A decree (dated 29 December 2018) was issued by the executive branch to promote the development of Mexico's northern border region (“frontera norte”).
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.
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.
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).
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
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.