“Explore the intricate taxation system of Mexico and its impact on India’s trade relations. Learn about resident and non-resident tax rates, corporate tax, VAT, and recent reforms. Stay informed for successful cross-border trade.”
An Indian (beautiful) woman created history either in India or abroad as it can be inferred that Saintly Catarina de San Juan who embellished the raging embroidery and other mind- boggling beautiful accessories to Mexican dress in 1600s is our connection to discuss the taxation of Mexico, the world’s 15th ranked GDP nation with an annual turn over of USD 10 Billion with India. Our imports have enormously increased during the last three years with emphasis on petroleum products from their end while huge investments from our end there in return to gather momentum.
With foray of American market in view and also enlarging our huge export potential in areas other than Information technology, Pharma and educational pursuits where we have a leadership role, let us learn the basics of the taxation from Mexico, one of the greatest nations from South America.
Before understanding the complex tax structure of Mexico, a brief about its positioning, role played in contributing to U.S.A. and Canada’s economy is a must.
Mexico has a free market economy in the trillion United States dollar (USD) class. It consists of highly diversified and modern industries, with significant amounts of private investment. Trade with the United States and Canada has nearly tripled since the implementation of the North American Free Trade Agreement (NAFTA) in 1994, renegotiated in 2018 and 2019 (ratified by the Mexican Senate) and renamed as the United States-Mexico-Canada Agreement (USMCA). Huge benefits like higher emoluments in high tech sector have been given to American human resources to gain to attain this new agreement. No more politicians imaginative FTA with the least benefits to American man power and talent.
Mexico has free trade agreements with over 50 countries, including the European Union (EU), Japan, and many other countries around the world, placing more than 90% of trade under free trade agreements.
Mexico has been on a reform path for a number of years, privatizing, deregulating, and cutting back the role of government. Facilitating cross-border trade, opening sectors to private investment, and enhancing intellectual property rights protection are good examples of the measures taken by Mexico to support its economic growth and development.
Yes, India has FTA with Mexico.
Now to the website of Mexican tax authority. Extensive use has been made of the information from websites of big 4 accounting firms with due acknowledgment at the end under reference since it has been difficult to get English information from Mexico which has strong roots in Spanish language.
https://www.sat.gob.mx/home
Resident personal income tax for tax payers are given below:
| Annual Tax Rates for Resident Individuals | Vary from 1.92% to 35% (2022) |
| from MXN 1 to 7,735.00 | 1.92% |
| from MXN 7,735.01 to 65,651.07 | 6.4% |
| from MXN 65,651.08 to 115,375.90 | 10.88% |
| from MXN 115,375.91 to 134,119.41 | 16% |
| from MXN 134,119.42 to 160,577.65 | 17.92% |
| from MXN 160,577.66 to 323,862.00 | 21.36% |
| from MXN 323,862.01 to 510,451.00 | 23.52% |
| from MXN 510,451.01 to 974,535.03 | 30% |
| from MXN 974,535.04 to 1,299,380.04 | 32% |
| from MXN 1,299,380.05 to 3,898,140.12 | 34% |
| over MXN 3,898,140.12 | 35% |
If the employee is considered a non-resident for Mexican tax purposes, the tax rate applicable to compensation will vary from 15% to 30%. The first MXN 125,900 of employment income received in a 12-month floating period will be tax exempt.
The following tax table is applicable to income tax with respect to income earned by non-residents for the calendar year 2023:
| Taxable income (MXN) | Tax rate (%) | |
| Over | Not over | |
| 0 | 125,900 | Exempt |
| 125,900 | 1,000,000 | 15 |
| 1,000,000 | and above | 30 |
Some interesting facts:
- Non-residents (NRs) face withholding taxes on Mexican interest income 0%-35%
- NRs also subject to capital gains tax on sale of property: 25% capital gains or 35% on net income.
- Sale of Mexican company shares on an appreciation gather 10% tax withholding. The same for dividends from Mexican companies
Corporates
Random facts for memory
Corporate income tax is 30%
CIT return date is 31st March. The same date for final tax payment too. The estimated payments to be done by 17th of the following month.
Tax year: January – December.
Personal income tax
Tax return due date is 30 April. The same for final payment too. The estimated tax payment falls latest by 17th of following month.
Standard VAT rate is 16%
Residents’ income tax rate goes up to 35% while non-residents bear the high rate of 30%.
Tax year: January – December.
WHT rates for individuals: (Dividends/interest/royalties)
Resident: 10* / 0.08** / NA; Non-resident: 10 / 4.9 to 35 / 5 to 35%
* WHT on dividend paid to an individual. ** WHT on interest paid by financial institutions. Applicable on the invested capital.
There is no wealth/worth tax rate in Mexico.
What about inheritance tax or gift tax rate?
For non-residents, it is treated as regular income tax while for residents, it is tax exempt.
Gift tax rate
Taxable to the recipient as ordinary income unless exempt.
It is a news that provisions to recognize the effects of inflation for tax purposes in the areas of monetary assets and liabilities (annual monetary adjustment) and depreciable assets are provided in the Mexican Income Tax Law, even though recent inflation rates have been stable at low levels. I have not come across similar tax treatment among any other top GDP nation.
There are no state taxes on corporate net income.
Main Allowable Deductions and Tax Credits
In general, all federal, state, and local (including the municipal tax on real estate) taxes levied on a company (not including taxes on acquisitions of fixed assets and real estate and CIT) are tax-deductible expenses.
Start-up expenditure incurred prior to the commencement of business may be amortized at the yearly rate of 10%, after applying the adjustment factors.
This is to encourage setting up of new start ups mostly indulged in by youngsters, the future of the nation.
However, the deduction of charitable contributions is limited to 7% of the taxable income of the previous year.
Employees have to contribute to social security according to varying rates and subject to various limits based on multiples of the UMA, up to a maximum of MXN 22,243 (2021).
Real property taxes are levied by the states at different rates.
R&D expenditure (including investment in R&D) gives rise to a 30% tax credit. Mexico has to uplift its human resources by huge investments in research and development. This validates the high net worth of its talented man power.
Net operating losses can be carried forward up to 10 years (15 years for deep-water operations related to oil extraction activities), subject to adjustments for inflation. The carryback of losses is not permitted.
Non-deductible items include penalties, unauthorized donations, contingencies, indemnities, goodwill, exempt salaries, etc.
Let us look at accounting standards the pinnacle of any modern society.
Accounting standards are set by regulatory bodies like the Mexican Council for Research and Development of Financial Information Standards. Mexican companies are required to prepare their financial statements in Spanish and according to Mexican Financial Information Standards (NIF, formerly known as Generally Accepted Accounting Principles or PCGA). Accounting registries and books of account must be recorded in Spanish.
It is not helpful for a large number of internationally reputed entities which would like to shift partially their area of operations, particularly the good business atmosphere of Mexico as well as being considered as a gateway to Canada and U.S.A.
About accounting laws applicable
The General Law for Commercial Enterprises of 1934, Regulatory Law of Banking and Public Credit Service, Law on Systems for Retirement savings and the Tax Federation Code of 1987.
Interestingly, as early as in 1934, just like U.S.A. Mexico ventured to update its laws to give an ethical and updated accounting systems to its investments and new industrialists who would come forward for furthering their business here.
Are the accounting standards compatible with IFRS standards which will be essential for growth?
The National Banking and Securities Commission of Mexico (Comisión Nacional Bancaria y de Valores (CNBV)) fully adopted IFRS Standards for financial reporting in 2012.
The Mexican Financial Reporting Standards Board (CINIF) has also been eliminating differences between IFRS and Mexican Financial Reporting Standards (MFRS), which is one of the frameworks that can still be used by SMEs.
Capital gains tax
There are no taxes on estate or inheritance, therefore they are treated as normal income. A local real estate property tax may apply.
Reforms in taxation, the dire necessity to survive in the turbulent economic world
In general terms, the 2020 and 2021 Mexican Tax Reforms were meant to incorporate fundamentals of the OECD BEPS initiative. The economic context in which these reforms were legislated assumes gross domestic product (GDP) growth of between 1.5% and 2.5%, and an increase in tax collection without the creation of new taxes, although the current expectations for economic growth have been affected due to the ongoing SARS-CoV-2 pandemic.
OECD BEPS, the revolutionary tax agreements among 130 plus nations attracted Mexico towards its orbits and will usher multitude of taxation benefits to its economy.
On 23 April 2021, the Mexican government enacted reforms of the Labour Law as well as different fiscal provisions. This reform prohibits the subcontracting of personnel services and aims for each taxpayer to directly employ its labour force without the intermediation of an in-house or outsource service provider, disallowing the deduction of payments for subcontracting services.
It is sensible that being a major economic power within South America, Mexico needs to gather more economic benefits from U.S.A. and Canada.
Taxation – Residence definition for a corporate
As an enticement for any corporate to function in Mexico,
the Mexican Federal Tax Code provides that corporations are deemed residents in Mexico if the principal centre of administration or the effective place of management is located in Mexico. A specific definition of ‘tax resident’ in any tax treaty overrides domestic law definitions, provided the taxpayer is eligible to apply the treaty.
When a company ceases to be a Mexican resident in terms of the Mexican Federal Tax Code or any tax treaty, it is deemed to be liquidated for tax purposes. In such cases, a notification is required at least 15 days before the change, and the CIT return must be filed with the Mexican tax authorities within 15 working days following the date on which the change of tax residency takes place.
Permanent establishment
The Mexican Income Tax Law considers a PE to be any place in Mexico where business activities or services are carried out or rendered by non-residents, such as agencies, offices, mining exploration sites, or any other place of exploration, extraction, or exploitation of natural resources, regardless of the length of time involved.
Moreover, note that the 2020 Tax Reform introduces additional provisions to determine when a foreign resident has a PE in Mexico. In this regard, the threshold to trigger a PE when a foreign entity acts in Mexico through a dependent agent in those cases where it habitually concludes contracts on behalf of the non-resident is extended to also cover situations when the dependent agent habitually carries out the principal role leading to the conclusion of the contracts, and any of the following apply:
- The contracts are executed in the name of or on behalf of the non-resident.
- The contracts provide for the transfer of the rights or grant the temporary right to use property or imply transferring such temporary right.
- The contracts commit the non-resident to provide a service.
Additionally, the 2020 Tax Reform introduces additional scenarios to consider when an independent agent could also trigger as a PE under the argument that it does not act within its ordinary framework of activities. In this sense, the 2020 Tax Reform adds that a Mexican resident acting exclusively or almost exclusively on behalf of non-Mexican resident related parties will be deemed to be an independent agent acting outside of its ordinary frame of activities.
Let us analyze the Indian exports to Mexico and how to push up the exports to a decent level?
With hardly 4.6USD exports to Mexico, we have a long way to go in expediting our efforts further in this direction.
Lined below are some sectors with details: (all in millions of USD), B means billion.
For the year 2021, the figures are Aluminum $445M, vehicles than railway 1.39B, organic chemicals 397M, Machinery, nuclear reactors 295M, Iron and steel 218m, electrical and related sector 174M, Pharma 140M, Plastics 136M.
India being the world leader in Pharma exports, at least one Billion USD valued Indian products in this sector needs to be stepped up by cleaning up our procedures, manufacturing tech, and effective man power for which FEDA USA has been raising various observations regularly.
Conclusion
Hardly a day passes without discussing the efforts to increase our economy to USD 5 Billion, a realistic figure if we make efforts to set up factories in Mexico, one of the brightest economies of the Southern America which has realized its dream to push up its economy by imbibing the latest tax/economic reforms in tune with the world standards.
With The United States-Mexico-Canada Agreement (USMCA) entered into force on July 1, 2020, replacing NAFTA, the original agreement which favored Mexico vis a vis USA, it is possible India can also venture to increase its human resources on expert levels with maximum return. Often, India is presumed to permanently export its talents to settle there and affect their economy. This attitude of Indian bios Para needs to widen further by offering its talents on short term basis to the whole world than on total immigration basis.
Yes, hardly we have attempted at the base level of Mexican economy, and need to import a lot and also export giving a level playing ground to Mexico.
Reference
https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement.
https://santandertrade.com/en/portal/establish-overseas/mexico/tax-system.
https://taxsummaries.pwc.com/mexico/corporate/corporate-residence.
With Spanish, the main language used in Mexico, where even the tax return has to be in Spanish only, I had enormously depended on above world class web sites for expert discussion, information and hence due credit is obviously given. Only expert CPAs from Mexico can handle its tax expectations.
Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting because of the above write up. The possibility of other views on the subject matter cannot be ruled out. By use of the said information, you agree that Author/Tax Guru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors, or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.
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