This article offers an overview of the tax and accounting requirements for both local and foreign companies operating in Mexico. It is important that you understand your business obligations when operating in Mexico. A thorough understanding will ensure that you avoid any penalties that could arise from not fulfilling your duties. In addition, smart accounting can lead to substantial savings in time, money and resources.
Many international companies have discovered that doing business in Mexico can be a very profitable investment. The business opportunities in Mexico are endless and are strongly influenced by a great strategic location, policies that welcome foreign trade, and a large and skilled labor force. Depending on the size of the company, and the different business activities that it conducts, different legal and financial obligations will apply.
Accounting and Taxation Requirements – Invoicing and Taxes in Mexico
Mexican invoicing and taxes go hand-in-hand. The collection of taxes is the most important instrument of economic policy that the state imposes. Taxes are obligations of the citizens to contribute to public spending, as well as to direct the production and distribution of goods and services.
The national tax system in Mexico is administered by the Mexican Tax Authority (SAT). In Mexico, the tax year follows the calendar year, ending on the 31st of December.
The Three Main Taxes to Pay When Operating in Mexico
There are three main taxes that you will pay when operating in Mexico. These are as follows:
- Value Added Tax (IVA) – 16%: IVA is a tax on consumption which most providers of goods and services pay. This tax is paid at the time of purchase and is paid by everyone; there is no distinction between residents and non-residents. IVA can be distinguished into three categories:
- Exempt – Property, books, newspapers, magazines
- Zero rate – Basic commodities such as bread, milk, flour, water etc.
- Normal rate (16%) – Everything else
- Income Tax (ISR): This tax applies directly to generated income. For natural persons (individuals), this income tax will be based on earnings. For moral persons (companies, businesses, entities etc) the income tax (corporate tax) is set at 30%.
- Special Taxes on Production and Services (IEPS): Tax that applies to the payment for the production, sale or importation of certain products. It is an indirect tax which is transferred from the taxpayer to the consumer.
Other Taxes to Pay In Mexico
Taxes on Exports and Imports in Mexico
Impuesto General de Importacion, is a tax that is paid on the importation of goods into Mexico. Before getting involved in international trade with Mexico, one should be aware of the HS Code (Harmonised System Tariff) which is an international customs clarification system. The HS Code will determine how much tax should be paid on a certain product. This system is quite complex; on top of this, importing into Mexico requires the use of a customs agent. For these reasons, many investors chose to hire the services of a Mexican international trade specialist.
Taxes on Paysheet
The employer pays this type of tax through the employment of staff; which includes salaries, wages, over time, prizes, bonuses, incentives, compensations, employers’ contributions to the savings fund, commissions etc. The percentage of this tax varies depending on the state. Employers should take taxes on paysheet into account before hiring new staff.
The return of taxes is in principle, a right of all taxpayers. This tax refund allows taxpayers to recover the balances in their favor, or in some cases money that has been overpaid for some error in calculating taxes. The process to request the return is done automatically without the need for the person to go to the offices of the Mexican Tax Administration Service (SAT).
Fines and Penalties in Mexico
Mexican taxpayers must submit monthly and annual declarations. According to the Fiscal Code of the Federation, however, these statements can be corrected up to three times as long as the fiscal authorities have not initiated auditing processes.
Fines and Sanctions Related to the Annual Statement
The following fines are imposed for breaches related to the filing of annual declarations:
- From $1,240 to $15,430 MXN for each of the obligations not declared spontaneously within the corresponding term.
- From $1,240 to $30,850 MXN for each obligation to which you are obligated, when filing a statement, request, notice or record, outside the period indicated in the request or for breach of said request.
- From $12,640 to $25,300 MXN for not submitting the declarations by internet when being obliged to do so, submit them after the deadline or do not comply with the requirements of the tax authorities to present them or comply with them outside the established deadlines.
In addition, among the SAT Fines, there are additional penalties:
- Failure to provide the information of the persons to whom they had given cash amounts for employment subsidy, or submit it after the deadline: Fine of $15,430.00 to $30,850.00 MXN.
- Failure to provide information on operations carried out through trusts for which business activities are carried out: A fine of $9,250.00 to $30,850.00 MXN.
- Failure to file an informative statement of operations with related parties residing abroad or submitting it incomplete or with errors: Fine from $68,590.00 to $137,190.00 MXN.
- Failure to present the declaration, not to comply with the requirements of the fiscal authorities, or not to comply with the deadlines indicated: Fine of $1,240.00 to $15,430.00 MXN for each of the undeclared obligations and another fine of $ 1,240.00 to $ 30,850.00 MXN for each obligation presented outside the period indicated in the request or for its non-compliance.
Tax and Legal Obligations Depend on Company
Depending on the size of the company, and the different business activities that it conducts, different legal and financial obligations will apply.
Different Kinds of Business Activities
- Industrial companies: These companies’ primary activities are the production of goods through the transformation and extraction of raw materials (mining companies). They can be further classified as:}
- Extractions Companies: Specifically work in the exploration and extraction of natural resources; whether renewable or non-renewable.
- Manufacturing Companies: The principal activities are to transform raw materials into finished products.
- Commercial Companies: The intermediate between producer and consumer. Their primary function is the buying and selling of finished products. Commercial companies can be divided into 3 categories:
- Whole-Sale Companies: Carry out large-scale purchases and then sell directly to the consumers.
- Retail Companies: Sell products in low quantity directly to consumers.
- Commissioning Companies: Sell merchandise to the producers and make a commission based on their sales.
Different Business Sizes in Mexico
- Financial Criteria: The size of a company is determined by the amount of capital it has.
- Employee Criteria: A small company is one with less than 350 employees; a medium company has between 250-1000 workers and a large company is composed of more than 1000 employees.
- Production Criteria: A company is determined by the degree of machinery or systemization that exists in the production process.
- Sales Criteria: This is determined by the size of the company in relation to the size of the market that the company supplies.
Biz Latin Hub helps both local and foreign companies and investors to navigate their way through the complexities of the Mexican and Latin American business environments. Our capable team is able to assist wih your investment enquiries. If you would like more information regarding the tax and accounting requirements in Mexico, get in contact with us. Reach out to Alex at [email protected] and see how we can add value to your Latin American investment.