may only be deducted from the fiscal profit derived from said activities and may not be transferred even as a result of the sale of the business.

In regard to the above point we consider that said provision is faulty, since the law requires that all income be accumulated and that the tax be paid on said amount, but in regard to losses a more rigid is maintained, which does not allow taxpayers to pay according to their tax capacity.

It is pointed out that there is no transitory article that indicates the procedure to be followed with fiscal losses pending amortization at December 31, 2001 of persons who paid their taxes under the business activities system.

Calculation of the annual tax

The tax for the fiscal year will be calculated upon the tax profit that results by reducing from total income of the period total deductions thereof, and losses of prior periods pending amortization.

To the above results will be added the other income obtained from other activities taxed by the ISR to later make the applicable personal deductions.

It is significant that the option for taxpayers who engage exclusively in agricultural, livestock, fishing or forestry activities to reduce their ISR 50% continues. Moreover these persons will have an ISR exemption for income up to 40 minimum wages taken to a year.

Crediting of ISR against IMPAC

By virtue of the fact that business activities are subject to IMPAC the new provisions establish that the annual tax corresponding to said activities may be credited against said tax, in the proportion that they represent the total income obtained by the taxpayer.

We consider that the mechanism for determining the amount of ISR to credit against IMPAC is rather impractical, since it originates a greater administrative burden for the taxpayer.

The above-described procedure also will apply to provisional payments to IMPAC.

Obligations

We consider that among the obligations for these taxpayers, the most important are the following:

1. Accounting practices must conform to CFF.

The foregoing is excessive for natural persons who receive income from fees, since it imposes upon them an administrative burden they did not previously had.

2. To issue and conserve receipts for income they obtain, with its printed statement “Fiscal purposes to the payment ”.

A transitory article allows natural persons who at December 31, 2001 paid under this system to continue using the receipts they have until they are exhausted, or until their effective term expires, in terms of their printing date, provided that they add by a handwritten notation, with a seal or by machine, cited statement.

3. When the consideration for a service or sale is paid in installments, the receipt must indicate in addition to normal data a receipt must contain, the amount of the installment covered at that time.

4. File the informative returns of credit to salary paid to their workers, outstanding credit balances with foreign residents, ISR withholdings, donations, etc., through electronic media.

A transitory article establishes that persons who receive income from fees must comply with this obligation by February 15, 2003.

This other provision is detrimental to natural persons who receive income from fees since until December 31, 2001 they did not have these obligations.

In regard to taxpayers who engage in agriculture, livestock, fishing or forestry activities or the land auto transport of freight or passengers whose income was obtained in the immediately preceding period for said activities was not hither than $10’000,000, may follow this simplified system for their accounting, such as taxpayers under the intermediate system, and apply the administrative facilities that may be issued by the tax authorities.

Intermediate system

Subjects

Natural persons who engage exclusively in business activities, and who in the immediately preceding fiscal year obtained income of less than 4’000,000, are the only ones who may apply this intermediate system.

For these purposes, understood as “exclusively” is that at least 90% of their accumulated income corresponds to business activities.

We consider that the fact that natural persons who obtain income from fees were not included in this system is opened to criticism, and further consider that it may contain vices of constitutionality.

Obligations

1. Maintain a book of income expenditures and a registry of investments and deductions.

2. If the considerations are paid in installments, the may note the amount of those paid on the reverse of the receipt.

3. They are not required to provide information regarding their principal clients and suppliers, or transactions carried out with affiliates.

4. Taxpayers who immediately preceding fiscal year obtained income of over $1’000,000, but not more than $4’000,000, and who have taken the option to apply this intermediate system will be required to have machine registers to evidence tax receipts or tax registry electronic equipment or systems.

A transitory article establishes that the obligation to maintain tax receipt machine registers for tax registry electronic equipment or systems will go into effect 90 days from the effective date of the new law.

Investments

These taxpayers instead of deducting from their investments through the application of factors will deduct the disbursements actually made during the period for the acquisition of fixed assets, deferred expenses or charges, except in the case of automobiles, buses, trucks, tractor trucks and trailers, which must be deducted in the terms of the Chapter on investments established in the law.

Small taxpayer sistem

Subjects

With respect to this system, it remains practically with no change in comparison to the one that was in force up to December 31, 2001.

It continues to be option for persons who engage in business activities and who only self commodities, or render services to the public in general, and whose income does not exceed $1’500,000 pesos in the immediately preceding period.

The same provision contains the limitation that taxpayers who obtained during the immediately preceding period, income from commissions, mediation, agency, representation, brokerage, consignment, distribution or public shows, may not pay under the small taxpayers system, and it also limits the possibility for those individuals who engage in selling merchandise from foreign countries.

Rate

A fixed rate of 1% is established for determining the tax corresponding to income collected during the period, whether in cash, commodities or services.

Obligations

As previously mentioned, said system did not undergo relevant changes, therefore we will mention only some of the obligations as follows:

1. No later than March 31, of the period in which a taxpayer begins to pay under this section, or during the month following start of operations, to file the respective notice.

2. When they stop to pay under said section they must file the respective notice within the month following the date of said cessation.

3. Natural persons who take the option to pay taxes under this system are still unable to issue receipts that satisfy fiscal requirements.

4. Likewise, they are still unable to carry out activities through trusts.

5. Deliver to their clients, copies of sales notes and maintain the originals.

6. Conserve evidence of fixed assets used in their business, valued at over 2’000.00 pesos.

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

Transitory articles establish that fiscal authorities will not determine amounts that were not paid and their accessories for those individuals the 2001 period obtained income not in excess of $1’000,000 pesos and who paid their taxes under the small taxpayer system established in the law in force up to December 31, 2001, and who issued one or more receipts satisfying fiscal requirements, or who received payment of income for their activities in a check or by account transfers in Banks or Stock Brokerages, when they comply with any of the requirements of article 29-C-CFF, until they pay ISR for the 2001 fiscal year, in the terms the provisions applicable to the new system of business activities.

With respect to the preceding point, it is understood that the authorities are granting an amnesty in regard to payments that were not made and their accessories during the 2001 period, up to the effective date of the amendment, provided that they conform to the new business activities system.

According to the same transitory article said taxpayers will also be allowed to deduct in the period above, investments in fixed assets, deferred expenses or charges provided that they have the supporting documentation.

Chapter III Income from lease

General Aspects

No big changes were made to this Chapter by the amendment, consequently we will comment only upon what we consider to be of general importance.

Income

As is the case with previous chapters and consistent with the amendment, in regard to the accumulation of income for natural persons, the inflationary gain that could be generated in respect to debts related to this activity is not considered.

Deductions

The optional (blind) deduction for a home is reduced from 50% to 35%, whereby a single rate of 35% remains for a deduction on income for the lease of real estate, irrespective of the use or intended use.

We consider that the modification is due to the fact that the Supreme Court of Justice of the Nation determined that unequal treatment was unconstitutional among taxpayers engaged in the same activity.

The amendment also allows those who take the above option to deduct the land tax corresponding to said real estate.

It is established that when the taxpayer occupies part of the real estate, or grant the use or enjoyment at no cost, he may not deduct the part of the expenses, the land tax the duties for public works cooperation, corresponding proportionately to the occupied part or to the part he granted at no cost.

On the other hand, real interest derived from loans used to buy or improve personal properties may be deducted. Considered as real interest is that which exceeds the annual inflation adjustment. For said purposes, the provisions related to income from interest will apply.

Provisional payments

The law establishes a benefit for taxpayers who obtain income only by granting the use or temporary enjoyment of properties to be used as residences, of making provisional quarterly payments. In all of these cases, provisional monthly payments must be made.

The top limit is raised for taxpayers who obtain income from lease are discharged from making provisional payments; it is now ten times the minimum general salary of the Federal District taken to one month.

Informative return

The date for filing the informative tax return is modified for those who withhold taxes from natural persons who obtain income from leases, to February 15, each year at the latest. In respect to fiduciary institutions, in cases where lease transactions are performed through a trust, the deadline is January 31 of each year.

As mentioned in the preceding chapters, a transitory article establishes that taxpayers require to file informative returns in the terms of the abrogated law, they will present the returns for the 2001 period in the month of February 2002

Chapter IV Sale of Commodities

General Aspects

The provisions of this Chapter did not undergo relevant changes in comparison with the abrogated LISR; consequently we will comment upon those that underwent a general interest modification.

Fiscal cost of shares of mutual funds

A mechanism is established to determine the cost of shares of variable income mutual funds, which are sold by natural persons, which consist of considering the adjusted original amount of the shares that which is obtained by adding to the proven purchase cost, the dividends or profits received by the issuer, updated during the holding of the shares, and subtracting the dividends during said period.

Regarding earnings obtained from the sale of shares of variable income mutual funds, the members or shareholders of which are exclusively natural persons, as well as those specialized in retirements funds, will begin in a treatment commented upon in the section non-profit corporate entities.

Deductible losses

The option that was given to natural persons to subtract from their other accumulable income (salaries and income from business and professional activities etc.), the loss suffered in the sale of properties is eliminated.

On the other hand there is a new option to reduce the losses suffered in a period from the sale of properties, similar to the one that existed in the past, except that the loss may not be deducted from the income obtained under Chapter I and II.

We consider that on limiting the application of losses against a certain type of income may have vices of constitutionality, because it is inequitable.

Informative return of notaries or brokers

A new obligation is added for public notaries or brokers which is the obligation to file in February of each year an informative tax return of transactions performed in the immediately preceding period, in regard to income obtained by natural persons from the sale of properties.

A transitory article establishes that it will be filed for the first time no later than February 15, 2003, by virtue of the fact that said information should not be provided to the fiscal authorities at a previous time.

Chapter V Acquisition of properties

General aspects

The provisions relative to this Chapter are unchanged; consequently we will make no comments.

Except for a new obligation imposed on public brokers or Notaries that was commented upon in the preceding Chapter in the point of informative returns of public brokers and notaries.

Chapter VI Interest

General Aspects

Consistent with the amendment substantial changes are made in the system applicable to natural persons who receive income from interest, in order for said to accumulate to their other income from the period, amounts corresponding to interest substituting for a final withholding system.

Transitory articles establish that the system described above will go into effect, starting in the 2003 fiscal year, since in this period the withholding system in effect up to December 31 2002, for certain cases as indicated in this Chapter will continue to be applied.

Concept of Interest

A new definition of the taxed interest is established, stating that for the purposes of this Chapter interest is considered as that established in article 9 of the LISR and all others, which according to said Law have the same treatment.

Accrual

The Law establishes that natural persons will accrue the real interest received during the Public Education Ministry.

For these purposes considered as real interest is the amount by which the interest exceeds the inflationary adjustment.

Said provision also establishes that natural persons will accumulate, in the period in which it accrues, interest paid by companies that are not members of the financial system in the terms of the Law and that derives from securities that are not placed among the investing public in general, through authorized stock exchanges or markets with significant trading volume.

To determine de accrual of the above-mentioned interest the inflationary investment will be calculated according to the following:

1. The average daily balance of the investment from which the interest was generated will be multiplied by the factor determined in accordance with the terms of the following point.

2. The factor will be obtained by subtracting the unit of the quotient that results from diving the National Consumers Price Index of the most recent month of the investment period, and that corresponding to the first month of said period.

It also establishes when the calculation of the real interest is made for a period of less than one month or covers part of said month the percentage increase of the National Consumers Price Index for said period, or part of the month will be considered in proportion to the number of days for which the calculation was made.

3. The average balance of the investment will be that obtained by dividing the sum of the daily balances of the investment by the number of days thereof, without taking into consideration unpaid accrued interest.

It also establishes that when accrued interest is reinvested, said interest will be deemed to be received at the time it is reinvested or when it is available to the taxpayer, whichever occurs first.

A transitory article establishes that during the 2002 period, not to be considered as accrued income for natural persons, members of investment funds are those obtained from the sale of shares issued by said funds, except in the cases in which they were acquired in the terms of the title of fiscal incentives, that is, they are funds that may eventually be listed in the general provisions according to said Title.

Loss in the inflationary adjustment

The Law establishes when the inflationary adjustment is higher than the interest obtained, the result will be considered as a loss, in which case it may be subtracted from the other income obtained by natural persons, except that corresponding to salaries and business and professional activities.

If the loss could not be subtracted during the period, it may be applied in the following five periods until it is exhausted, updating it from the last month of the period in which it occurred, or was last updated, up to the last month of the period in which it is applied.

Interest paid by insurance companies

The Law establishes that the same interest treatment will be given to income paid by insurance companies, and to the insured or their beneficiaries when said persons are entitled to withdraw the premiums, the amount contributed or the yield on said amount prior to the occurrence of the risk or the event covered by the policy, provided that it is the taxpayer who purchases and pays the premium in its entirety and provided that he is the only contributor in the contract in question.

From our point of view, attempting to consider these concepts as income from interest is opened to criticism since on some cases, obtaining said income does not apply a modification to the equity of the natural persons, but simply constitutes a restitution of the amounts, which the natural person provided to said institutions.

Consequently, there would be a case of payment of ISR for income not obtained which did not increase the equity and which, nevertheless is diminished by cited fiscal effects.

In the cases cited above, the respective tax will be determined in accordance with the following rules:

1. The real interest will be determined according to the above-mentioned mechanism.

2. The real interest will be divided between the number of years expired between the date the insurance plan was purchased and its termination, without ever exceeding ten years.

3. The result obtained will be the part of the real interest that is to be accumulated to the other income during the period in question, in order to calculate the annual tax.

4. The portion of the real non-accumulable interest in accordance with the foregoing will have applied to it the tax rate corresponding in the period in question to all of the accumulable income of the taxpayer, and the resulting tax will be added to the tax for the period.

Said provision also establishes that when more than five fiscal periods have expired between the day when the contract was executed with the insured and the date that cited amounts are withdrawn, and the casualty or the event covered has not occurred, instead of calculating the tax as described above is to be paid on the actual interest applying the average tax rate that corresponded to it during the five periods prior to that in which the calculation was made and the result will be the tax to be paid, which is to be added to the tax corresponding to the taxpayer in the fiscal year in question, in order to pay it jointly.

Provisional payments on interest

Those who make the respective payments are required to withhold and pay as a provisional payment, the tax resulting from applying to the capital that originates payment of interest the rate established by the Congress of the Union in the LIF.

Regarding interest paid by a corporation that is not a member of the financial system in the terms of the Law, and deriving from securities that are not placed among the public investors in general, through authorized brokerage firms or markets with significant trading value, the withholding will be 20% upon interest.

It is also stated that natural persons who only obtain in the fiscal period accumulable income for interest may consider the withholding they effected as a final payment, provided that said income corresponds to the fiscal year in question and it is not higher than $100,000.00 pesos.

A transitory provision establishes that during the 2002 fiscal year, persons who make payments for interest will withhold the tax by applying the 24% rate on interest paid, with no deductions whatever.

In cases in which the annual interest rate is higher than ten percentage points, the withholding will be effected by applying the 24% rate on the amount of interest that results from the first ten percentage points, with no deductions whatever.

The withholdings made in accordance with the transitory provision will have the nature of a final payment, except when the interest is paid to corporate person taxpayers, or to natural persons in related business and professional activities, and in this latter case, interest deriving from credits affected to the business activity or to the rendering of the professional service, in which case, said withholding will be treated as a provisional payment.

The same transitory article exempts natural persons from payment of ISR for income from interest derived from Federal Government securities for its financial agent, interest that derives from monetary regulation bonds issued by the Banco de México, Highway Indemnification Promissory Notes issued by the Support Trust for the Rescue of Highways with a Concession and Protection Bonds for Bank Savings, issued by the Institute for the Protection of Bank Savings.

Another transitory provision establishes that during the 2002 fiscal year, persons who pay interest to mutual funds in debt instruments or variable income mutual funds, will withhold the tax by applying cited 24% rate upon the first ten percentage points, with no deduction whatever, having the nature of a final payment, and the interest will not be accrued in said period for the members of the mutual fund.

Obligations

New obligations are added under the amendment of this Chapter, in addition to the obligations established in other legal precepts; they will be as follows:

1. To request registration in the RFC.

2. To file an annual tax return in the terms hereof.

3. To maintain documents referred to income withholdings and tax payments as provided in the CFF.

A transitory article establishes that natural persons will request registration in the RFC, within two months following the effective date of the new law.

The above-mentioned obligations will not apply in the case of natural persons who only obtain income from interest and who may consider the withholding made from them as a final payment in terms of the income level, as stated above.

As an additional obligation for persons who pay the above mentioned interest, the law establishes that information contemplated in fiscal provisions for the institutions that compose the financial system, even when the payer of the interest is not a credit institution, must be provided no later than February 15 of each year.

Also applicable is the transitory article that establishes that the information to be filed in the month of February of the following year, and which, in the terms of the obligated law, was not to be provided to the fiscal authorities, is to be provided for the first time no later than February 15, 3003.

Chapter VII Income from premiums

The amendment establishes a single rate applicable to lotteries, raffles, drawings, contests, and games that involve betting, of 1% upon the value of the respective premium to each ticket or complete sheet of tickets, with that condition that the local tax applied by the federal entities may not be higher than 6%

There will be a 21% rate in cases where the rate of the local tax is higher than 5%, in which case the total rate will be higher or equal to 27%.

The above-mentioned 1% has been applied to games than involve betting.

We consider that said amendment was made to support drawings and lotteries that benefit public assistance. But the fact of subjecting the rate to the condition that the States do not charge a higher one in our opinion is for the purpose of avoiding the collection of high rates by the Federal Entities at the local level.

Withholding

Withholding will continue to be made by the persons who make the payments and they will be considered as final payment, when the person who receives the income declares it, being required to do so; that is, when the payments are higher than $1,000,000 pesos jointly or severally with the loans or donations obtained in the period, in accordance with general provisions applicable to natural persons.

Likewise, the law also establishes that those who fail to file the tax return may not consider the respective withholding as a final payment, and must accrue the income obtained form premiums to the other income obtained during the period. In such case, natural persons may credit said withholdings against the tax for the period.

Payer obligations

The law establishes that those who deliver the premiums will be required to issue documents evidencing that income and the tax withholding, and likewise, for the income that do not originate payment of the tax; previously supporting documentation had to be issued only if so requested by the interested party.

A new obligation is added for persons who deliver the premiums, which is the obligation to file the informative return no later that February 15, of each year, providing data inherent in the amount of the premiums paid in the previous calendar year, and that of withholdings effected in said year.

As we have commented previously, a transitory provision establishes that the information to be presented in February of the following year, and which, in the terms of the obligated law was not to be provided to the fiscal authorities must be provided for the first time no later than February 15, 2003.

Chapter VIII Income from dividends

Accumulation

There is a modification of the option to accumulate to other revenue, revenue from dividends or profits received, so that starting with those receipts, starting from fiscal year 2002, they must be accumulated in every case. In addition dividends reinvested in the subscription or increase of capital within 30 days following their distribution are included.

Crediting

The amendment maintain the option to credit against the tax determined in their annual tax returns the ISR paid by the company that distributed the dividends or profits, provided that the party that effects the crediting considers as an accumulated income, in addition to the dividend or profit received, the amount of the ISR paid by said company on dividends or profits, and also has the supporting documents required by law for corporate entities that make payments for these concepts.

For these purposes it is stated that the tax paid by the company will be equivalent to the result obtained by applying the 35% rate on the amount that results from applying the factor of 1.4706 to the amount of the dividend or profit.

It is mentioned that for determining the tax that is to be added to the dividends or profits received the provisions of the transitory article will apply, according to which the ISR rate that will apply to natural persons will be 35% for 2002, 34% for 2003, 33% for 2004 and 32% for 2005.

Constructive dividends

The concept considered by the authorities as dividends distributed by a company to its shareholders (constructive dividends) subsist in the amendment; we point out that said dividends must now be accumulated and pyramided and the creditable tax must be determined.

Chapter IX Other income

General aspects

Changes were made in this Chapter relative to the adjustment with withholdings and provisional payments; instead of setting a fixed rate, the rate or maximum rate mentioned therein is used; in addition, certain additions or modifications were made, the respective points of which we will comment upon:

Interest

The law establishes that to be considered as other income is interest other than the interest mentioned in the respective Chapter (Chapter VI), as well ad delinquent interest.

It is mentioned that the Chapter on interest includes all interest, consequently we do not understand the fact of having included the preceding concepts; it is likely that this situation may lead to uncertainty and confusion in respect to compliance with the obligations.

Estimate of income

Also considered as another income is that circumstantially determined by the fiscal authorities in the relevant cases in accordance with fiscal laws.

Income of insurance companies

The law mentions that the amounts paid by insurance institutions to the insured or their beneficiaries they are not considered as income or indemnifications are considered as income under this Chapter, and the insurance companies are required to withhold 20% upon the amounts paid, with no deduction whatever.

Income from royalties

Also considered as other income is that obtained from royalties in accordance with the provisions of the Fiscal Code.

Income from retirement plans

Lastly, considered as income under this Chapter is income from personal retirement plans, provided that the individual is not an invalid or is not disabled from performing remunerated work, pursuant to the social security laws, or that the person is not yet 65 years old.

Considered as total income are updated contributions to the personal retirement plan which the taxpayer deducted in accordance with the law on the subject, including real interest accrued throughout the entire time of the investment, for which the following mechanism is to be applied:

1. The income will be divided by the number of years during which the investment was maintained, up to a maximum of five years; the result will be the amount that will be accumulated to all other income and the tax for the period will be calculated.

2. The result obtained will be the part of the income that will be accumulated to other income.

3. To the part of the income that is not accumulated during the period will be applied the tax rate in the fiscal year in question that corresponds to the entire amount of accumulable income, and the result will be the amount that will be added to the above determined tax.

On the other hand, when more than five fiscal years have transpired, the natural person will apply to the amount of the income the average tax rate corresponding to the five immediately preceding years and the result will be added to the tax that corresponds for the period in question. For such purposes, it is established that the average rate will be the one that results from the sum of the respective tax rates in said periods, divided by five.

Informative tax return

Persons who withhold taxes corresponding to the other income obtained by natural persons are required to file an informative tax return, no later than 15th of February each year with the authorized offices, except when said withholdings are for royalties and the administration of real estate.

In this case, the transitory provision described in preceding paragraphs will apply; meaning that this information must be filed for the first time no later than February 15, 2003.

Derivative financial transactions

In accordance with the amendment, the withholding rate is modified from 15% to 25%, which will apply to the interest or accumulable gain that results from these transactions.

In addition, persons who make the above mentioned payments must withhold every month and pay the taxes in the same manner.

In cases where the above-mentioned transactions result in a loss, the loss may be subtracted from the gains or from the interest of the subsequent months, until it is exhausted, and it may not be updated.

For the purposes of this provision, defined as gain obtained is that realized at the expiration of the derivative financial transaction, irrespective of the exercise of the rights established in the same transaction, or that a transaction opposite to the original is recorded, in such manner as that the latter is canceled. Moreover, to be understood as a generated loss is that corresponding to transactions that have expired or have been cancelled.

Lastly, included as an obligation for securities firms or persons who intervene in derivative financial transactions is the duty to make available to the tax authorities an annual report, reflecting in detail and separately each transaction, as well as the party who intervenes therein.

Chapter X Requirements for Deductions

The article on requirements for deductions is amended. The amended article regulates deductions intended to be made by natural persons who obtained the type of income referred to in the chapters of this Title, except for income corresponding to business and professional activities.

In view of the foregoing, some of the requirements applicable to the above-mentioned taxpayers are eliminated; they were incorporated in the Chapter under comment.

Now then, of those obligations that are amended, some are identical to those mentioned in the Title on corporate entities related to payment, supporting documentation, the term to compile same; consequently, we consider that it is unnecessary to repeat them at this point.

Non-deductible expenses

As previously mentioned, the amendments relative to non-deductible expenses were commented upon under the Title on corporate entities; therefore we consider that they are repetitive, consequently we will comment only upon those of general interest.

Automobiles

The amended Law establishes that investments or payments for the temporary use or enjoyment of automobiles will never be deductible.

We consider that this provision is unfair; while it is true that some individuals committed abuses, it is also true that there is a large number of taxpayers who actually require said investments in order to engage in their activities.

Salaries, commissions and fees

Salaries, commissions and fees paid by the party who grants the temporary use or enjoyment of real properties, at the time they exceed, in the aggregate, more than 10% of the income of the party who grants the temporary use or enjoyment.

Consumption at bars and restaurants

In contrast with what is established for corporate entities, consumption at bars and restaurants are not deductible in percentage whatsoever.

We consider that this provision is inequitable because it signifies that natural persons do not have the same option to deduct as corporate entities.

Chapter XI Annual Return

Filing date

The filing date of the annual returns for natural persons required to file them is modified to the month of April.

A paragraph is added, which establishes that taxpayers who obtained income only from salaries and from interest which does not exceed, in the aggregate, the sum of $300,000.00 will not be required to file annual returns, provided that the income from real interest is not in excess of $100,000.00 and that the option of considering the respective withholding, according to the Chapter on interest, as a final payment is applied.

It also establishes the obligation for taxpayers whose income during the fiscal period is in excess of $1,500,000.00 to declare the total sum of their income, including income for which they are not obligated or for which they had paid the final tax.

A transitory article establishes that during the 2002 fiscal year, said amount will be $1,000.000, and for fiscal years starting in 2003 and thereafter this amount will be $500,000.

Personal deductions

Mentioned below are some of the deductions that are added, as well as some that subsist, and that are of general interest.

Mortgage interest

The amendment includes an option of deducting the amount of real interest actually paid during the fiscal year for mortgage loans contracted with a credit institution or an auxiliary credit organization authorized by the CNVB, when the amount of the loan is not higher than one million five hundred thousand-investment units.

The real interest will be determined in accordance with the provisions of Chapter VI on interest.

Added in the amended law is the obligation for credit institutions or auxiliary credit organizations to deliver a written report to taxpayers no later than February 15 of each year, of the amount of real interest paid by the taxpayer during the fiscal year in question, in the terms of the general rules issued by the SAT for such purpose.

A transitory article establishes that this deduction will go into effect as of January 1, 2003.

Voluntary contributions

The amendment also allows for deducting voluntary contributions made directly in the retirement sub-account, retirement for old age, in the terms of the Social Security Law, or personal retirement plan accounts. Said deduction will be up to 10% of the accumulable income of the taxpayer for the period, but said contributions may not be higher than the equivalent of five minimum general wages of the geographic area of the taxpayer, taken to a year.

Said precept also establishes what are to be understood as personal retirement plans.

As previously commented upon, a transitory article establishes that this deduction will go into effect as of January 1, 2003.

Insurance premiums

Lastly, starting with this fiscal year, natural persons may deduct premiums for medical expense insurance, that complement or are independent from health services provided by public social security institutions, provided that the beneficiary is the taxpayer himself, his/her spouse or the persons with whom he lives in a common law relationship, or his/her ancestors or descendants, in a straight line.

We consider that the above amendments are appropriate, since each one of them promotes growth in each of its areas, as well as granting extra benefits to taxpayers.

Calculation of the annual tax

The new provision establishes that the tax will be calculated by adding to income obtained according to the Chapters relative to salaries and wages, lease, sale of properties, purchase of properties, interest, dividends and other income, after making the deductions authorized by each Chapter, the taxable profit which now must be determined by natural persons engaged in business and professional activities.

The personal deductions established in said Chapter will be subtracted from the result obtained in accordance with the foregoing.

The provision clarifies that income for which the individual is not required to pay tax will not be subject to the annual calculation.

Regarding the mechanism for determining the tax, it remains the same as in the abrogated law; that is, the provisional payments and withholdings made by the taxpayer can be credited to the result.

On the other hand, for calculating the annual tax, the general annual credit, to which natural persons were entitled in general, is eliminated, as well as the credit to salary for natural persons who file an annual return.

We consider that the elimination of the above concepts was strictly for collecting as much as possible in taxes.

On the other hand, workers not required to file an annual return are the only ones who will be entitled to the credit to the annual salary. Employers when determining the tax for the period apply said credit.

The amendment continues to establish that when the tax payable by the natural person is lower than the amount he is entitled to credit, the refund or compensation of those actually paid or withheld will be the only ones that will apply.

Regarding the rates, they adjust to the new maximum 32% ISR rate; however, as previously noted, said rate will apply as of 2005.

It is worth mentioning that the mew rates did not expand the ranges of income, which results in the fact that the ISR payable by natural persons is raised.

As a matter of fact, the tables for determining the new creditable subsidy grant a lower subsidy than those of last year (2001), which is added to the disappearance of the annual general credit, resulting in a real increase of the effective rate; consequently, the tax is higher for the taxpayer, as previously mentioned.

TITLE V- FOREIGN RESIDENTS WITH INCOME DERIVED FROM A SOURCE OF WEALTH LOCATED IN NATIONAL TERRITORY

Parties subject to the tax

The concept of a fixed base, which was included in the former LISR, is eliminated. Now, the concept of permanent establishment also includes the rendering of personal independent services. The foregoing results from the fact that article 14 of the Pro-forma Agreement for Avoiding Double Taxation and Impeding Tax Evasion, issued by the Board of the Organization for Economic Cooperation and Development is eliminated. Now, the rendering of independent services is found in article 5th of the Agreement, which is the one that regulates permanent establishments.

Income from fees

As will be seen, the legislators attempted to establish a general 25% rate to the withholding of income obtained by foreigners from a source of wealth located in national territory. However, as will be mentioned in due course, the new LISR continues contemplating different rates for certain type of income.

Regarding income from fees, and in general form the rendering of a personal independent service, the rate is increased from 21% to 25% upon the total income, with no deductions whatever.

Payments to members of the board, examiners, etc.

The 30% rate is reduced to 25% for payments to members of boards of directors, vigilance boards, advisory boards or any other type, when the source of wealth is located in national territory.

Income from the lease of real properties

The withholding rate is increased from 21% to 25% for the leas of real properties located in the national territory. Excluded from this concept is the lease of railroad cars.

Income from the lease of personal properties

The withholding rate is increased from 21% to 25% for the grant of temporary use or enjoyment of personal properties.

Time-shared tourist service agreements

The withholding rate is increased from 21% to 25% on income of foreign residents emanating from a time-shared service agreement when one or more of the real properties subject matter of the agreement are located in national territory.

The 40% rate is reduced to 35% (which will be reduced year by year until reaching 32%), which is to apply to profits obtained for performing a time-shared service agreement, when the foreign resident has a legal representative in Mexico. This option is no longer subject to being established within any of the treaties signed by Mexico.

Income from the sale of real properties

Starting in 2002, the withholding rate is increased from 21% to 25% in respect to total income obtained, with no deductions whatever, when the income emanates from the sale of real estate located in national territory.

The 40% rate is reduced to 35% (which will be reduced year by year until reaching 32%), which is to apply to the profits from the sale of real properties located in Mexico when, in addition to other requirements, the foreign resident has a legal representative in Mexico (A representative in the country will not be required to exercise this option when the sales are recorded in a public deed).

Income from the sale of shares

The new LISR establishes that the same treatment given to the sale of stock will be given to sale of equity interest in an profit-sharing association (asociación en participación). It will be understood that the source of wealth is located in national territory when business activities are carried out fully or partially in Mexico through a profit-sharing association (asociación en participación).

The withholding rate is increased from 20% to 25% upon the total amount of the transaction, with no deductions whatever.

Section LIX of Transitory Article Second authorizes, in 2002 (subject to certain requirements), corporate entities located in territories with preferential fiscal systems to sell stock to a Mexican resident company, pertaining to the same group, applying a 1.8% rate on total income, with no deductions whatever.

The 40% rate is reduced to 35% (which will diminish year by year until reaching 32%) which is to be applied to the profit from the sale of stock when, in addition to other requirements, the foreign resident has a legal representative in Mexico.

A 5% rate is established for foreign resident corporate entities that sell stock through Bolsa Mexicana de Valores, provided that said the Ministry of Finance and Public Credit among those place stock with the investor public in general, in accordance with the general rules published. The tax will be upon the entire amount of the transaction that will be withheld by the financial broker.

Foreign resident natural persons will not be subject to this tax, provided that they comply with the provisions for exemption that exist for Mexican resident natural persons. Taxpayers may take the option to pay, through a withholding that will be made by the financial brokers, of 20% on the gain from the sale of stock in question.

Also established is a 5% rate for foreign resident corporate entities that sell stock of variable income mutual funds. Foreign resident natural persons will not be subject to this tax provided that they comply with the provisions for the exemption that exist for Mexican resident natural persons. Taxpayers may take the option to apply the 20% rate on the gain from the sale of the shares under comment.

The 20% rate is increased to 25% for gratuitous acquisitions.

Restructuring of companies that form part of the same group

Until last year, the Ministry of Finance and Public Credit could grant authorizations for the transfer of shares of companies that formed part of the same group, at a value different from that of the market value (never lower than the fiscal cost of said shares). Now, the Ministry of Finance and Public Credit may only authorize that, when shares are transferred as a result of a corporate restructuring of a same group, the tax payment that may derive from the gain from said sale may be deferred.

For these purposes, it is considered as a “group” are all the companies whose shares with voting right representing the capital stock are owned directly or indirectly by the same corporate entity, by a percentage of at least 51%.

The deferred tax must be paid, updated, within 15 days following the date in which the sale takes place, which results in the shares being transferred outside the group.

These authorizations will be granted provided that the seller or the buyer does not reside in a territory with a preferential tax system, or in a country with which Mexico does not have a broad information exchange agreement. The foregoing will not apply when the taxpayer files a writ recording that he has authorized the foreign fiscal authorities to provide the Mexican authorities with information on the transactions for fiscal purposes.

The above amendment may have negative effects, depending on the value at which the shares are sold outside the group, which would not occur if the previous system of restructuring authorizations had been maintained.

Income from transactions of public debt substitution with capital

The rate is increased from 20% to 25% upon total income obtained from the substitution of public debt with capital.

Income from derivative financial transactions payable in cash

The withholding rate is increased from 20% to 25% on gains obtained. The rules applicable to derivative financial transactions payable in kind are also modified.

Income from dividends

The 5% tax on dividends disappears, and only the tax at the corporate level is maintained, when said dividends are distributed.

There is an adjustment, consistent with the other changes in the law, to the concept of dividends and distributed profits; the only ones to be considered as such are profits in cash or in kind sent by permanent establishments of foreign corporate entities to the home office of the company or to another establishment of the latter located abroad, provided that they do not emanate from the CUFIN balance or from the account of remissions of capital of the foreign resident.

Income from interest

In the new LISR, all definitions of what is to be understood by interest for purposes of Title V of the law are contained in one article, including financial concepts such as financial lease transactions, as well as the income in credit obtained by a foreign resident from the acquisition of any type of credit right, whether present, future or contingent.

New provisions are included for the sale of shares of mutual funds of debt instruments.

The 10% rate applicable to interest paid to foreign banks subsists, provided that they are registered in the Registry of Banks, Financial Entities, Pension and Retirement Funds and Foreign Investment Funds.

A transitory article establishes that, in 2002, interest paid to foreign banks may be subject to a 4.9% withholding rate, provided that the actual beneficiary thereof is a resident of a country with which a treaty is in force to avoid double taxation, and that the requirements of said treaty are complied with. In our opinion, in order to enjoy this benefit, banks must also be registered in the Registry of Banks, Financial Entities, Pension and Retirement Funds and Foreign Investment Funds.

A 4.9% rate is established on interest from credit instruments placed through banks or securities firms in a country with which a treaty is in force to avoid double taxation (subject to compliance with certain requirements).

The withholding rate that applies to income on interest from financial lease agreements will be 15%.

When securities are sold without the intervention of a broker, the securities depository will be jointly liable for payment of the tax.

Royalties

Starting in 2002, payments for advertisement will be regarded as a source of wealth in Mexico when effected by Mexican residents or foreign residents with a permanent establishment or fixed base in the country.

In view of an error in the wording of the LISR, the 25% rate will apply only to payments for technical assistance. Actually, section II of the article that regulates royalties paid to foreign residents establishes the 25% rate to “Royalties other than those included in section II, as well as for technical assistance”, which obviously is an error, the result of which is that said rate applies only to payments for technical assistance.

As to royalties for the temporary use or enjoyment of patents or certificates of invention or improvement, trademarks and trade names, as well as advertising, the rate is reduced from 40% to 35% (which will be reduced year by year until reaching 32%).

The law establishes that when contracts involve a patent or certificate of invention or improvement and also involve technical assistance, the 25% rate will apply when it is impossible to distinguish the proportional part of each payment. We believe that here too is an error, since it would be sufficient for the respective contract not to identify the proportion corresponding to each payment in order for the 25% rate to apply rather than the 35% (or the one that corresponds depending on the year when applied).

Established as a royalty is the grant of the temporary use or enjoyment of railroad cars, and the applicable rate is 5%.

Income from construction services

Starting in 2002, the withholding rate is reduced from 30% to 25% for income, with no deductions, for construction, installation or maintenance services, or for the assembly of real properties.

The rate is reduced from 40% to 35% (which will be reduced year by year until reaching 32%), which is to be applied to the profit obtained for construction, installation or maintenance services or for the assembly of real properties.

Premiums

The withholding rate is reduced from 21% to 1% applicable to premiums from lotteries, raffles, drawings and contests. When a local tax is imposed in excess of 6%, the federal withholding rate will be 21% (previously it was 15%).

This provision could contravene the principle of tax proportionality contained in section IV of article 31 of our Constitution, since it establishes a higher tax (21%) only when the premium is taxed by more than 6% by the respective State; this is out of proportion to the income obtained.

Income of artists and athletes

The withholding rate is reduced from 30% to 25% for income (without deduction) received by foreign residents for these activities. The 40% rate is reduced to 35% (which will diminish year by year until reaching 32%) which is to apply to the profits obtained.

TITLE VI TERRITORIES WITH PREFERENTIAL FISCAL SYSTEMS AND MULTINATIONAL COMPANIES

Territories with preferential fiscal systems

In 1997 the LISR established the concept of low taxation jurisdictions. It referred to jurisdictions where the ISR rate is very low or even nonexistent.

Now, the new LISR maintains a system very similar to the one established for low taxation jurisdictions, but under the concept of territories with preferential fiscal systems, the principal characteristic of which consists of the fact that income received from said territories, in general terms, must be accumulated when generated and not when received. For this purpose, a new Title VI is added to the LISR, in which are found provisions relative to investments in preferential fiscal systems both of natural persons and corporate entities.

The transitory articles contain a list of the territories with preferential fiscal systems, which list is equal to the one of the former LISR.

As a result of the elimination of the inflationary component, it establishes that taxpayers will accumulate interest accrued in favor and the annual adjustment for inflation.

The rules applicable for determining gains from the sale of shares of investments in territories with preferential fiscal systems are modified.

In regard to the informative return (which must be filed in February each year, the amended law establishes that it must be filed by natural persons and corporate entities when income is obtained from territories with preferential fiscal systems. Consequently, if said persons maintain an investment in said territory, but do not receive income, they will not be required to file the informative return with the Ministry of Finance and Public Credit.

According to the transitory provisions of the new LISR, fiscal losses resulting from investments maintained in low taxation jurisdictions in the five fiscal years prior to the effective date of the new law may be reduced from the profits which residents of Mexico obtain from their investments in territories with preferential fiscal systems.

A transitory article establishes the territories with preferential fiscal systems:

Anguila

Antigua and Bermuda

Dutch Antilles

Svalbard Archipelago

Aruba

Ascención Island

Barbados

Belice

Bermudas

Brunei Darussalam

Campione D´Italia

Commonwealth of

Dominica

Commonwealth of

Bahamas

United Arab Emirates

State of Bahrein

State of Kuwait

State of Qatar

Independent State of

Western Samoa

Commonwealth of

Puerto Rico

Gibraltar

Great Duchy of

Luxembourg

Granada

Greenland

Guam

Hong Kong

Cayman Island

Christmas Island

Norfolk Island

San Pedro and

Miguelón Island

Isle de Man

Qeshm Island

Azores Islands

Canary Islands

Cook Islands

Cocos or Kelling Islands

Guernsey Island,

Jersey, Alderney,

Great Sark Island, Herm,

Little Sark, Brechou,

Jethou Lihou (Channel

Island)

The Falkland Islands

Pacific Islands

Salomon Islands

Turkish and Caicos
Islands

British Virgin Islands

United States Virgin

Islands

Kiribati

Labuan

Macao

Medeira

Malta

Montserrat

Nevis

Niue

Patau

Pitcairn

French Polynesia

Principality of Andorra

Principality of

Liechtenstein

Principality of Monaco

Kingdom of Swaziland

Kingdom of Tonga

Hachemite Kingdom of

Jordan

Republic of Albania

Republic of Angola

Republic of Cape

Verde

Republic of Costa Rica

Republic of Cyprus

Republic of Djibouti

Republic of Guyana

Republic of Honduras

Republic of the Marshall

Islands

Republic of Liberia

Republic of The

Maldives

Republic of Mauritius

Republic of Nauru

Republic of Panama

Republic of Seychelles

Republic of Trinidad and

Tobago

Republic of Tunisia

Republic of Vanuatu

Republic of Yemen

Uruguay

Democratic Socialist Republic of Sri

Lanka

American Samoa

Saint Kitts

Saint Vincent and the

Granadines

Santa Elena

Santa Lucía

The Very Serene

Republic of San

Marino

Sultanate of Oman

Tokelau

Trieste

Tristan of Cunha

Tuvalu

Special Canarian Zone

Free Ostrava Zone

Multinational companies

This Chapter contains the provisions relative to transfer prices for transactions carried out by Mexican residents and corporate entities with offshore affiliates. The provisions contained in this Chapter are very similar to those contained in the former law.

The law establishes that in the case of profit-sharing associations (asociaciones en participación), considered as affiliates are their members, as well as affiliates of the members. Also considered as affiliates of a permanent establishment is the parent company or other permanent establishments thereof, as well as affiliates of the latter.

The new law contains clarifications regarding the methods for Resale Price and Added Cost.

The law establishes that for the interpretation of the provisions contained in said Chapter the Guides on Transfer Prices for Multinational Companies and Fiscal Administrations approved by the Board of the Organization for Economic Cooperation and Development will apply, provided that they are consistent with the provisions of the LISR and the treaties executed by Mexico.

TAX THAT SUBSTITUTES CREDIT TO SALARY

As a result of the various changes which the Fiscal Amendment proposed by the Federal Executive in April, 2001 underwent, transitory article third of the LISR was incorporated; it is a new tax that goes into effect as of January 1, 2002, which attempts to raise the amount of taxes collected by the Federal Government.

Parties subject to payment

Required to pay the tax that substitutes for the credit to salary are natural persons and corporate entities that make disbursements for the rendering of a personal subordinate service in national territory.

For the purposes of this provision, considered as disbursements for the rendering of a personal service are salaries and other cash or in kind considerations paid by the natural person or corporate entity to those who render them a personal subordinate service, as well as income assimilated to salaries.

We consider that this new tax is contradictory to the administrative simplification policies attempted to be obtained; in addition, it discourages the opening of new sources of work, a situation, which we consider, aggravates the great employment deficit prevailing in the country for several decades.

Rate

The tax will be determined by applying to the total of disbursements made for the rendering of the subordinate personal service the 3% rate.

Annual tax

The taw will be calculated for fiscal years, and will be incurred at the time that disbursements are made for the rendering of a personal subordinate service.

Provisional payments made may be credited against the tax for the period. If a tax is still owing, it must be paid in March, 2003, with a tax return that will be filed with the authorized offices.

We consider that in view of the mechanism to be applied, it would be illogical for a difference to result payable in the annual return, in virtue of the fact that the calculation for determining provisional payments and the tax for the fiscal year is identical.

In view of the foregoing, the fact of filing the annual return would be a new administrative burden for taxpayers, again contradicting the administrative simplification policy intended to be implemented by the Federal Government.

Provisional payments

Provisional payments are to be made monthly, against the tax for the fiscal year, by a tax return that will be filed with the authorized offices no later than the 17^th day of the month immediately following that in which said disbursements are made.

The provisional payment will be calculated by applying the 3% rate on all disbursements made in the month to which the payment corresponds.

Exemption of the tax

Persons required to pay this tax may take the option not to pay it, provided that they do not effect the reduction of the credit to salary paid to their workers from the ISR payable by them, or from that withheld from third parties, that caused or withheld.

When the amount of the credit to the salary paid to workers is higher than the substitute tax, taxpayers who took the option to reduce said difference from their ISR or from that withheld from third parties, may reduce only the amount by which that credit exceeds the tax caused in the terms of this article, provided also that they comply with the crediting requirements established in article 119 of the LISR.

It is pointed out that the provision under comment refers to article 120 of the LISR, which corresponds to natural persons who engage in business and professional activities. We consider that the error in the reference to the law resulted from the passing of the law within the time limits.

According to this option, the taxpayer must decide between paying 3% of the total of the base or not reducing the credit to salary that is paid to the workers, from the ISR.

Concept of a single corporate entity

Considered as a single corporate entity, for purposes of this tax, is the entire group that satisfies any of the characteristics mentioned below:

1. That more than 50% of the stock or equity interest with voting rights are owned by a single natural person or corporate entity.

2. When the same natural person or corporate entity exercise effective control over them, even when they do not determine the consolidated fiscal results. It is understood that effective control exists when any of the following hypothesis materializes:

¨ When the commercial activities of the company in question are carried out primarily with the controlling company or with the controlled companies.

¨ When the controlling company or the controlled companies hold, together with other natural persons or corporate entities related to them, an ownership interest of more than 50% in the voting shares of the company in question. In the case of foreign residents, they will only be considered as such when they reside in a country with which a broad information exchange agreement exists.

¨ When the controlling or the controlled companies have an investment in the company in question, of such magnitude that effectively allows them to exercise a predominant influence over the operations of the company.

¨ For the purposes of this article, companies considered as controlling or controlled companies are those, which, in the terms of the LISR, are regarded as such.

Each one of the corporate entities found in any of the above hypothesis must pay the tax established in this article for the entire amount disbursed for the rendering of a personal subordinate service.

From our point of view, the fact that there are indications relative to what should be considered as the same corporate person is not transcendental, since the calculation is made individually by those who make the payment, and there is no express indication as to what penalty or “benefit” those found under said hypothesis may have.

We consider that this tax may have vices of constitutionality that could be declared as such by our courts.

LAW OF THE SPECIAL TAX ON PRODUCTION AND SERVICES

A series of modifications were made to this Law al the last minute, aimed at increasing the federal government fund, as a result of a lack of consensus among the members of the Congress, in respect to the increase of IVA for food and medicines.

New activities taxed

Considered as subject to payment of this tax is the sale and import of carbonated or mineral waters, soft drinks, hydrating and re-hydrating beverages, concentrates, powders, syrups, essences or flavor extracts which, on diluting, produce soft drinks, hydrating or re-hydrating beverages, as well as syrups and concentrates for preparing soft drinks which are sold in open containers, using automatic, electric or mechanical devices, which use sweeteners other than sugar cane. The tax will be 20% on the amount of the sale.

In this sense, it is clear that the principal purpose of this latter provision is not to capture funds through direct tax collection, but rather indirectly through the increase of the price of sugar, apart from the expropriations effected in this industry in recent months.

It also establishes a rate applicable to the sale of alcoholic beverages that ranges between 25% and 60%, depending on the alcoholic content of the product.

Another tax is that which is related to the rendering of telecommunication and related services.

Levying of the tax

As is the case with the provisions related to IVA, in the sense that this tax, for the fiscal year 2002 will be levied on the basis of a cash flow system. The law provides that the IEPS will be levied up to the time the considerations, subject matter of the activity subject to the tax, are collected.

Crediting

The IEPS will be levied throughout the entire commercialization process of the product in question until generating a final impact on the consumer.

However, the Law establishes the possibility of crediting, in the case of IEPS that is transferred to the sale of soft drinks, re-hydrating beverages, syrups or concentrates, among others, when the tax is itemized separately in the invoice issued for such purpose.

However, those who, according the Law, issue the invoices are not authorized to issue them expressly separating the IEPS that is transferred; this situation makes it impossible to effect the crediting.

The foregoing may lead to extraordinarily negative snowball effects on prices, which will impact directly on the final consumer.

General Rules

Certain rules are established relative to obligations under this tax. For example, the Law provides that provisional payments must be monthly and final, in all cases, while up to 2001 they were on the account of tax for the fiscal year.

The Las establishes that when the taxpayer does not make the crediting against the tax payable, he will forfeit the right to do so.

Inasmuch as the payments will be definitive, new rules are established in regard to credit balances, which can be counterbalanced only against the tax payable for subsequent periods, until they are exhausted.

The law specifies the manner in which refunds, rebates or discounts will impact as a result of the change to definitive payments.

Exports

The Law establishes that exports that are effected will be exempt from payment of the tax, giving rise to the practical impossibility of requesting a refund of the creditable tax.

The foregoing means that exporters will have an additional cost, which will necessarily impact on the sale price of products sold. This measure is frankly absurd, because it may force out Mexican exporters from the competitive international market, openly contravening what the country needs.

Alcoholic beverages

The Law establishes a taxation system throughout the entire commercialization process, which will be a result in a tax being caused for the amount of profit that each member of the chain includes. Obviously, this will raise the tax paid until reaching the final consumer.

In view of the foregoing, certain adjustments are made to the system that will allow for said system to operate in the manner as described.

Soft drinks and hydrating beverages

Parties subject to the tax

Under the fiscal amendment, starting on January 1, 2002, the sales and imports of carbonated or mineral waters, soft drinks, hydrating or re-hydrating beverages, concentrates, powders, syrups, essences or flavor extracts which, when diluted produce soft drinks, hydrating or re-hydrating beverages that use sweeteners other than sugar cane will be subject to payment of cited tax; This also includes those sold in open containers using automatic, electric or mechanical devices.

For the purposes of the above-mentioned concepts of this Law, the following definitions will apply:

Natural and mineral waters are carbonated waters that contain mineral substances or electrolytes, and purified waters, provided that they are sold in containers, including those that are artificially mineralized.

Soft drinks are non-fermented beverages, made with water, carbonated water, fruit extracts or essences, flavoring substances or with any other raw material, whether with or without gas, and which may contain citric acid, benzoic acid or ascorbic acid or their salts as preservers, provided that they contain fructose.

Hydrating or re-hydrating beverages are beverages or solutions that contain water and variable quantities of carbohydrates or electrolytes.

Transitory article ninth of the LIF establishes that fruit juices and nectars will not be considered soft drinks for purposes of the IEPS.

It is pointed that, in the specific case of soft drinks, only those that contain fructose will be subject to this tax.

Exempt activities

The Law establishes that the sale to the public in general will be exempt from said tax, unless the seller is the manufacturer, producer, bottling company, distributor or importer.

Merchants who obtain the majority of their income from sales that are not made to the general public will not be entitled to the above benefit.

For said purposes, considered, as operations with the public in general are those for which receipts that satisfy the requirements of the CFF are not issued.

Exempt inventories

A transitory article states that natural persons or corporate entities who, up to December 31, 2001 had not been subject to payment of said tax and who, as the effective date of this amendment are subject to payment of the tax must file, within five days following the effective date of this law, a report showing the inventory of stock by type, brand, presentation and capacity of the commodities for which they are now subject to payment of the tax.

Telecommunications

Parties subject to the tax

As a means for collecting more taxes, as commented above, also included is a new tax on telecommunication and related services; this tax is included to substitute for the increase that was attempted to be made of IVA.

The justification contained in the declaration of motives for the new tax is that its effects will impact on the segment of population with a higher level of income.

Defined in this Law as telecommunication and related services are the following:

1. Mobile radiotelephony with cellular technology and fixed or mobile wireless access.

2. Mobile radio location (paging) of persons or properties.

3. Specialized radio communication services of fleets or services that include closed groups of users or specific group of users.

4. Restricted television services (cable television, satellite television or any other similar type of television).

5. Any other service provided by a concessionaire or holder of a permit to engage in telecommunication services.

6. Related services are those rendered by telecommunication companies that are provided to users of telecommunication services, as a result or complement to said services, even of they are not conditioned to these services.

As may be observed, the definition of telecommunication services is broad, consequently, any service render by companies engaged in telecommunications not related to rendering of the services subject to the tax could be considered as such.

In view of the foregoing, we consider that it would be advisable for the authorities to provide more specific definitions in general rules.

Exempt activities

In this Law, the tax exemption is established for various types of service related to telecommunications, as mentioned below.

1. Rural telephone service to communities with fewer than 3,000 inhabitants.

2. Basic residential telephone service, up to $250.00 a month.

3. Public telephone service.

4. Shared or dedicated hosting, co-location, preparation of internet pages, portals or sites, administration, distribution and storage services related to internet services, among others.

5. Those rendered among concessionaires of public telecommunication networks or among the latter and internet service providers, and that it is an intermediate service.

6. Residential national long distance up to $40 and international long distance among Mexican users and those of a foreign country.

7. Internet service, for the basic rent.

8. Emergency call services.

9. Cellular telephony through prepaid cards up to $200.00, not included in regular service contracts.

10. Basic local telephone service in all its types.

11. National long distance.

We consider important to stress that, in the case of basic residential telephone service, which is exempt up to $250.00 (section II), it contradicts the provision that exempts entirely local telephone services in all of its types (section IX).

The Congress, in the sense that the exemption up to $250.00 for basic residential telephone service does not apply, since the congress intended to declare this service completely exempt, has only clarified the foregoing informally.

Other obligations

According to the amendment, new obligations are imposed on taxpayers:

1. In March of each year, taxpayers must file with the fiscal authorities information corresponding to commodities produced, sold or imported that were consumed in each State, as well as services rendered by establishment in each State.

For the purposes of this provision, it is considered that the commodities are consumed at the place where the actual delivery of the product takes place, according to the proof of sale.

2. They must provide the information requested of the IEPS in the ISR returns.

3. Taxpayers who sell alcoholic beverages to the public in general to be consumed at the same place or establishment must destroy the containers. This provision is truly absurd since there is no statement as to how they are to be destroyed.

4. Exporters of commodities taxed by this law, exporters of gasoline, diesel and natural gas must be registered in the Federal Taxpayers Registry.

ABBREVIATIONS

CFF	Código Fiscal de la Federación Fiscal Code of the Federation
CNBV	Comisión Nacional Bancaria y de Valores National Banking and Securities Commission
CUFIN	Cuenta de utilidad fiscal neta Net Fiscal Profit Account
CUFINRE	Cuenta de utilidad fiscal neta reinvertida Net Reinvested Fiscal Profit Account
CUCA	Cuenta de capital de aportación Account for Capital Contributions
DF	Distrito Federal Federal District
DOF	Diario Oficial de la Federación Daily Gazette of the Federation
EUA	Estados Unidos de América United States of America
IEPS	Impuesto Especial sobre Producción y Servicios Special Tax on Production and Services
IMPAC	Impuesto al Activo Business Asset Tax
IMSS	Instituto Mexicano del Seguro Social Mexican Social Security Institute
ISR	Impuesto sobre la Renta Income Tax
IVA	Impuesto al Valor Agregado Value Added Tax
LIF	Ley de Ingresos de la Federación Federal Revenue Law
LISR	Ley del Impuesto sobre La Renta Income Tax Law
LIVA	Ley del Impuesto al Valor Agregado Value-Added Tax Law
NOM	Norma Oficial Mexicana Mexican Official Standard
OPEP	Organización de Países Exportadores de Petróleo Organization of Petroleum Exporting Countries
PEPS	Primeras entradas primeras salidas First In First Out
PEMEX	Petróleos Mexicanos Mexican National Oil Company
PIB	Producto Interno Bruto Gross Domestic Product (GDP)
PTU	Participación de los trabajadores en las utilidades de las empresas Employees’ Profit Sharing
SAT	Servicio de Administración Tributaria Tax Administration Service
SHCP	Secretaría de Hacienda y Crédito Público Ministry of Finance and Public Credit
UFIN	Utilidad fiscal neta Net taxable profit
UFINRE	Utilidad fiscal neta reinvertida Net reinvested taxable profit
UFIRE	Utilidad fiscal reinvertida Reinvested taxable profit

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

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

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

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

Deductions

Obligations of corporate entities

Financial system

Exempt income

Chapter VII Income from premiums

GROWTH OF THE PIB IN THE COUNTRY

COUNTRY/YEAR

Tax on the Sale of Luxurious Commodities and Services

Powers to Federal Entities

Substitute Tax of Credit to Salary

General Remarks

IVA

Cumulative Income

Corporate Restructuring

Chapter IV Sale of Commodities

Fiscal cost of shares of mutual funds

Deductible losses

Informative return of notaries or brokers

Chapter V Acquisition of properties

General aspects

Chapter VI Interest

General Aspects

Transitory articles establish that the system described above will go into effect, starting in the 2003 fiscal year, since in this period the withholding system in effect up to December 31 2002, for certain cases as indicated in this Chapter will continue to be applied.

Concept of Interest

Accrual

Loss in the inflationary adjustment

Interest paid by insurance companies

Provisional payments on interest

Obligations

Chapter VII Income from premiums

Impuesto sobre la Renta

Income Tax

Impuesto al Valor Agregado

Value Added Tax

Utilidad fiscal neta

Net taxable profit