Corporations in Mexico are subject to multiple obligations regarding tax laws. The Mexican tax system, while not as broad as that in the US, does include plenty of reporting formats and issues to consider. Regardless of the type of business or industry, companies must observe its obligations regarding two taxes:
1) Income tax
Companies must pay a 30% tax on its profits, determined from the difference between the taxable income and the authorized deductions. There are several limitations on deductions as well as specific requirements to observe in order to deduct some concepts; for example, in order to deduct the salaries paid, companies must also comply with social security payments. Or, to deduct intercompany expenses, the taxpayer must comply with transfer pricing regulations.
Throughout the year, companies pay monthly income tax, in advance of the annual calculation to be reported in the month of March of the following year. Monthly advance payments are determined using the profit coefficient obtained in the previous year. In the annual tax report filed in March, companies either pay the balance due or claim a tax in favor, which can be requested for return or credited towards future income tax.
2) Value added tax (VAT)
With a general rate of 16% the VAT law taxes four activities when done in Mexico: trade, services, rent and imports. The tax is added across the chain, until it reaches the final consumer. Companies must subtract the VAT paid from the VAT collected every month and either pay the excess or report a balance in favor on the following month.
An important tax change happened in legal year 2019 when the tax authority withdrew the possibility of offsetting these two taxes. Companies have been complaining about this reform, but the government does not seem to reincorporate this right any time soon. On top of that, getting returns of balances in favor is a burdensome process, with the authority delaying these returns as much as it can. Having good communication with the authority and demonstrating that the company has the legal right to obtain these balances becomes fundamental to maintain a healthy cash flow management.
3) Contributions on payroll
In addition, to the two taxes mentioned above, companies with employees must pay social security contributions. These include covering employees’ needs for health, housing and retirement, and increase payroll costs by 30% on average. Furthermore, companies must pay a state payroll tax that, depending on the state, can range from 2% to 3% across Mexico.
The main tool the authority has to monitor companies in their tax reporting, is the electronic billing. Companies issue their invoices using an electronic format, which is processed through the authority’s servers. Almost all deductions require an electronic invoice to proceed. Even payroll payments have to be electronically processed by the employer. The Mexican government has made an important investment in technology in the last 6 years which now allows it to monitor companies in real time. Almost all payments made by companies must be done with checks or bank transfers in order to be deductible, so there’s always a trace that can be reviewed through the bank account statements.
Besides those obligations, there are several informative reports that companies must file throughout the year, which the authority will use to monitor their compliance. Companies have to stay on top of things to maintain a current taxpayer status and avoid penalties and financing costs.
You might also want to see: Doing Business In Mexico: Why Are Things Slower?
If in need of assistance regarding taxes for your business in Mexico, please contact us to find out how we can help.