Mexico’s Tax Reform: What Does It Mean for Business?

In January 2022, a decree reforming Mexico's tax framework went into effect, which will close tax loopholes that have until recently made foreign manufacturing in Mexico a lucrative and cost-effective way of doing business. Another goal of tax reform in Mexico is to crack down on high levels of tax evasion among domestic companies and individuals.

It is important for foreign companies and investors with operations and/or assets in the Latin American country to pay attention to the tax changes. Every year since 2020, President Andrés Manuel López Obrador's (AMLO) administration has implemented significant changes to the tax code, and many of Mexico's tax reforms have (or will have) a direct impact on how business is done there.

Although not explicitly stated, businesses in Mexico – both foreign and domestic – should double theirs accounting requirements in Mexicoas the prospect of being audited by federal tax authorities just increased.

What effect will Mexico's tax reforms have on business?

The most important thing to be aware of is that while tax reform does not actually raise taxes, business entities and individuals will pay more tax in 2022 and beyond. Mexico's tax reforms provide the tax authorities expanded powers to conduct audits and collect taxes.

The latest reforms will:

• Treat many foreign companies with operations in Mexico as taxable entities

• Reign in the number of assets and expenses that are considered deductible

• Introduces mandatory information obligation for business units

• Place restrictions on the applicability of reduced withholding tax rates

SEE ALSO: Corporate Tax Filing in Mexico: Federal and Local

How will tax reforms in Mexico affect foreign companies?

Perhaps the most obvious effect that the tax reforms in Mexico will have on foreign companies is the new restrictions on “maquiladoras.” A maquiladora is a low-cost factory in Mexico owned by a foreign company. These companies take advantage of cheap Mexican labor while enjoying tax benefits under the USMCA agreement and the IMMEX program.

Under Mexico's tax reforms that took effect in 2022, maquiladoras will no longer be allowed to apply for an APA (Advance Pricing Agreement) to comply with Mexican transfer pricing rules regarding the fees they charge their foreign companies.

Operators must now comply with the following tax rules:

• Pay 6.5 percent of the total costs and expenses incurred by the maquiladora in the manufacturing process

• Pay 6.9 percent of a notional net tax base for all maquiladora assets used to perform the assembly or manufacture of products, including assets owned by the maquiladora and assets owned by the foreign company

• Foreign companies that hire a third-party contractor – a shelter maquiladora – to manufacture or assemble products in Mexico must pay a shelter tax to avoid creating a permanent establishment in the country

What else can we expect in 2023 from Mexico?

Like the slew of Mexico's tax reforms we saw in 2022, this year's package contains no significant proposed changes to existing taxes. But it gives federal agencies more robust powers to levy taxes and even renegotiate international agreements.

What we can expect to see this year:

• Enforcement of the General Anti-Avoidance Rule (GAAR). Mexican companies can argue that certain transactions “lack a business purpose” and therefore should not be taxed. However, if a company is audited, GAAR can help get to the bottom of it of such transactions by performing more sophisticated audits.

• Mandatory disclosure of cryptocurrency accounts and transactions. Foreign cryptocurrency service providers operating in Mexico will be forced to report to Mexican authorities all transactions and account information with respect to customers residing in the country.

For fiscal year 2023, revenues are budgeted at MXN 7.1 trillion pesos ($386 billion), a 9.9 percent increase over fiscal 2022. Much of that increase is expected to come from the two main pillars of Mexico's tax reform: closing legal loopholes often exploited by foreign companies, and the ability of authorities to punish tax evasion and enforce tax collection like never before.

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At Biz Latin Hub, we provide integrated market entry and back-office services throughout Latin America and the Caribbean, with offices in Bogota and Cartagena, as well as over a dozen other major cities in the region. We also have reliable partners in many other markets.

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Contact Us today to find out more about how we can help you find top talent, or otherwise do business in Latin America and the Caribbean.
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