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Mexico

General Information

Country Name: United Mexican States (México)
Currency: Mexican Peso (MXN)
Primary Tax Authority: Servicio de Administración Tributaria (SAT)

Key Legislation

  • Constitution of Mexico: Establishes the general framework for taxation.
  • Federal Tax Code (Código Fiscal de la Federación): Governs tax administration, compliance, and enforcement.
  • Income Tax Law (Ley del Impuesto sobre la Renta): Covers personal and corporate income taxes.
  • Value Added Tax Law (Ley del Impuesto al Valor Agregado): Regulates the VAT system.

Fiscal Authority Allocation

Mexico operates under a centralized tax system, with federal taxes constituting the majority of tax revenue. However, states and municipalities have some authority to levy local taxes.

Taxes Collected by Central Authorities:

  • Corporate income tax
  • Personal income tax
  • Value-added tax (VAT)
  • Excise duties
  • Customs duties

Taxes Collected by Regional Authorities:

  • Payroll tax (state-level)
  • Property tax (municipal-level)

Revenue Sharing Mechanisms:

Federal tax revenue is redistributed to state and municipal governments through a system of federal transfers, ensuring funding for local development.

Corporate Income Tax (CIT)

  • Standard CIT Rate: 30% on taxable income.
  • Deductions: Ordinary business expenses, such as wages, utilities, and interest payments, are deductible. Depreciation and amortization are also allowed under specific rules.
  • Loss Carryforwards/Carrybacks: Losses may be carried forward for up to 10 years, but carrybacks are not permitted.
  • Tax Incentives: Mexico offers incentives for R&D, renewable energy investments, and businesses operating in certain sectors (e.g., maquiladoras).

Value-Added Tax (VAT)

  • Standard VAT Rate: 16% on most goods and services.
  • Reduced VAT Rate: A 0% VAT rate applies to exports and specific goods like food and medicine.
  • Exemptions: Educational services, medical services, and financial services are VAT-exempt.
  • VAT Refunds: Exporters are eligible for VAT refunds, and businesses can credit input VAT against output VAT.

Personal Income Tax (PIT)

  • Progressive PIT Rates: The personal income tax is progressive, with rates ranging from 1.92% to 35% depending on income levels.
  • Dividends: Dividend income is taxed at a 10% rate in addition to the regular income tax.
  • Capital Gains: Gains on the sale of real estate and shares are taxed at 10%, with certain exemptions for primary residences.
  • Tax-Free Allowances: There are various deductions for medical expenses, educational expenses, mortgage interest, and contributions to retirement savings accounts.

Additional Mandatory Contributions

Social Security Contributions:

  • Employer Contributions: Employers are required to contribute around 15-20% of employees’ salaries to social security funds, covering pensions, healthcare, and other benefits.
  • Employee Contributions: Employees contribute approximately 2.7% of their gross salary.

Withholding Taxes

  • Dividends: 10% withholding tax on dividend payments to non-residents.
  • Interest: Withholding tax on interest paid to non-residents ranges from 4.9% to 35%, depending on the recipient’s country of residence.
  • Royalties: 25% withholding tax on royalties paid to non-residents.
  • Service Fees: A withholding tax of 25% applies to fees for technical assistance and consulting services rendered by non-residents.

Transfer Pricing Rules

Mexico adheres to OECD guidelines on transfer pricing. Companies must ensure that transactions with related parties, both domestic and international, comply with the arm’s length principle. Documentation requirements are strict, and penalties apply for non-compliance.

Special Tax Regimes

  • Maquiladora Program: Foreign companies operating manufacturing or assembly plants (maquiladoras) can benefit from reduced CIT and VAT rates. This program encourages foreign investment by offering competitive tax rates.
  • IMMEX Program: Provides tax incentives for export-oriented manufacturers, including duty deferrals on imported goods used in production.

Other Taxes

  • Excise Taxes (IEPS): Imposed on goods such as alcohol, tobacco, and fuel. The rates vary based on the product.
  • Property Tax: Imposed at the municipal level, with rates depending on the location and value of the property.
  • Payroll Tax: A state-level tax on employer payrolls, typically around 2-3% of wages paid.
  • Customs Duties: Mexico levies customs duties on imports from countries not covered by free trade agreements.

Double Taxation Agreements (DTAs)

Mexico has signed more than 50 DTAs, including with the US, Canada, and several EU countries. These agreements provide relief from double taxation, reducing withholding tax rates on dividends, interest, and royalties.

Compliance and Reporting

  • Corporate Tax Filing Deadline: Annual CIT returns are due by March 31 of the following year.
  • VAT Filing: VAT returns are filed monthly.
  • PIT Filing: Individuals file their returns by April 30 of the following year.
  • Penalties for Late Filing: Penalties for non-compliance include interest on unpaid taxes and fines that vary depending on the severity of the violation.

Recent Developments

  • Digital Services Tax: Mexico has introduced a tax on digital services provided by foreign platforms, including streaming, advertising, and e-commerce. This tax applies a 16% VAT on these services.
  • Maquiladora Reforms: Recent reforms have strengthened compliance requirements for maquiladora companies to ensure tax benefits are being used correctly.
  • Tax Incentives for Renewable Energy: The government has expanded tax incentives for companies investing in renewable energy projects, including accelerated depreciation and reduced CIT rates for eligible investments.

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