percent. For example, the percentage is 74 percent for buildings, 74-95.7 percent for machinery and equipment, and 94 percent for computers and peripherals.

Qualified taxpayers include those outside the three largest metropolitan districts -- Mexico City, Monterey, and Guadalajara -- and taxpayers regardless of their location with gross income and assets not exceeding 7 and 14 million pesos (roughly $1.1 millions and $2.2 millions) may enjoy an immediate deduction for their capital investment. The rate of deduction equals the present value of the annual depreciation allowance using a real discount rate of 3 percent.

# **THE UNITED STATES**

U. S. firms are subject to federal taxes on their worldwide income, including income of foreign branches (whether or not the profits are repatriated). In general, a U.S. firm is not taxed by the United States on the earnings of a foreign subsidiary until the subsidiary distributes dividends or is sold or liquidated. Numerous exceptions to this deferral concept may apply, resulting in current U.S. taxation of some or all of the foreign subsidiary's earnings.

# **The Capital Tax Provisions**

_The corporate income tax rate._ A progressive CIT scheme is applied to the taxable income. Firms with taxable income between $335,000 and $1 million are effectively taxed at 34 percent on all taxable income. Corporations with taxable income of less than $335,000 receive partial benefit from graduated rates of 15 percent and 25 percent that apply to the first $75,000 of taxable income. A firm's taxable income exceeding $15 million but not exceeding $18,333,333 is subject to an additional tax of 3 percent. Firms with taxable income in excess of $18,333,333 are effectively subject to tax at a rate of 35 percent on all taxable income. These rates apply both to U.S. corporations and to the income of foreign corporations that is effectively connected with an U.S. trade or business.

In addition, most states and some local governments levy an income tax up to 13 percent. (An average rate of 6.5 percent is used for our effective tax simulation.) This type of sub-national income tax is deductible for the federal income tax purpose. By using an average state rate of 6.5 percent and the highest CIT rate at the federal level, the combined CIT rate is about 39 percent.

_The tax depreciation rule._ Tangible depreciable assets placed in service after 1986 is generally depreciated under a modified accelerated basis (MACRS). Under the MACRS system, assets are grouped into eight different classes and each class is assigned a recovery period and a depreciation method. For example, an asset with a useful life of 10 to 17 years is classified as a seven-year property. A seven-year property is recovered using the 200 percent declining-balance method with a half-year rule for the first year and a switch to the straight-line method in the sixth and seventh year, using the depreciation rate of the fifth year; and then a residual is written off in the eighth year. Based on the MACRS and the capital structure by industry, we estimated the equivalent tax depreciation rates based on the declining balance, which varies by industry and is above 5 percent for buildings and well above 30 percent for machinery and equipment.

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