Lowering income tax in America (Central and North)

[citytrader]

Hello to all, I'm new on all this stuff and your help will be really appreciated.
If a company in Mexico city sells software licenses in Mexico (the software companies are outside Mexico), could be possible to do something like the company in Mexico buys software licenses to a company in Belize and the company in Belize buys the licenses to the software house, the profits remains in Belize. This is just something that came to my mind but I'm not sure if this could be possible or you can suggest another scheme that will work.
In Mexico the income tax is 30%, you get the money from your company through dividends once a year and you pay 10% of tax on them, only 60% of the income of my money can enter in my pocket... I want all my money in my pocket!!
Is there any way to lower this 40% of tax money?

Thanks a lot for your time!

 

[Martin Everson]

Is there any way to lower this 40% of tax money?

Yes there is - move out of Mexico and sell your software from tax free country.

 

[citytrader]

Yes there is - move out of Mexico and sell your software from tax free country.

I can't totally because the sales are done in Mexico and the software houses are abroad (not mine), for this I'm asking here for help

 

[citytrader]

in mentor group will I find a help to get an answer?

 

[Martin Everson]

in mentor group will I find a help to get an answer?

Yes

 

[John Andrews]

Hello to all, I'm new on all this stuff and your help will be really appreciated.
If a company in Mexico city sells software licenses in Mexico (the software companies are outside Mexico), could be possible to do something like the company in Mexico buys software licenses to a company in Belize and the company in Belize buys the licenses to the software house, the profits remains in Belize. This is just something that came to my mind but I'm not sure if this could be possible or you can suggest another scheme that will work.
In Mexico the income tax is 30%, you get the money from your company through dividends once a year and you pay 10% of tax on them, only 60% of the income of my money can enter in my pocket... I want all my money in my pocket!!
Is there any way to lower this 40% of tax money?

Thanks a lot for your time!

I have a feeling this kind of stuff is too complicated for this forum (licensing, etc.), if I were you I'd save some money and contact the big 4.

 

[citytrader]

I have a feeling this kind of stuff is too complicated for this forum (licensing, etc.), if I were you I'd save some money and contact the big 4.

what are the big 4?

 

[John Andrews]

https://en.wikipedia.org/wiki/Big_Four_accounting_firms

 

[Tax Cow]

Where contracts are signed is a highly relevant factor when it comes to determining taxation rights.

If you meet clients and sign licensing contracts in Mexico, your offshore structure, regardless of what you do, will almost certainly be deemed artificial fiscal engineering.

Considering your constraints, the only lawful tax engineering is to become an employee of a real and substantiated offshore company, and enter Mexico with the purpose of fulfilling temporary work assignment abroad. After you no longer qualify as a seconded employee, when Mexico demands you become a permanent tax resident to prolong your stay in the country, you leave the country, and the company sends in another employee on a temporary assignment in Mexico to sign contracts.

 

[Tax Cow]

This is a simplified overview of the moving parts and relevant factors. I'm basing my opinion on OECD principles. Mexico is highly aligned with those. Before you take action, get in contact with a real lawyer based in Mexico who knows more than an E-commerce dude sharing tax advice on OCTF

1. (Real & Substantiated) Offshore Company, wherever that may be, sells software licenses to corporate clients in Mexico. The seller has no office or physical presence in Mexico. The buyer just deducts software licensing fees as business expenses and the seller pays CIT offshore. Furthermore, the seller declares nothing in Mexico.
2. The same as above, except that the seller has appointed one employee or representative in Mexico who signs contracts on behalf of the company. The worker can live in a hotel, or on the street, the seller is deemed to have physical presence in Mexico. All income related to Mexican contracts is taxable in Mexico. The seller must file Corporate Income Tax return in Mexico.
3. The same as in #2 except that the appointed employee does not live in Mexico. He enters country on a temporary work assignment which clearly outlines an objective (meeting clients and signing contracts), and the end date. You can cherry-pick an end date to make the "temporary" contract as long as lawfully possible. Corporate taxation outcome is the same as in #1 but the appointed employee must pay all personal taxes in Mexico unless he is appointed from a treaty country. If the appointed employee stays for too long, more than lawfully allowed for temporary assignments, the taxation outcome will be the same as in #2. The permanent solution is to keep replacing the appointed employees who enter Mexico. Ideally, modify the objective of the assignment a little bit (even if in words only), and take a break for a few months before sending in another employee.

 

[citytrader]

@xzars Thanks a lot for the explanation and your time, probably what I mean is different, please correct me if I'm wrong, the software is from UK, lets call software K, the reseller is located physically in Mexico and has a mexican customer, normally the process is to sell for example 200 licenses at us$5 each license of the software to a mexican company, the company pays to the reseller us$1000, now the reseller wire to UK the cost of the licenses for this example us$500 and remaining us$500 is profit where you pay tax.
Instead of that for example, the same mexican company buys to the mexican reseller, but the reseller instead to buy the license directly to the UK software company, the reseller buys the licenses from a company located in Belize paying us$900, from Belize it transfers us$500 to the UK company and us$400 remains in Belize a profit, could this be possible?...

 

[Tax Cow]

@citytrader

I'll give a little thought to it tomorrow.

 

[Martin Everson]

could this be possible?...

No, not in Mexico.

What you are suggesting is profit shifting or (BEPS) i.e shifting profits to Belize entity. Mexico uses the Resale Price Method (RPM) plus Comparable Uncontrolled Price Method (CUP). In plain English they compare your gross profit margin to others carrying out similar transactions around the same time. Gross profit margin is ratio of gross profits to net sales revenue. Hence the taxman will tax you according to CUP and RPM methodology regardless of what profit you are showing on paper sadly - this is 2019 reality. However for $1000 in sales it is not worth their effort in my opinion.

 

[citytrader]

@martin thanks for your answer, that number is an example but is at least 100 times bigger, if you maintain a very low profit in Mexico but higher in Belize, will it work?

 

[Martin Everson]

@martin if you maintain a very low profit in Mexico but higher in Belize, will it work?

So you still want to shift profits to Belize after what I told you? It's a free world I guess.

 

[Tax Cow]

Assuming the numbers are proportionate, there's a 50% gross profit margin. I certainly see some room to play. However, I'm not sure if "software K", as you referred, is a big brand with millions of users, or is it something custom-made with much fewer clients? This matters in a number of ways.

If you want to structure through Belize, consider this:

1. Your basic minimum requirement is to pass the substance test. Rent or purchase property for the middleman company, and employ 2+ (my rough opinion) qualified staff to make it plausible that the Belizean company is a small regional software (re)licensing business.

Registering and maintaining a Belizean company is commonly offered at a price point of $1K or less per year, and it may seem like an easy way out. However, whenever you browse offshore service provider web sites, add another $50K per year to price tags, because only then you get what I call "a company according to a tax man". That $1K per year thing is paper trash.

Therefore, a Belize company alone costs $51K per year. Before you contemplate any further, make sure your estimated tax savings are higher than that.

Needless to say, you do not use slutty nominees who have their name everywhere, nor will you manage the company yourself from Mexico. Instead, you make the qualified persons you hired in Belize directors of the company.

2. On to more complex stuff. If you change your supplier, replacing the economic and cost-effective with an expensive alternative, you must be able to justify the economic reasoning; if it ever comes to Q&A with the tax man. It's not like you can just argue that the Belizean firm will give you a better quality product if the software license is literally the exact same thing.

Prep for the tax man Q&A:

One way around is to claim that it's no longer possible to acquire the licenses from the UK supplier directly. It's recklessly high risk, because it's not very difficult to verify that claim with the supplier. But if the supplier aligns his story with yours, it's an option to consider. The second way around is to make a claim that there are subtle differences in software which are nearly impossible to verify. Just modify the front-end a little bit, or have a freelancer developer do it for you. During an investigation, show the tax man both "versions of the software". As it appears, the custom-made expensive variant has more buttons and menu options on the interface, and therefore, it seems like there are more features (LOL). Tax officials lack the man power and qualifications to reverse engineer complex software for an in-depth investigation.

---

Which ever back story you choose, you're exposed to risks; they are the highest during your first 3 years. Try to avoid an investigation in the first place. As Martin said, artificial profit shifting is not legal.

Lastly, perhaps the most important piece of advice I can give. My recommendation is to gradually make the license acquisition costs higher. Instead of jumping from $500 to $900 acquisition cost immediately, make it $600 on first year, then $750 on next. Settle on that $900 only after 3-4 years. It will look like an organic drop in profitability.

Good luck, you Mexican tax dodger.

 

[citytrader]

So you still want to shift profits to Belize after what I told you? It's a free world I guess.

Just trying to understand this stuff!

 

[citytrader]

Assuming the numbers are proportionate, there's a 50% gross profit margin. I certainly see some room to play. However, I'm not sure if "software K", as you referred, is a big brand with millions of users, or is it something custom-made with much fewer clients? This matters in a number of ways.

If you want to structure through Belize, consider this:

1. Your basic minimum requirement is to pass the substance test. Rent or purchase property for the middleman company, and employ 2+ (my rough opinion) qualified staff to make it plausible that the Belizean company is a small regional software (re)licensing business.

Registering and maintaining a Belizean company is commonly offered at a price point of $1K or less per year, and it may seem like an easy way out. However, whenever you browse offshore service provider web sites, add another $50K per year to price tags, because only then you get what I call "a company according to a tax man". That $1K per year thing is paper trash.

Therefore, a Belize company alone costs $51K per year. Before you contemplate any further, make sure your estimated tax savings are higher than that.

Needless to say, you do not use slutty nominees who have their name everywhere, nor will you manage the company yourself from Mexico. Instead, you make the qualified persons you hired in Belize directors of the company.

2. On to more complex stuff. If you change your supplier, replacing the economic and cost-effective with an expensive alternative, you must be able to justify the economic reasoning; if it ever comes to Q&A with the tax man. It's not like you can just argue that the Belizean firm will give you a better quality product if the software license is literally the exact same thing.

Prep for the tax man Q&A:

One way around is to claim that it's no longer possible to acquire the licenses from the UK supplier directly. It's recklessly high risk, because it's not very difficult to verify that claim with the supplier. But if the supplier aligns his story with yours, it's an option to consider. The second way around is to make a claim that there are subtle differences in software which are nearly impossible to verify. Just modify the front-end a little bit, or have a freelancer developer do it for you. During an investigation, show the tax man both "versions of the software". As it appears, the custom-made expensive variant has more buttons and menu options on the interface, and therefore, it seems like there are more features (LOL). Tax officials lack the man power and qualifications to reverse engineer complex software for an in-depth investigation.

---

Which ever back story you choose, you're exposed to risks; they are the highest during your first 3 years. Try to avoid an investigation in the first place. As Martin said, artificial profit shifting is not legal.

Lastly, perhaps the most important piece of advice I can give. My recommendation is to gradually make the license acquisition costs higher. Instead of jumping from $500 to $900 acquisition cost immediately, make it $600 on first year, then $750 on next. Settle on that $900 only after 3-4 years. It will look like an organic drop in profitability.

Good luck, you Mexican tax dodger.

Thanks again xzars for taking your time to explain the details and thanks to Martin too.

At this point the idea of re-licensing is discarded, even considering an option that I could pay for IT services abroad (not taking in consideration Belize anymore , I should take in consideration that tax savings should be way above 51K... so this kind of schemes of lowering taxes is only for rich people, isn't?

 

[happyjohn]

So moving to Mexico is the solution for OP according to the advisors around here?

 

[citytrader]

So moving to Mexico is the solution for OP according to the advisors around here?

The person is living in Mexico, the problem they have besides tax is if they sell IT services abroad, they need to pay taxes in Mexico and with this they are not competitive but to sell services in Mexico you need to be a company in Mexico. It's an equation with lots of variables that I need to solve and I'm not a finance man!