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Mexico: Income tax, VAT incentives in northern border region

Mexico: Income tax, VAT incentives, northern border

A decree (dated 29 December 2018) was issued by the executive branch to promote the development of Mexico's northern border region (“frontera norte”).


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The incentives under the decree apply with respect to income tax (ISR) and value added tax (VAT), and will be available for a two-year period from 1 January 2019 through 31 December 2020.

Under the decree, there are 43 municipalities listed, and investments that satisfy certain criteria (e.g., job creation) in those locations will be eligible for the tax incentives. 

Income tax incentives

For income tax (ISR) purposes, the incentives being made available are in the form of a tax credit, with the credit generally being equal to one third of the tax for the year (that is, income from the northern border region in proportion to total income of the taxpayer for the corresponding tax period). In other words, for taxpayers that conduct operations in the northern border area, as well as in other regions of Mexico, the tax incentives are applied in proportion to the income generated from the northern border region with respect to the taxpayer’s total income.

  • The decree also addresses the tax benefits available for individuals who obtain income from business activities exclusively in the border region and who are residents of the region or have an establishment in the region and do not have access to certain other special regimes (e.g., the maquiladora sector). 
  • Income is deemed to be exclusively from the northern border region if the income from that region represents at least 90% of the total income of the taxpayer for the previous fiscal year. 
  • There are special rules under the decree when the income is derived from intangible assets or digital commerce.

To take advantage of the tax incentives under the decree, taxpayers must request an authorization from the tax administration (SAT) no later than 31 March of the tax year at issue. The request made to SAT for registration as a beneficiary of the tax incentives for the northern border region must show that the taxpayer meets an 18-month threshold period requirement as well as other procedural requirements. 

Authorization from the SAT will be valid for the tax year for which it was obtained and can be renewed. 

If one of the requirements for obtaining SAT authorization is no longer satisfied, the taxpayer must cease applying the tax incentives available under the decree and must file a declaration with the tax administration (and possibly pay tax and any related surcharges or interest).

VAT incentives

The decree offers an incentive equivalent to 50% of VAT on the transfer of goods, rendering of services, and granting of the temporary use or enjoyment of goods in the premises or establishments located in the northern border region. With this incentive, the effective rate of VAT in the border area would be 8% (a rate that is similar to the sales tax rates that exist in the southern states of the United States bordering Mexico).

The incentive is in the form of an automatic tax credit to be applied to the 16% VAT rate. The intention is to make Mexican border cities more competitive by having a more attractive rate for consumers, both domestic and foreign.

Like the incentives available for income tax, there are requirements that the SAT issued for this purpose that must be satisfied for the VAT relief. For instance, the VAT incentives do not apply with respect to certain digital commerce transactions.


Read a January 2019 report (Spanish) prepared by the KPMG member firm in Mexico

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