A third possibility is to operate in Mexico through a branch, in which case it must pay Mexican income tax on its branch income and is then allowed a credit for at least a substantial part of the Mexican tax against its U.S. income tax. M anufacturing operations in Mexico are subject to full Mexican income tax. All taxpayers must use a calendar year. Tax returns must be certified by an independent CPA if the taxpayer and its affiliates in Mexico have consolidated taxable income or assets exceeding certain limits, or more than 300 employees. The statute of limitations on deficiencies is five years, beginning when the tax authorities start an investigation, rather than the return due date.
Indexing is used to avoid taxing inflationary gains.
Taxable income is reduced by an inflationary component announced each year by the government and historic cost can be written up to current levels before deducting depreciation. Costs incurred during the year for materials, labor and overhead can be deducted in full, without having to adjust for changes in inventory levels. Even the cost of fixed assets can ordinarily be expensed rather than capitalized. Dividends received by one Mexican corporation from another are not taxable, but no deduction is allowed for increases in bad debt reserves. A U.S. company with a Mexican subsidiary must consider intercompany transfer pricing requirements.