Mexico: Follow-up on income tax and VAT incentives in border regions
Mexico: Follow-up on income tax and VAT incentives
Tax incentives are available to taxpayers with business operations in the northern and southern border regions.
Four decrees in late November 2020 provided the reduced tax rates as incentives for Mexico’s northern and southern border regions, effective 1 January 2021. Read TaxNewsFlash
Northern border region incentives
The Mexican government announced modifications to the tax incentive measures that are available for activities in Mexico’s northern border region. The incentives provide a reduced income tax rate of 20% (reduced from 30%) and a reduced rate of value added tax (VAT) to 8% (reduced from 16%).
The modifications (30 December 2020):
- Allow taxpayers to apply the incentives by means of a registration notice, and taxpayer eligibility for these incentives can be renewed if submitted no later than 31 March of the applicable year.
- Allow registration for taxpayers that are listed on the tax administration (SAT) website and that satisfy a tax credit requirement.
- Clarify that for VAT purposes, the fiscal stimulus will only apply regarding services of the transportation of goods or persons, whether by land, sea or air, when such services begin and end in the northern border region, without making stops outside of the region.
- Extend application of the incentives through 31 December 2024.
Southern border region tax incentives
The Mexican government on 30 December 2020 published a decree that establishes the tax incentives for income tax and VAT purposes. The incentive regimes are available for the period 1 January 2021 through 31 December 2021. The decree lists the following 22 eligible municipalities in four states:
- Quintana Roo: Othón P. Blanco
- Chiapas: Palenque, Ocosingo, Benemerito de las Americas, Marques de Comillas, Maravilla Tenejapa, Las Margaritas, La Trinitaria, Frontera Comalapa, Amatenango de la Frontera, Mazapa de Madero, Motozintla, Tapachula, Cacahoatan, Union Juarez, Tuxtla Chico, Metapa, Frontera Hidalgo and Suchiate
- Campeche: Calakmul and Candelaria
- Tabasco: Balancan and Tenosique
Regarding the income tax incentive, the stimulus consists of applying a tax credit equal to one-third of the tax incurred in the year (or based on advanced payments of tax in proportion to the income realized from the southern border region when measured against the total of the taxpayer’s income obtained in the fiscal year or period to which the advanced payment corresponds).
Under the decree, the incentives are available for individuals and legal entities, as well as foreign residents with a permanent establishment in Mexico that obtains income from business activities exclusively in the southern border region and are residents in the region, or have a branch, agency or any other establishment in the region and are taxed under the general regime of the income tax law or under the optional tax regime based on cash flows. The incentive relates to income realized from activities in the southern border region if the income obtained from that region represents at least 90% of the total income of the taxpayer for the immediately preceding fiscal year, without considering the income derived from intangible assets or income from digital commerce.
For those taxpayers that conduct business operations in the southern border area, as well as in other regions of the country, the stimulus offered by the tax incentives may be applied in the proportion that the revenues of the southern border region represent with respect to total revenues.
The incentives are not available for certain sectors or taxpayers such as:
- Members of the financial system
- Those that pay taxes under the optional regime for group of companies; those that engage in agricultural, livestock, forestry and fishing activities; those operating under a regime of fiscal incorporation; those that provide professional services; maquiladoras; trusts and cooperative societies
- Those that appear on certain lists published by the SAT
- Those that conduct “simulated operations” or that realized income from intangibles and digital commerce
- Those taxpayers to whom “verification authority” has been exercised in the last five years and have “omitted contributions”
- Those that supply personnel
- Taxpayers that are eligible for other tax benefits or incentives (with some exceptions)
- Those that are in liquidation
- Productive state companies, as well as contractors, in accordance with the hydrocarbons law
In order to access the tax benefits, taxpayers must submit a notice to the SAT no later than 31 March to be registered in the list of beneficiaries eligible for the incentives of the southern border region and must also comply with some other requirements, such as being located in the southern border region for a period of at least 18 months, being compliant with tax obligations, and having an electronic signature, access to the “tax mailbox,” and collaborate with the SAT under the real-time verification program. The authorization will be valid during the fiscal year for which it was obtained, and a renewal notice must be submitted no later than the date when the annual tax return for the fiscal year immediately preceding the one for which the renewal is requested must be filed.
Regarding the VAT incentives, the benefit is equal to 50% of the VAT imposed (at a rate of 16%) on the sale of goods, the provision of independent services, and the use or temporary enjoyment of goods in the premises or establishments located in the southern border region—thus, the VAT incentive will be a rate of 8%. Eligibility for this incentive requires certain criteria are met, such as the submission of a notice within 30 days after the decree’s effective date. For taxpayers that start activities after the effective date, they must submit the registration notice together with an application filed in the taxpayer registry.
Additionally, the “material” delivery of the goods or the provision of independent services must be performed in the southern border region.
The tax incentive is not available for sales of real estate or for the temporary use or enjoyment of intangible assets, as well as digital commerce.
Activities or transactions conducted during the period of the decree’s validity are eligible for the VAT incentives as long as the consideration is paid for the activities or transactions no later than within 10 calendar days after the end of the term of the incentive.
Lastly, the benefits stemming from these tax incentives are not taxable for income tax purposes, and taxpayers are released from the obligation to file a notice required under the tax law.
For more information, contact a tax professional with the KPMG member firm in Mexico:
Antonio Zuazua | +52 81 8122-1938 |firstname.lastname@example.org
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