isda international swaps and derivatives association, inc. derivatives and risk management in mexico...

ISDAInternational Swaps and Derivatives Association, Inc.

Derivatives and Risk Management in Mexico

Tax Treatment of Derivatives

José Carlos Silva

Background

• Statutory definition of “derivatives”– Right or obligation to

• Buy or sell

• Pay or collect differences

– Sale of contractual rights

– Includes futures, options, “coberturas”, swaps

Tax vs. Non-Tax Derivatives

• Tax – Underlying asset is publicly traded

– Referred to publicly known indicators

• Non-Tax – all other

Debt vs. Equity

• Debt– Interest rates

– Notes

– CPI

• Equity– Other securities

– Commodities

– Currency

– Other indicators

Hybrid = debt

Debt vs. Equity

• Debt – CPI Warrants under CNBV 10-157 rules

– Interest rate futures – 2019/95 BdeM

– CPI futures 10-231 & 2019/95 BdeM

• Equity– Coberturas, currency futures 2019/95

– Warrants

– Forwards

– MexDer transactions

• OTC – underlying asset rules

Residents

• Cash settled– Gains are ordinary income

– Losses may be deducted

• Physically settled– Capital gains rules

• All amounts updated for inflation

Residents

Tax effects• Equity

– At maturity or when cash differences are paid

– Exception: Currency derivatives – option to accrue December 31

• Debt– Accrual basis

Non Residents

• Equity • Taxed in Mexico if underlying assets are shares

issued by a Mexican corporation AND counterparty is a resident

• 20% on gross income, or

• 40% on net profit (within 3 months)

• If physically settled, capital gain rules apply• Even if sold to non resident

Non Residents

• Equity– Exempt if warrants on publicly traded Mexican shares

– Tax havens taxed at 40% on gross

Non Residents

• Debt• Taxed if counterparty is a resident

• Rate depends on beneficial owner

– OR

• Physical delivery of notes issued by resident• 10%

Non Residents

• Rate applied on cash leaving Mexico– Offset cash differences if possible

• Beneficial owner rates– Banks resident in treaty jurisdictions – 4.9%

• Mandatory registration

– Other registered banks – 10%

– Paid by Mexican banks – 21%

– Other cases – 40%

Tax Treaties

• Broad treaty network• Article 11 may

– refer to interest “as defined in domestic legislation”

• Debt derivatives included

• E.g. USA

– Contain limited definition of interest

• Debt derivatives not included

• E.g. Netherlands, Switzerland

ISDAInternational Swaps and Derivatives Association, Inc.

Derivatives and Risk Management in Mexico

Tax Treatment of Derivatives

José Carlos Silva