New tax incentives in Mexico
By Sergio Guerrero Rosas, Guerrero y Santana, S.C.
Last December, the Chamber of Deputies approved the federal budget of 2019 for the first year of the government of the new President Andrés Manuel López Obrador (AMLO), which fixes a total net expenditure of 5 trillion 838 billion pesos. That is 23 billion 768 million pesos more than that proposed by the Ministry of Finance, as well as the Income Law of 2019, whose validity began on 1 January 2019.
Additionally, on 31 December 2018, President López Obrador signed a presidential decree creating a series of new incentives for Income Tax and Value Added Tax (VAT) for taxpayers who carry out operations on the northern border of Mexico.
Through this budget, the new government expects an income collection of approximately 3.3 billion pesos, which includes 1.75 trillion income taxes and 38 billion pesos of Value Added Tax.
The central macroeconomic considerations contained in the said budget are:
- A budget surplus of 1% of GDP before considering public debt and a net budget deficit equal to 2% of GDP.
- Annual inflation of 3.4%.
- An average price per barrel of crude oil of USD 55.
- An exchange rate of MXN to USD of MXN 20: USD 1.
- An average nominal interest rate of Mexican Treasury Certificate (Cetes) of 8.3%.
Tax incentives for taxpayers who carry out operations on the northern border
On 31 December 2018, President López Obrador issued a Presidential Decree that creates fiscal incentives in specific municipalities along Mexico's northern border. The Decree became effective as of 1 January 2019 and will apply to 2019 and 2020.
The Decree grants natural persons, companies, and permanent establishments that qualify with the requirements established therein, a tax rate on income of 20% on the provisional monthly payment of income tax and that of the fiscal year. This benefit will be applied in the proportion represented by the income of the border region in relation to the total income of the taxpayer for the same period.
Requirements for the application of the income tax stimulus of the Border Region
Taxpayers must request their inclusion in the offcial registry of eligible taxpayers for tax incentives of the Border Region before 31 March of the fiscal year in question. This authorisation requires an annual renewal.
To qualify for the tax benefits of the Decree, the taxpayer must generate at least 90% of their total income from the Border Region during the immediately preceding fiscal year. Revenues for intangible assets and digital commerce are not eligible for benefits.
The taxpayer must also show proof of residence in the Border Region by maintaining their tax domicile, a branch or establishment in the Border Region for at least 18 months before the application for inclusion in the Registry. If the taxpayer does not meet the 18-month limit at the time of the registration request, the taxpayer must show:
- Proof of operational capacity in the Border Region, including the use of new fixed assets, and
- That 90% of the taxpayer's total income for the tax year will be generated in the Border Region.
It is important to mention that the Decree specifically excludes certain taxpayers from eligibility for tax incentives, such as credit institutions and maquiladora companies that apply the safe harbour rules.
Elimination of universal compensation of balances in favour of federal taxes
Until 31 December 2018, the Tax Code of the Mexican Federation allowed taxpayers to offset favourable balances against all federal taxes in both monthly and annual returns (universal compensation). With the elimination of universal compensation as of 1 January 2019, it is expected to have a significant impact on highly exporting companies or those whose products or services are rated at a VAT rate of 0%, since the recovery of their cash flow was made through the compensation of, for example, VAT, in favour of the monthly payment of the Income Tax.
The above would be forcing companies to make the request for refund of balances in favour of VAT which, as we know, represents more time, complexity, and uncertainty that the tax authority will return it in a timely manner.
Incentive to Value Added Tax
The Decree provides for an immediate reduction of the VAT rate from 16% to 8% for taxpayers who sell or lease property or provide services in the border region, and only with respect to such income. To apply for this benefit, taxpayers must submit a notification by 30 January 2019.
While it is true that there are a number of limitations and requirements for application of these incentives, the possibility of reducing Income Tax and Value Added Tax may be important, which is why we suggest that you analyse the requirements contemplated in the Decree in detail with your tax and legal advisors, taking into account that the terms to adjust to said benefits are short.
The elimination of universal compensation, together with the impossibility of offsetting VAT balances with specific taxes and income tax in the future, will have a significant impact on Mexican companies.
These days, the Mexican Employers Confederation of the Mexican Republic (Coparmex) commented that it would be expected that in the coming days the Tax Administration Service (SAT) issues provisions that can mitigate the harmful effects of this elimination and that the primary sectors (agricultural, livestock, fishing, and silvicultural) exporter and maquila could continue to apply the compensation of taxes universally.
Our firm continues to study and analyse any new provision that allows our clients to quantify the benefits of existing or future operations in the border region with North America.
Sergio Guerrero RosasGuerrero y Santana, S.C., Tijuana, Baja California, Mexico
T: : +52 333 120 05 38
Guerrero y Santana S.C. provides its clients with a wide range of tax, legal and consulting services. The firm makes comprehensive evaluations of its clients’ businesses and draws on the expertise of its professionals to offer the best solution available.
Prof Sergio Guerrero Rosas, Managing Director at Guerrero y Santana, has over 25 years’ experience advising companies from SMEs to multinationals, as well as individuals, on tax and estate planning. He is also the Latin American Chairman of International Taxation Practice Group and Global Vice Chairperson of the Trust & Estate Planning Practice Group.
Published: January 2019 l Photo: R.M. Nunes - stock.adobe.com