Latin America has a reputation as being a complex place to do business, and operating in Mexico does little to dispel that image - the country reached the global top 10 in TMF Group's 2018 Financial Complexity Index. Mexico is, however, working towards simplifying its tax regime, and to make it easier to invest and do business in the country.
The Mexican Financial Reporting Standards Board (CINIF) has been eliminating differences between its local Mexican Financial Reporting Standards (MFRS) and the International Financial Reporting Standards (IFRS) - at this time, small businesses can still use MFRS - and has an e-invoicing mandate which uses an officially-approved "digital invoicing via internet" format. But when it comes to taxes? Here's a brief overview of the tax environment.
Of course, if you require further information, get in touch with TMF Group's Mexico team.
The Mexican tax year follows the calendar year.
All income obtained by companies resident in Mexico is taxed, regardless of the source.
The corporate tax rate in Mexico is 30%. Any foreign enterprises established in Mexico face the same tax system as domestic enterprises, though some exemptions are in place, and some states offer competing tax incentives to attract foreign investors. That said - and in contrast to many Latin American countries - the majority of taxes in Mexico are levied at the federal level.
Companies may also be subject to an employee profit-sharing tax (10%).
Known as Impuesto al Valor Agregado, or IVA, the standard rate is 16%. There is a 0% rate applicable to foodstuffs, water, agricultural supplies, books and magazines, while those supplies exempt from VAT include immovable property, land, financial services, insurance, cultural exhibitions and events.
VAT returns detailing taxable activities must be submitted electronically each month by the 17th of the month following the period's end; any tax due must be paid by this date as well. VAT credits may be rolled over but may also be credited back.
Wage taxes and social security
Specific contributions from inhabitants are required by every state in Mexico; the largest such contribution is property tax. Some states will tax employee wages at an average of 2%, though in the Mexico City, employers must pay a 3% tax on wages paid to their employees every month.
An employer must register all of their employees with the Mexican Institute of Social Security, which provides job-related, unemployment and disability benefits. Around one-third of payments are withheld by the employer from the employees' wages, with the rest paid directly by the employer. Employers must also issue digital tax receipts for wages paid to each employee.
Capital gains and real estate
There are three different types of property tax in Mexico. When a sale is closed, there is an acquisition tax (up to 5.9% in Mexico City) usually collected on behalf of the local municipality. Then there is the "Predial", an annual property tax owed to the municipality in which the property is located. These must be paid in person at the municipal office.
Finally there is the capital gains tax, or ISR (Impuesto Sobre la Renta), which is to be paid upon the sale of property. Any capital gains arising from the sale of fixed assets, shares and real property are considered normal income and are subject to the standard corporate tax rate.
Non-residents that sell shares of a Mexican company are subject to tax at 25% on the gross proceeds or 35% on the net proceeds if the non-resident has a representative in Mexico (provided the non-resident is neither located in a tax haven nor benefits from a preferential tax regime). Non-residents that realise gains on the sale of publicly-traded shares are subject to a 10% withholding tax on the net gain.
Process and compliance
There are six tax payments to make each year, which take around 286 hours in total according to the World Bank's Doing Business rankings. The total share of taxes as a percentage of profit is 52%, which is slightly higher than the Latin America and Caribbean average of 46.6%.
The principles of FATCA have been brought into local laws in Mexico, and the country has also signed up to the principles of the OECD's automatic exchange of financial account information regime, or the Common Reporting Standard (CRS). This will impact financial and tax compliance in the country.
Tax legislation in Mexico is unique in the sense that the basic accepted documentation supporting transactions is the invoice issued by the supplier.
Mexico has an e-invoicing mandate which uses an officially approved 'digital invoicing via internet' format. Banks in Mexico do not return paid cheques and, for tax purposes, cheques are not recognised as valid support for an expense.
Since January 2018, electronic invoices must be issued for each partial income that is obtained - especially in transactions being paid in instalments - in addition to the digital electronic voucher issued as initial support of said transaction. The deadline for issuing this receipt is 10 days after the date of receipt or partial collection. It should also be issued for transactions in which the sale is on credit and is charged in a single transaction after the date of sale.
There is an expectation, too, that Mexican authorities will continue to further automate reporting and auditing tools, leading to additional controls on the disclosure of fiscal and financial information through electronic documents, so compliance must be monitored to mitigate future risks.
For more detailed information about the implications of Mexico's tax environment on your investment, get in touch with our local experts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.