Business activity and investment levels are booming in Mexico. Though foreign direct investment (FDI) flows are healthy, the government is making efforts to further encourage FDI by implementing a set of reforms to the local taxation system. This includes numerous labor reforms, changes to Value-Added Tax or ‘Impuesto al Valor Agregado’ (IVA) laws, and improving free trade zones.
Crucial to new investment and business success in Mexico is a clear understanding of these reforms and fundamental elements of the country’s tax regulations. We explore the requirements and federal compliance measures for tax on business activity in Mexico.
Mexico Taxation System – Background
There are 2 main groups of taxpayers: legal entities (companies) and individuals. To start a business and comply with Mexican taxation laws, companies must be established and fulfill tax standards during formation.
The Mexican taxation system ties together many different laws. Throughout the years, tax processes have undergone different reforms, and legislators (Congress and Senate) are still working to strike a balance between tax collection and public expenditure.
In Mexico, there are two key types of taxes: direct taxes that tax an economic activity and indirect taxes that tax consumption. The main taxes companies must pay are:
- Income Tax, known locally as ISR (Impuesto Sobre la Renta)
- VAT Tax, known locally as IVA (Impuesto al Valor Agregado).
Income Tax (Impuesto Sobre la Renta)
ISR is a direct tax over profits earned. These are the difference between revenue and authorized deductions obtained in the fiscal year and must be paid to the Tax Administration Service or Servicio de Administración Tributaria, the agency responsible for such taxes. The income tax rate is 30%.
As mentioned before, the ISR is determined by the difference between revenue and deductions. These deductions are very specifically outlined in, and must comply with, Mexican law. For example, some deductions are discounts or bonuses granted during the year, investments, or fees paid by employers to the Mexican Social Security Institute, (IMSS) a Federal Institution dedicated to providing health and social security services.
All companies must file monthly provisional payments no later than day 17 of the month. Companies must also ensure they file an annual tax return, due 31 March of each financial year.
There are several other considerations to have in mind regarding Income Tax (ISR). Businesses are legally required to comply with the following:
- keep accurate accounting records in accordance with Mexican regulations
- issue tax receipts
- formulate a statement of financial position
- record profit and loss
- keep an inventory of goods by the end of the fiscal year.
Note that this is not an exhaustive list; you may need to consult with a local accounting professional to fully understand all taxing requisites in Mexico.
Valued-Added Tax (Impuesto al Valor Agregado)
As with most countries, in Mexico there is a VAT known as Impuesto al Valor Agregado. The IVA tax rate is 16% and in areas that border with the USA, IVA is 8%. This measure came into force with the recent government change and it is designed to make border areas more competitive and encourage investment as well as a support for the population residing in border States.
The IVA is an indirect tax that is generated every time a company buys goods or services; IVA taxes any value that is added to the merchandise in its production process. This is done by a transfer model, by which the company adding value to the product does not suffer an economic loss under the tax; the final tax amount is transferred to the consumer.
IVA is paid no later than day 17 of each month. Companies must pay the difference between the IVA withheld and transferred. The IVA is calculated based on cash flow, that is, what is actually paid when acquiring the goods, and what is charged when the final product is sold to consumers.
Other taxes, contributions, and duties
Besides the ISR and IVA, in Mexico, there are other contributions, taxes, and duties which are important to consider when starting a business, such as Special Tax on Production and Services. This is also known as Impuesto Especial Sobre Produccion y Servicios (IEPS).
This tax only applies to certain products and services that may cause social damage, or their consumption and distribution are restricted. Products that generally fall into this category include alcoholic beverages, tobacco, energy drinks, high sugar products, gasoline, and diesel.
In the case of the IEPS, different rates and/or fees are established for each good or service. Like the IVA, this tax has a transferral model.
Social Security (Instituto Mexicano Del Seguro Social) IMSS contributions are those that employers and workers make so a worker can receive medical assistance, allowances for work-related disability, general illness, maternity, as well as a retirement pension.
Other taxes or contributions may include payments by individuals or corporations that directly benefit from public works, contributions established according to the use or exploitation of the public domain assets of the nation, as well as for receiving services provided by the State.
Peace of mind is priceless; go with the best
Even though the Mexican taxation system can look complex at first, the new government of Andres Manuel Lopez Obrador is making an effort to encourage FDI by making these tax laws easier to understand and comply with.
While the government works at simplifying the tax system, it’s wise to partner with a reliable firm who can ensure your business stays compliant with tax law.
At Biz Latin Hub, we have a team of local accounting professionals who can support your through company formation, and all tax and duties requirements, so you can focus on growing your business.
Reach out today at [email protected] for advice from our team and a personalized quote for your business.