In January 2022, a decree reforming Mexico’s tax framework came into effect, which will close tax loopholes that have, until recently, made foreign manufacturing in Mexico a lucrative and cost-effective way of doing business. Another goal of the Mexico tax reform is to crack down on high rates of tax avoidance among resident companies and individuals.
It is important for foreign companies and investors with operations and/or assets in the Latin American country to pay close attention to the tax changes. Each year since 2020, the administration of President Andrés Manuel López Obrador (AMLO) has implemented substantial changes to the tax code, and many of Mexico tax reforms are having (or will have) a direct impact on how business is done there.
Though it doesn’t explicitly say so, companies in Mexico – both foreign and domestic – should redouble their accounting requirements in Mexico, as the prospect of being audited by federal tax authorities just went up.
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What effect will Mexico tax reforms have on business?
The main thing to be cognizant of is that while the tax reforms don’t actually raise taxes, business entities and individuals will end up paying more tax in 2022 and beyond. The Mexico tax reforms give tax authorities beefed up powers to conduct audits and collect taxes.
The latest slate of reforms will:
- Treat many foreign companies with operations in Mexico as taxable entities
- Reign in the number of assets and expenses that are considered tax deductible
- Place new restrictions on a phenomenon known as hybrid mismatches (the practice of exploiting the differences in the tax treatment of an entity under the laws of two or more tax jurisdictions).
- Introduce mandatory disclosure obligations on business entities
- Place limitations on the applicability of reduced withholding tax rates
SEE ALSO: Corporate Tax Filing in Mexico: Federal and Local
How will the Mexico tax reforms impact foreign enterprises?
Perhaps the most obvious impact the Mexico tax reforms will have on foreign business is the new restrictions placed on ‘maquiladoras’. A maquiladora is a low-cost factory in Mexico that is owned by a foreign corporation. These companies capitalize on cheap Mexican labor while enjoying tax advantages under the USMCA agreement and the IMMEX Program.
Under the Mexico tax reforms that came into effect in 2022, maquiladoras will no longer be permitted to apply for an APA (Advance Pricing Agreement) to comply with Mexican transfer pricing rules regarding the fees they charge to their foreign companies.
Operators now must adhere to the following tax rules:
- Pay 6.5 percent of the total costs and expenses incurred by the maquiladora in the manufacturing process
- Pay 6.9 percent of a theoretical net tax basis of all the maquiladora’s assets used to perform the assembly or manufacturing of products, including assets owned by the maquiladora and assets owned by the foreign company
- Foreign companies that hire a third-party contractor – a shelter maquiladora –to manufacture or assemble products in Mexico must pay a shelter tax to avoid creating a permanent establishment in the country
What more can we expect in 2023 from Mexico?
Like the batch of Mexico tax reforms we saw in 2022, this year’s package does not include any significant proposed changes to existing taxes. But it does give federal authorities more robust powers to levy taxes and even rethink international treaties.
What we can expect to see this year:
- The elimination of the 8 percent income tax deductions for taxpayers who donate books, newspapers and magazines.
- An increase from 0.08 percent to 0.15 percent the withholding tax levied on interest payments made by Mexico’s financial institutions.
- Enforcement of the OECD’s Multilateral Tax Treaty (MLI) to reduce large companies from shifting their Mexico tax burdens to low tax jurisdictions.
- Enforcement of the General Anti-Avoidance Rule (GAAR). Mexican companies can claim that certain transactions “lack business purpose” and should therefore not be taxed. But if a company is audited, the GAAR can help get to the bottom of such transactions by performing more sophisticated audits.
- Mandatory disclosure of cryptocurrency accounts and transactions. Foreign cryptocurrency service providers operating in Mexico will be forced to report to Mexican authorities any transactions and account information with respect to clients residing in the country.
For the fiscal year 2023, revenues are budgeted at MXN 7.1 trillion pesos ($386 billion USD), an increase of 9.9 percent more than the fiscal year 2022. Much of that increase is expected to come from the two main pillars of Mexico’s tax reform: the closing of legal loopholes often exploited by foreign companies, and the ability of authorities to punish tax avoidance and enforce tax collection like never before.
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