Mexico: Indirect tax reform proposals in economic package for 2022

Proposed changes to the federal income tax law and value added tax (VAT) and excise tax (duty) legislation

Proposed changes to federal income tax law and VAT and excise tax legislation

Mexico’s president on 8 September 2021 presented to the Mexican Congress an economic package for the year 2022.

The package includes proposals relating to federal budget for 2022 as well as proposed changes to the federal income tax law and value added tax (VAT) and excise tax (duty) legislation. The economic package does not propose any new taxes or increases to the existing taxes, but it is possible that changes could be made during the legislation process.
 

VAT proposals

Regarding VAT, the proposals focus on providing legal certainty with minimal change in the tax determination procedure. Some of the relevant proposed changes regard the elimination of the references to the tax incorporation regime (RIF), the definition of the activities not subject to VAT, and clarifications to activities taxed at the 0% VAT rate.

0% rate: The proposal would add sanitary products for menstrual hygiene and sales of animal food to the list of goods subject to tax at the 0% rate.

Creditable VAT: In connection with the rules for creditable VAT, the proposal would clarify that VAT paid for importation activities would need to be supported by the customs import document (pedimento) and would need to be issued to the taxpayers that intend to carry out the VAT credit. It also proposed to limit the creditable amount of VAT only to the extent that the activities carried out by the taxpayer are subject to VAT (at rates of 16% and 0%).

To implement the limitation, several clarifications would be added to reflect the activities not subject to VAT in the computation of the pro-rata credit (in addition to the exempt transactions). In this sense “non-subject activities” would be defined as those activities carried out outside of Mexico, as well as those conducted in Mexico but that do not fall with the definition of disposals, provision of services, granting of the temporary use or enjoyment of goods, and importation referred to in the VAT law.
 

KPMG observation

This is not the first action to include non-subject activities in the VAT pro-rata credit. In 2019, a tax bill included a similar proposal that was rejected by the Mexican Congress. If this measure is approved, taxpayers would need to evaluate the potential implications of the pro-rata credit, specifically with regard to the cash flow of the organization.

This limitation would be also applicable for the creditable VAT paid during pre-operative periods, and the taxpayers would be required to inform the Mexican tax authorities of the pre-operative period start and final activities.
 

Digital services providers

The provisions relating to digital services neither include any proposals to modify activities defined as digital services, nor changes to the legal assumptions to determine if a resident abroad is considered to be a taxpayer for VAT purposes. The “kill switch” sanction would remain as a mechanism to force foreigners to register and comply with reporting rules in Mexico.

The only change proposed would be to modify the wording of the law regarding a quarterly filing of the information return about digital services rendered in Mexico to a monthly information return.
 

Leasing activities

A proposed change to the tax treatment of leasing activities would apply regardless of the location where the delivery of the goods takes place, to the extent that the goods are used in activities carried out in Mexico.
 

Excise tax (IEPS)

The modifications proposed are mostly focused on the definition of terms, the implementation of new regulatory authority for the tax administration, the exclusion of the references to the tax incorporation regime (RIF), and the definition of the charges for automotive fuels.

Automotive fuels: The modifications focus on granting the tax administration with authority to apply the corresponding quotas to the fuels for which the tax payment has been omitted (whether partially or totally). Additionally, the measures propose new 2022 quotas for automotive fuels:

Fuel

Quota (pesos per liter)

Gasoline less than or equal to 91 octanes

5.2887

Gasoline greater than or equal to 91 octanes

4.4660

Diesel

5.8123

Non-fossil fuels

4.4660


Alcoholic beverages:
The proposal incorporates the definition of “electronic tag” and “final consumption establishments.” It would provide certain relief for “final consumption establishments” related to the obligation to destroy empty containers or bottles. In addition, there is a proposal to require a QR code-reading system so that a consumer could verify the tags of the alcoholic beverages. As for the manufacturers, producers, packagers or importers of denatured alcohol and non-crystallizable honeys, there would be no requirement to be registered in the “Alcoholic Beverages Taxpayer Registry” because these entities are not obliged to incorporate tags and seals.

Security codes: Regarding the security codes for tobacco products (except for cigars and those products that are entirely handmade), the tax administration would generate and provide such security codes. These codes would need to be included in any presentation in which tobacco products are sold and not limit the application only to packs.
 

KPMG observation

The tax legislation is pending consideration in the lower chamber until 20 October 2021 and then will be sent to the Senate for its final approval by 31 October 2021—with an expected effective date of 1 January 2022.


For more information, questions or assistance on indirect taxes, contact a tax professional with the KPMG member firm in Mexico:

Antonio Zuazua | +52 811-999-2523 | azuazua@kpmg.com.mx
 

Read a September 2021 report prepared by the KPMG member firm in Mexico

 

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