Mexico Tax Reform: What Does it Mean for Business?

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.

Mexico Tax Reform
An agreement between the United States, Mexico, and Canada that supports mutually beneficial trade between the three countries. Take it into account when looking into the Mexico tax reform.

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
  • 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:

  • 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.

Financial regulatory compliance in Mexico infographic by Biz Latin Hub for an article on Mexico Tax Reform
Necessary tasks to complete in order to comply with Mexico’s current financial regulations, important to keep in mind for Mexico tax reforms

Biz Latin Hub can help you and your business

At Biz Latin Hub, we provide integrated market entry and back-office services throughout Latin America and the Caribbean, with offices in Bogota and Cartagena, as well as over a dozen other major cities in the region. We also have trusted partners in many other markets.

Our unrivalled reach means we are ideally placed to support multi-jurisdiction market entries and cross-border operations.

As well as knowledge about Mexico tax reform, our portfolio of services includes hiring & PEO accounting & taxation, company formation, bank account opening, and corporate legal services.

Contact us today to find out more about how we can assist you in finding top talent, or otherwise do business in Latin America and the Caribbean.
If this article on Mexico tax reform was of interest to you, check out the rest of our coverage of the region. Or read about our team and expert authors.

Hay una nueva reforma fiscal en México para reducir las lagunas y la evasión fiscal. Esto puede afectar a la forma de hacer negocios.
Key Services offered by Biz Latin Hub.

The information provided here within should not be construed as formal guidance or advice. Please consult a professional for your specific situation. Information provided is for informative purposes only and may not capture all pertinent laws, standards, and best practices. The regulatory landscape is continually evolving; information mentioned may be outdated and/or could undergo changes. The interpretations presented are not official. Some sections are based on the interpretations or views of relevant authorities, but we cannot ensure that these perspectives will be supported in all professional settings.


Categories: LATAM | Mexico

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