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Direct taxation of businesses

i Tax on profits

The MITL essentially taxes resident corporations and individuals, non-resident corporations or individuals with a PE in Mexico, and non-residents with taxable income coming from a source of wealth found in Mexico; it is divided into Titles I to VII, each of which respectively governs the following:

  1. general aspects;
  2. corporate taxation (residents and PEs);
  3. non-lucrative corporate entities;
  4. individuals (residents and PEs);
  5. non-residents (source income not attributable to a PE);
  6. controlled foreign corporations (CFCs) and multinational companies (transfer pricing); and
  7. fiscal incentives.

In this chapter we concentrate on corporate taxation and outbound income taxation.

Determination of taxable profit

The MITL applies a worldwide taxation principle for residents. Corporate income is taxed on an accrual basis regardless of where the source is found. Taxable income and deductions follow the MITL's special rules, so different items' treatment may vary from their financial accounting reporting treatment.

Regarding deductions, the concepts of expenses, cost of goods sold and investments are deductible, and deductions are also provided for items such as returns, discounts and rebates, non-collectible accounts receivable, and certain losses deriving from the loss or sale of deductible property. Deductions of interest, social taxes and contributions to certain pension and retirement funds are specially regulated.

Allocation of expenses under the MITL is literally provided for only in certain cases of PEs, and is expressly barred in the case of expenses made abroad and shared with persons that are not corporate or individual regime income tax subjects in Mexico. Denying proration shared with non-residents not subject to taxation in Mexico covered by a DTA is potentially discriminatory. However, a new 2014 administrative rule, following a Supreme Court precedent, now allows for such deductions, although the compliance burden is relevant, and includes meeting transfer pricing parameters and keeping proof of the expense made abroad on file in Mexico.

The concept of deductible investments includes fixed assets, deferred costs and expenses, and certain preoperative outlays. These items are deductible by applying the maximum authorised annual depreciation or amortisation percentages; the taxpayer has a limited ability to apply lesser percentages from time to time. Special percentages have been established for the generation of clean-sourced, renewable energy as well as for certain oil and gas industry cases established in the Hydrocarbons Revenue Law.

A peculiarity of the system is that an inflationary effect is given to the difference between cumulative qualified credits and debts by considering the tax year's inflation rate: when the credits exceed the debts, a deductible inflationary adjustment is allowed by applying the inflationary effect to such difference; when debts are the greater of the two, a taxable value is likewise determined on the difference.

The tax is paid on an annual basis; the fiscal year is necessarily identified with the calendar year.

Capital and income

No differentiation is drawn between taxation of ordinary income and of capital gains; both are taxed within the same taxable base. It should be noted that, while capital gains generated through the transmission of shares are accumulated as income together with other income, and subject to other deductions, losses coming from transmission of shares may only be deducted in the measure that taxable gains from the transmission of shares are accumulated as income in the current tax year or in the 10 following tax years.

Losses

Tax losses determined as per the MITL rules may be offset from tax profits of the following 10 years. There is no carry-back rule. A special 15-year rule exists for deepwater oil exploration and production operations.

Tax losses may not be transferred by merger, although they may be allocated between the relevant companies in the case of split-offs. In the case of a merger where a loss-sustaining company subsists after another company is merged into it, such subsisting company may only offset its losses existing before the merger from tax profits generated by the same lines of business as those that generated the losses.

Regarding change of controlling ownership, limitations allowing for the amortisation of losses apply that in general terms can be described as follows. Specifically, losses can only be offset from tax profits generated from the same lines of business as those that generated the losses when income as shown in the annual financial statements over the past three years is less than the cumulative tax losses amortisable and there is a change of controlling ownership in the company. Change of controlling ownership is defined as a change in ownership of more than 50 per cent of direct or indirect ownership of voting right shares over the past three years.

Rates

The corporate income tax rate is 30 per cent.

Administration – federal

Provisional income tax payments are made on a monthly basis by applying the profit quotient of the previous tax year (the taxable profit divided by all income, both corresponding to the previous year) to the income obtained in the year through to the month to which the provisional tax payment refers; tax losses from previous years may be subtracted from the provisional tax profits determined for the monthly instalment payments; and prior provisional tax payments are creditable against the resulting tax.

The annual tax return may be filed in January, February or March of the tax year following that to which the return refers.

A distinguishing feature of the Mexican tax system is the requirement to obtain a digital internet tax receipt (CFDI) to support any deduction. These receipts are digitally stamped upon issue by the tax authorities' IT platform. The regulations regarding the issuance and requirements for CFDIs have gradually been updated. Some of the most significant changes include invalidation of bank statements as sole support for deductions, formal requirements that must be included in the CFDI and, most recently, the issuance of a supporting tax receipt upon payment.

The authority charged with designing legislative tax policy for consideration by Mexico's Congress is the Undersecretary of Revenue. The authority charged with revenue collection and auditing taxpayers is the Tributary Administration Service; however, state tax authorities may have coordinated powers to audit federal taxpayers.

Rulings can be sought from the tax authorities; negative replies cannot be challenged until applied as part of an assessment issued to the taxpayer's detriment. Favourable rulings are binding on the tax authorities as long as the facts argued are correct.

Audits principally come in the form of requests for taxpayer information and documentation to be filed at the tax authorities' offices, or domiciliary visits where the tax authorities conduct the audit at the taxpayer's address. The time limit for conducting the audit is, as a general rule, one year. The ongoing pattern is that, in the current year, the tax authorities initiate the audit of the fourth or fifth previous tax year.

Official letters of observations are issued before an assessment is made; observations are likewise directly notified to corporate administrative organs (if no member of a board is designated to such effect, in the specific case of SAs, the president of the board of directors is the legal representative of the same).

Assessments may be challenged through an administrative appeal (within a term unfortunately reduced, as of 2014, from 45 to 30 working days) or through a tax lawsuit before the Federal Tribunal of Fiscal and Administrative Justice (within 45 working days). Final appeals (amparo) may be made to the federal judiciary.

Directly settling controversies with the federal tax authorities is legally not provided for; however, the Taxpayers' Attorney General's Office (Prodecon) does have powers to oversee settlements in certain cases (see Section XI).

Local taxation

Each of Mexico's 32 federative entities has its own tax system. Commonly, there is a revenue collection administrative split of powers between municipal authorities and state authorities. Real estate property acquisition or sale taxes, property taxes, payroll taxes and other like items are common state taxes. Some states may have a local tax on gross income coming from independent personal services or leases.

Tax grouping

Authentic tax consolidation – where taxable profits and losses for a single capital group are combined as a single tax base – was suppressed in Mexico as of 2014. As of this year, a minimal group 'integration regime' exists. In essence, this regime allows an integration factor to be determined in function of the percentage of group results that represent losses and, in application of such factor, companies within groups can defer a part of their individual tax for three years. Tax so deferred must be paid at the end of a three-year period, adjusted for inflation.

ii Other relevant taxes

In addition to income tax, the other relevant federal tax contributing significantly to tax revenue is VAT. VAT taxes sales, the rendering of services (which includes allowing the use of intangibles), the temporary use of tangible property and the importation of such items. The rate is 16 per cent. Certain foods and medicines, as well as the exportation of goods and a limitative list of intangibles and services, are taxed at a rate of zero per cent.

A change for 2014 was the elimination of the VAT exemption for temporary imports by what are referred to as maquiladora or IMMEX (in-bond) companies, together with other industry-specific programmes such as the automotive, aimed at promoting foreign trade. However, to avoid the cash outflow that will otherwise result from such importations (recoverable through accreditation upon the exportation of the transformed goods), companies can apply for certification (this requires fulfilling sundry requisites, with tax-compliant suppliers being one of them). Such certification grants this type of company the possibility of applying a credit against the importation VAT for the account of the taxpayer. Uncertified companies may opt to guarantee payment of the import VAT.

Another relevant change for 2014 was the elimination of Mexico's flat tax, a receipt-based tax, which operated as a minimum alternative tax to income tax. This became the first time since 1986 that Mexico has lacked an alternative minimum tax.

A special tax on goods and services exists, and taxes such sundry items as fuel, tobacco products, alcoholic beverages and high-calorie foods.

Payroll taxes are a common feature of the Mexican tax landscape, yet these are local taxes, not federal. Tax rates are usually found in the 2 to 3 per cent rate range.

Another relevant tax bill put forward owing to 2018 being an election year in Mexico was the issuance of a tax law on income derived from the rendering of digital services; although this initiative has not been approved by the Congress, it is expected that this topic will remain on the tax agenda for Mexico.

iii Employee profit-sharing

Another feature of investing in Mexico is worker profit sharing (PTU), a constitutionally established right for workers. As a general rule, profits to be distributed to workers are 10 per cent of the taxable profit. Such amount is payable in April or May of the year following that to which the profits refer. PTU effectively paid out in the year may be decreased from the taxable profit of the year before tax loss amortisation (and can also increase the amount of a tax loss). Unpaid PTU accrues to the following year's PTU.

Over the years, a common practice to mitigate the PTU impact and other labour and social security taxes by corporate groups was the establishment of service companies to render all human resource services to the operative companies; thus, the employees share only in the service company's profits. Amendments to Mexico's Federal Labour Law towards the end of 2012, amendments to tax legislation, and the issuance of judicial precedents and authorities tax criteria on outsourcing have put a question mark over the effectiveness of such arrangements, which continue to be used.