Corporate Tax 2024 Comparisons

There are various types of corporate forms in Mexico, and the most common is the Sociedad Anonima (commonly referred to as an SA). There is also a Sociedad de Responsabilidad Limitada, also referred to as SRL, which is analogous to a US limited liability company. In respect of both types of entities, the liability of their shareholders and members are limited.

A more sophisticated form of SA is a Sociedad Anónima Promotora de Inversiones or SAPI. The SAPI has a more modern corporate governance framework than the SA and it is more flexible to set up differentiated rights related to dividend distribution among categories of shareholders.

From a Mexican tax perspective, such entities are taxed as a separate entity from their members/shareholders and have in general the same tax treatment (30% on profits) and have identical income recognition, applicable deductions and foreign tax credit rules.

There are no Mexican legal entities that are treated as transparent for tax purposes. However, there are certain “agreements” that give such treatment, such as the Fideicomiso (which has some similarities to the common law Trust).

Fideicomisos provide a flexible and efficient way to hold a separate patrimony from the settlor and their beneficiaries and represent an efficient form of administration of assets. They are often used in real estate and investment transactions.

From a tax perspective, Fideicomisos that generate mostly passive income are completely transparent; those who carry out business activities (active income – ie, sale of assets) will need to calculate the taxable profit and allocate such to the beneficiaries.

Specific examples of Fideicomisos are:

• Fideicomisos de Inversión en Bienes Raíces (FIBRAs), which are real estate investment vehicles that offer a tax-efficient way to invest in income-generating real estate; they distribute most of their income to shareholders and benefit from tax transparency; and
• Fondos de Inversión (investment funds), which are investment vehicles providing a pooling mechanism for investors, allowing them to invest in a diversified portfolio; they are often used by private equity firms and hedge funds for their flexibility and tax advantages derived from their tax transparency.

Mexican income tax law recognises tax transparency for foreign entities solely for the purposes of determining the taxable income generated by Mexican residents abroad from such entities.

Mexican law follows the “place of effective management” criterion to determine the Mexican tax residency of an entity. This refers to the location where key decision-makers, who control, manage, and operate the entity and its activities, are based. Consequently, a foreign entity is deemed a Mexican taxpayer if its place of effective management is in Mexico.

As for transparent foreign entities, their tax transparency is not recognised and will be taxed as any other legal entity (not considering that the tax effect is on their members/shareholders), apart from the exception outlined in 1.2 Transparent Entities.

Under most of the tax treaties that Mexico has in place, tax residency will also be determined by the place from which the company or entity is effectively managed. Tax transparency is not recognised under most of those treaties (there are certain exceptions such as the one with Germany). With respect to the Mexico-US tax treaty, a certain transparency effect is recognised for LLCs, as long as its members are resident in the US.

In case of a dual resident company, under most of the tax treaties entered into by Mexico, a mutual agreement procedure is required. The Mexico-US Tax Treaty will directly deny treaty benefits.

Incorporated businesses pay a 30% income tax rate.

According to Article 4-B of the Income Tax Law, Mexican entities must regard as taxable income (in some cases only the profits) the income generated abroad by tax transparent entities or legal vehicles, according to the degree of participation by the Mexican resident, even if such entities or legal vehicles do not distribute such income. The tax triggered will be 35% + 10% for dividend distribution.

If taxpayers have operations through these entities or legal vehicles (transparent or not) they will have to file a tax report before the Tax Administration Service. The income will be directly attributed to the Mexican taxpayer and the tax paid abroad by these entities or vehicles will be considered as paid by the Mexican resident only for the taxable income that was considered.

The tax paid will create a tax credit for the Mexican resident in the proportion that the income received by the entity or legal vehicle was considered by the taxpayer as taxable income.

Taxable Profits are calculated by considering all taxable income (on an accrual and worldwide basis) and reduced by authorised deductions (including the profit-sharing payment made in the last year).

Income encompasses all increases in wealth. Entities need also to consider inflationary gains. Dividends distributed from a Mexican entity will not be considered as income.

Normal deductions or business expenses are allowed (depreciation and amortisation of assets, cost of goods, interest payments, other expenses, etc). To qualify for these deductions, there are general requirements that must be fulfilled. These include ensuring that the expenses are properly documented, strictly necessary for the business’s operation, and supported by relevant invoices. Additionally, each type of deduction has specific requirements that must be met. For example, there are particular criteria for deductions related to bad debts, charitable contributions, and interest expenses.

Taxpayers are required to make advance payments of income tax on the 17th of each month; such advance payments should be made on the basis of an estimated annual taxable income. Advance payments are not required during the first year of operation of a business.

Mexico does not have specific incentives such as a patent box or special tax treatment exclusively designed for technology investments. However, Mexico, like many countries, has a general framework of tax incentives and deductions that may indirectly benefit technology-related investments and research and development (R&D) activities.

Some of the general incentives that could be relevant to technology investments in Mexico include deductions for R&D expenses incurred by businesses. Eligible expenses may include costs related to technological innovation and development.

Accelerated Depreciation

Businesses in Mexico may benefit from accelerated depreciation for certain assets, including technology-related equipment and machinery.

Maquila Programme

While not specific to technology, the Maquila programme in Mexico allows companies to operate manufacturing activities with certain tax benefits. This programme is often utilised by industries with significant technology components.

Investment Promotion Programmes

Mexico has various investment promotion programmes that provide general incentives for companies making investments in the country. While not technology-specific, these programmes may indirectly benefit technology-related investments.

When authorised deductions, in addition to the Participation of Workers in Profits (PTU) paid, exceed the accumulable income in a fiscal year, the difference is considered a fiscal loss for that year. This fiscal loss can be offset against the fiscal income of the following ten fiscal years until it is exhausted.

Additionally, if a company fails to offset the fiscal loss from previous years in a given fiscal period, when it had the opportunity to do so, it will forfeit the right to offset it in subsequent fiscal years, up to the amount that could have been utilised previously.

The right to offset tax losses exists provided there is a tax profit, and none of the circumstances limiting their offsetting are met: (i) a change in shareholders or partners exercising over 51% of the voting rights of the entity, or offsetting only against profits obtained from the same line of business in which the loss was generated in cases of mergers where the loss-making company acts as the merging entity; (ii) a prohibition on transferring losses in the case of a merger if the loss-making company acts as the merged entity; or (iii) the right to transfer them, exceptionally granted in the case of a split, depending on certain forms and amounts of transfer.

The tax authority may presume an improper transfer of the right to amortise tax losses when a taxpayer is involved in corporate restructurings or changes of shareholders, resulting in a significant decrease in its material capacity to operate.

This presumption is triggered if certain conditions are met, such as obtaining greater tax losses than the value of assets or a sudden increase in deductions from related-party transactions, among others. The taxpayer will be notified of this presumption and will have the opportunity to defend itself. If it fails to refute the facts, a list of affected taxpayers will be published, confirming the improper transfer of tax losses and the inadmissibility of their decrease. Taxpayers are given a period to regularise their situation before the authority can exercise its verification powers and impose penalties.

Taxpayers under the general regime can benefit from deductions such as accrued interest during the tax year without adjustment. To qualify for the deductibility of interest payments, the taxpayer must adhere to several conditions:

• The principal amount must be invested in the primary activity of the borrower (directly associated with their business).
• If the interest comes from abroad, the corresponding withholding tax must be applied.
• The taxpayer must issue a digital tax receipt detailing payment amounts and the tax withheld from the lender.
• The taxpayer must submit a return, known as a multiple informative declaration, by 15 February of each tax year, disclosing loan-related information and the interest paid to the foreign tax resident.

Income tax law imposes a limitation on interest deductibility, applying to the net interest amount (taxable accrued interest less deductible interest) exceeding 30% of adjusted taxable profit. This limitation only applies to taxpayers whose interest accrued from debt in the fiscal year exceeds MXN20,000,000.

This limitation does not apply to members of the financial system. Any non-deductible net interest will be able to be carried forward for up to ten years until the pending amount is finished.

Under thin capitalisation rules, interest paid by a Mexican resident to a non-resident related party is non-deductible for income tax purposes if the debt exceeds three times the equity of the Mexican subsidiary (thin capitalisation rules only apply to related-party transactions).

Limited tax grouping rules exist when Mexican entities holding 80% directly or indirectly of equity can apply for authorisation to offset losses against profits of other entities of the group for a period of three years, considering the deferred income payable at the end of such period.

Generally, capital gains from the sale of shares or other assets are considered part of the company’s taxable income. The basic rules for calculating capital gains on the sale of shares include deducting the cost of acquisition from the sale price. The resulting amount is then subject to corporate income tax.

There are no specific exemptions or relief for capital gains from the sale of shares under Mexican law. Specific tax treaties might offer relief.

Besides income tax, several other taxes may be payable by an incorporated business.

VAT

This is a consumption tax that is levied on the sale of goods, the provision of services, use of goods, and the importation of goods into Mexico. The standard rate is 16%, but there are reduced rates and exemptions for certain goods and services.

Special Tax on Production and Services (IEPS)

This is an excise tax on the production and sale of specific goods and services. It applies to items such as gasoline, diesel, tobacco, alcoholic beverages, and certain energy products and services.

Local Transfer Tax (ISAI)

This tax is levied on the acquisition of real estate and is typically paid by the buyer.

Social Security Quotas

Employers are required to contribute to social security and other employee-related taxes, including contributions to retirement funds and housing funds.

Payroll Tax

This is a local tax that is currently effective in the 32 states of Mexico and represents one of their principal sources of income.

This tax is levied on all employers for the payment of payroll or salaries – ie, it is imposed on employers for the labour relations they maintain, including the payment of salaries and other items corresponding to their obligations with their employees.

See 2.8 Other Taxes Payable by an Incorporated Business.

Closely held local businesses owned by individuals normally operate in a corporate form. In certain transactions, the use of a non-corporate form such as the Mexican trust or fideicomiso is common.

The corporate rate is 30% plus the 10% employee profit sharing rate. Individual professionals will be taxed at 35% (in certain cases a 2.5% special regime applies for individuals if their annual profits are lower than MXN3 million). Any dividend distribution will be subject to an extra 10%. 

There are no specific rules that prevent closely held local corporations from accumulating earnings for investment purposes.

Capital gains are taxable by diminishing from the purchase price the tax basis adjusted by inflation and reducing it with certain adjustments that consider net retained earnings. There are certain variations on how to calculate the basis if the ownership period of the shares is less than 12 months.

Dividends are taxable for individuals at the applicable tax rate (maximum of 35%). The corporate tax rate paid (30%) at the level of the entity can be credited. There is an extra 10% applicable which needs to be withheld by the entity paying the dividend.

A tax rate of 10% is applicable on the net gain realised from the sale of shares in corporations on the Mexican stock exchange or other publicly traded companies.

Mexican entities that make payments to foreign entities or individuals are required to withhold and pay tax before the tax authorities on behalf of the recipient.

Dividend Distribution for Mexican Subsidiaries

If the dividend is paid to foreign residents it will be subject to an additional 10% withholding rate.

Capital Gains

The eventual sale of the shares of the Mexican Subsidiary will trigger a tax of 25% on the gross amount or 35% on the net profit if the non-resident has a representative in Mexico. A tax return related to the sale must be filed and a fiscal opinion obtained from a Mexican public accountant certifying that the reported profit is calculated correctly.

Interest

If a foreign shareholder granted a loan to the Mexican subsidiary, interest is considered to be sourced in Mexico where the capital is placed or invested in Mexico or where the party paying the interest is a Mexican resident or a non-resident with a permanent establishment.

Interest paid to a non-resident is subject to withholding tax at rates ranging from 4.9% to 35%.

A 4.9% rate applies to interest paid to foreign banks registered as banks in Mexico and resident in tax treaty countries and interest paid to non-resident financial institutions in which the federal government owns a percentage of the paid-up capital, provided certain conditions are satisfied and they are the beneficial owners of the interest. The 4.9% rate also applies to interest paid in respect of publicly traded securities in Mexico and securities publicly traded abroad through banks and stockbroking firms in a country that has concluded a tax treaty with Mexico; however if these conditions are not satisfied, the rate is 10%.

A 15% rate applies to interest paid to reinsurance companies and interest on finance leases.

A 21% rate applies to interest that is not subject to the 4.9% or 10% rates and interest paid to non-resident suppliers financing the acquisition of machinery and equipment that is included in the fixed assets of the acquirer.

A 40% rate applies to interest paid to a related party located in a tax haven.

A 35% rate applies in all other cases.

Royalties

Payments made for technical assistance, know-how, use of models, plans, formulae and similar technology transfer, including use of commercial, industrial or scientific information or equipment are considered royalties.

Royalties paid to non-Mexican residents are deemed Mexican-sourced when the payer is a Mexican resident for tax purposes. A 25% income tax withholding rate on the gross amount of the transaction would be applicable unless the rate is reduced under an applicable tax treaty.

Payments carried out by a Mexican subsidiary to foreign shareholders for the right to use a brand or technology would be considered royalties for income tax purposes and, generally, the former would have to withhold the corresponding income tax.

As of 2022, the concept of royalties has included the right to an image, specifying that for such purposes this right implies the use or concession of use of a copyright to a literary, artistic or scientific work.

In this regard, the tax treatment applied to royalties also extends to the taxable income resulting from the exploitation of the copyright associated with the image itself.

Know-How

The term “know-how” is considered the transfer of confidential information regarding industrial, commercial or scientific experience.

The payments derived from such transfer would be considered royalties subject to a 25% income tax rate. However, a preferential income tax rate provided in the relevant tax treaty could be applied.

Technical Assistance

Technical assistance is defined as the rendering of independent personal services whereby the provider undertakes to provide non-patentable knowledge, which does not involve the transmission of confidential information relating to industrial, commercial or scientific experience, and undertakes to participate with the provider in the application of such knowledge.

A 25% withholding tax rate is applicable to technical assistance payments.

In general, the different tax treaties entered into by Mexico do not specifically contemplate the tax treatment of technical assistance (except in the case of Belgium and Holland), so in general terms it should fall under the concept of business benefits (Article 7 of the treaties), independent personal services (Article 14 of the treaties) or other income (generally Article 21 of the treaties). If it is included in Article 7 or 14, the payments derived from it can only be subject to taxation in the state of residence and not in the state of source.

Recent Tax Court rulings have denied access to treaties principally on the grounds that technical assistance should not be considered a commercial activity for Tax Code purposes, but rather as a service of a civil nature, since the Commercial Code does not explicitly list technical assistance as an act of commerce; however, the list of commercial acts contained in the Commercial Code is not exhaustive.

Mexico has entered into several tax treaties with other countries to avoid double taxation and promote cross-border investments. The choice of tax treaty country for foreign investors depends on various factors, including the investor’s home country, the nature of the investment, and specific provisions of each treaty. The countries with which Mexico has entered into tax treaties commonly used by foreign investors include the United States of America, Canada, Spain, the United Kingdom, Germany and the Netherlands.

The use of entities in treaty countries by non-treaty country residents, often known as “treaty shopping”, can sometimes be subject to scrutiny by Mexican tax authorities.

Mexican law contains general anti-avoidance rules that allow tax authorities to challenge transactions or arrangements that have the primary purpose of obtaining a tax benefit in violation of the principles of the tax laws.

Mexican authorities may scrutinise the substance and purpose of the arrangements to determine whether they comply with the intended purpose of tax treaties. If they find that the primary motive of the structure is tax avoidance rather than a genuine business purpose, they may challenge the arrangement and deny the treaty benefits.

For inbound investors operating through a local corporation in Mexico, several significant transfer pricing issues may arise. It is crucial for investors to be aware of these issues to ensure compliance with Mexican transfer pricing regulations. Some of the key transfer pricing issues are outlined below.

Documentation Requirements

Mexico has stringent documentation requirements for transfer pricing. Inbound investors need to maintain comprehensive documentation to support the pricing of transactions with related parties. This includes documentation on the selection of the transfer pricing method, comparability analysis, and financial information.

Comparability Analysis

Performing a robust comparability analysis is crucial to determine the appropriate transfer pricing method. The challenge lies in finding reliable and comparable data for benchmarking purposes. Differences in industry practices and economic conditions between Mexico and other countries can complicate the analysis.

Use of Profit Level Indicators (PLIs)

Determining the appropriate PLI for benchmarking can be complex.

In Mexico, the choice of PLI depends on the nature of the transaction, and identifying the most suitable indicator can be challenging for certain industries.

Intangibles and Royalties

Transfers of intangible assets and the calculation of royalties present specific transfer pricing challenges. Establishing the arm’s length pricing for the use of intangibles requires a careful analysis, and ensuring alignment with the OECD Guidelines is crucial.

Management and Service Fees

Determining the appropriate pricing for management and service fees charged by a foreign parent to its Mexican subsidiary is a common challenge. It requires demonstrating that the services provided add value and are consistent with arm’s length principles.

Profit Attribution to Permanent Establishments (PEs)

For multinational corporations with a presence in Mexico, attributing profits to a permanent establishment can be complex. It involves evaluating the functions performed, risks assumed, and assets employed by the PE within the overall business structure.

Advance Pricing Agreements (APAs)

Inbound investors may consider seeking Advance Pricing Agreements with the Mexican tax authorities to provide certainty on transfer pricing matters. However, the APA process can be time-consuming, and negotiating terms that satisfy both parties can be challenging.

Country-by-Country Reporting (CbCR)

In line with international standards, Mexico requires the filing of Country-by-Country Reports for multinational groups exceeding certain revenue thresholds. Ensuring alignment with global reporting requirements and addressing potential discrepancies is essential.

Limited risk distribution arrangements are valid agreements whose supply chains have been structured and restructured. These types of transactions are normally subject to review and scrutiny by the tax authorities. 

Mexico follows OECD standards with minimum variations.

Transfer pricing audits are definitely more aggressive and thorough nowadays. It is common for the tax administration to initiate transfer pricing audits and, if new information emerges, may reopen audits for earlier years.

Although Mexico has a robust set of rules and legislation governing MAPs in the practical sense, it is difficult for the tax authorities to agree to initiate one.

Compensation adjustments are valid in Mexico following certain rules and steps. Adequate documentation is crucial in these cases.

There are no substantial differences in the taxation regimes between local branches and local subsidiaries of non-local corporations in Mexico.

Capital gains from the sale of stock in a local corporation are taxed at 25% on the gross amount (purchase price) or there is an option to be taxed at 35% on the net gain provided certain requisites are met (such as appointing a local legal representative and obtaining an auditor opinion on how the net basis was calculated).

Furthermore, indirect sales are taxable if more than 50% of the accounting value of the foreign entity being sold is represented by immovable property located in Mexico.

Certain treaties can eliminate direct or indirect capital gains, depending on the ownership percentage and the time of ownership (normally more than 50% and more than 12 months).

When there is a change of control in a foreign holding company that possesses a subsidiary in Mexico, taxation in Mexico can apply to the sale of shares. This tax is applicable if more than 50% of the foreign holding’s accounting value is represented by immovable property located in Mexico. However, certain tax treaties may provide relief in such scenarios.

There are no specific rules governing how to determine the income of local affiliates owned by foreigners that are subject to taxation. Transfer pricing provisions will apply. There are certain rules applicable to Mexican entities with an IMMEX authorisation (manufacturers) where the annual profit must be determined based on a percentage of the cost or assets used in the manufacturing process.

Deductions on payments made by local affiliates for management and administrative expenses are allowed as long as transfer pricing rules are complied with, in which case a withholding tax is applied. Normally such payments are considered as business profits under a tax treaty.

The expense must be considered strictly indispensable for business operations and sufficiently documented to prove that the service was rendered.

Specific rules govern the allocation of expenses incurred by the non-local affiliate. These rules dictate how the expenses are distributed between the foreign entity and its Mexican subsidiary.

Related-party borrowing will be subject to transfer pricing rules and income deduction limitations as stated in 2.5 Imposed Limits on Deduction of Interest. Payments made to a related party or derived from a structured agreement will not be deductible items if the income for the counterparty is subject to a preferential tax regime or if the party that directly or indirectly receives the payment uses such payment to make other deductible payments to other members of the same group or derived from a structured agreement subject to a preferential tax regime.

The foreign income of local corporations is not exempt from corporate tax. Tax credits are available if certain requisites are met. Monthly advance payments shall not consider foreign income (it is only computed for the annual return).

Foreign income of local corporations is not exempt. Local expenses shall follow the general rules for deductions (strict indispensability, proper registration, materiality, etc) and the specific rules applicable to interest, royalties, etc.

Foreign dividends received by Mexican entities are treated as ordinary income and subject to the 30% tax rate. Income tax paid by the non-local subsidiary can be credited (some limitations apply). There is a second-tier indirect tax credit.

The use of intangibles developed by local corporations by non-local subsidiaries is subject to transfer pricing regulations and the arm’s length principle in Mexico. Thus a consideration for the use or the transfer will be required.

The tax authorities have issued non-binding criteria addressing the transfer of intangible assets abroad. According to this criteria, the deduction of royalties for licensing intangible assets that were transferred out of Mexico at a price below their arm’s length value is considered an improper tax practice.

This might qualify as a business restructure subject to further scrutiny under recent OECD Transfer Pricing Guidelines. Tax authorities, exercising their audit powers, scrutinise intercompany transactions, with a particular focus on intangible assets. The significance of functional and comparability analyses is emphasised in addressing such transactions.

Additionally, since 2020, the Mexican Tax Code has included a business purpose test. This empowers tax authorities to disregard artificial transactions lacking a business purpose when taxpayers derive a tax benefit greater than the reasonably expected economic benefit. Therefore, transactions involving the use of intangibles between local corporations and non-local subsidiaries should comply with transfer pricing regulations, ensuring that the pricing aligns with the arm’s length principle and serves a legitimate business purpose to avoid potential challenges from tax authorities.

A local entity will be taxed on the income (in some cases only the profits) generated abroad by a controlled non-local subsidiary, according to the participation of the Mexican resident, even if such entities do not distribute such income. The tax triggered will be 35% + 10% for the distribution of dividends.

These CFC rules are applicable if there is control and if the revenue obtained is not subject to tax or subject to a tax rate of less than 22.5% in the foreign country. Active business income will not be considered subject to these rules.

If taxpayers have operations through these entities, they will have to file a tax report with the Tax Administration Service.

The income will be attributed directly to the Mexican taxpayer and the tax paid abroad by these entities will be considered paid by the Mexican resident only for the taxable income taken into account.

The tax paid will generate a tax credit for the Mexican resident in the proportion that the income received by the entity or legal vehicle was considered taxable income by the taxpayer.

The exception of being considered a CFC when the taxpayer does not have “effective control” over the foreign entity still applies. Nevertheless, the rules to determine if there is effective control are substantially modified. Under these new rules there is effective control over the foreign entity if the taxpayer holds more than 50% of the shares or rights, which allows such taxpayer to obtain the profits or the assets in case of a capital reduction or liquidation.

To determine if the participation exceeds the 50% threshold, and therefore if effective control over the foreign entity exists, all rights owned by any related party or linked individuals shall be taken into account.

General anti-avoidance rules (GAAR) apply to transactions that lack a genuine business purpose and primarily aim to achieve a tax benefit. Under GAAR, if certain transactions with non-local affiliates are deemed to lack a substantive business purpose, they may be subject to a recalculation of their tax effects.

Local corporations are taxed on the gain from the sale of shares in non-local affiliates. The taxable income is determined by subtracting the average cost per share from the sale price per share. The average cost per share for shares issued by foreign resident entities is calculated based on the adjusted original amount of the shares, which includes the verified acquisition cost reduced by any reimbursements paid, with adjustments for inflation. Reimbursements paid include amortisations and capital reductions. However, taxpayers should only consider amortisations, reimbursements, or capital reductions applicable to shares that have not been cancelled due to these operations.

Tax authorities, in the exercise of their audit authority, are entitled to re-characterise any transaction that does not have a legitimate business reason and results in a tax benefit for the taxpayer. In such cases, the authorities can attribute to these transactions the tax effects that would have been expected had they been carried out to achieve a reasonable economic benefit.

For the application of the anti-avoidance rule, a “favourable opinion” of a committee (officials of the Ministry of Finance and Public Credit and the Tax Administration Service) must be issued. If such opinion is not issued within a two-month period, it will be considered as a negative resolution.

It is legally assumed, unless the taxpayer proves otherwise, that a transaction does not have a legitimate business reason when: (i) the measurable economic benefit is a smaller amount than the tax benefit obtained; or (ii) the reasonably expected economic benefit could have been achieved with fewer transactions, resulting in a higher tax effect (referred to as the fragmentation of operations).

Any reduction, elimination or temporary deferral is considered a tax benefit.

Tax authorities in Mexico are investing heavily in technological solutions to improve their ability to automatically access taxpayers’ information and gain a better understanding of their transactions.

Among the technological measures that have allowed for greater oversight of taxpayers are:

• the obligation of taxpayers to maintain electronic accounting, which is uploaded monthly to the tax authority’s portal;
• the use of the Taxpayer Mailbox for efficient communication; and
• the mandatory issuance of electronic invoices.

Utilising this advanced data analysis, tax authorities can efficiently detect inconsistencies within the electronic systems, prompting the issuance of “invitations” for further clarification. These invitations are not formal audits but serve as initial inquiries to address potential irregularities.

Also, the tax administration has identified specific sectors which are routinely audited (such as large taxpayers, retail, automotive, export-import activities, real estate, pharma, oil and gas).

As a member of the OECD, Mexico has been actively involved in the design and development of BEPS and has begun implementing many of the following recommended actions since 2014:

• taxation of the digital economy (Action 1);
• anti-hybrid rules (Action 2);
• limiting base erosion involving interest deductions and other financial payments (Action 4);
• preventing the artificial avoidance of permanent establishment status (Action 7);
• a form of mandatory disclosure requirement for taxpayers (Form 76) (Action 12);
• an obligation for taxpayers to present a country-by-country report, master file and local file (Action 13); and
• new OECD transfer pricing guidelines (Actions 8–10).

Mexico is a signatory party of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), under which Mexico elected to supplement the principal purpose test with a simplified limitation on benefits provision. On 12 October 2022, Mexico ratified the MLI, and finally on 15 March 2023, the Mexican Senate deposited the MLI with the OECD. The MLI came into force in Mexico on 1 January 2024, resulting in the amendment of several provisions of the tax treaties in force in Mexico.

Mexico has shown a commitment to addressing BEPS issues. The government aims to prevent multinational companies from shifting profits to low-tax jurisdictions, and to ensure that they pay their fair share of taxes in Mexico.

With respect to Pillar One and Two, Mexico has participated in discussions but has not yet committed to their implementation. However, given the global momentum and Mexico’s active participation in international tax co-operation, it is possible that Pillar One and Two could be adopted in the future. If Mexico decides to implement Pillars One and Two, it would likely take some time to enact the necessary legislative and administrative changes.

The impact of implementing these measures would be significant, particularly for multinational companies operating in Mexico. It could result in increased tax revenues for the Mexican government, greater tax transparency, and a more level playing field for domestic companies. However, it could also mean additional compliance burdens for multinationals and possibly changes in their tax planning strategies.

Mexico has expressed its intention to apply these rules once adopted, with an estimated 100 organisations in Mexico falling within the scope of Pillar Two. Mexico’s tax treaties often include restrictions to prevent double taxation or the application of lower tax rates to certain income.

International tax has garnered increased attention in Mexico, especially with the implementation of BEPS recommendations. The actions taken by Mexico, such as amending various articles of the Tax Code and Income Tax Law to address issues like VAT for non-resident taxpayers, hybrid mechanisms, base erosion through financing operations, and aggressive tax planning, demonstrate a commitment to aligning with international standards. Additionally, the adoption of the Multilateral Instrument in 2022 further underscores Mexico’s commitment to enhancing tax transparency and preventing treaty abuse, which aligns with the broader goals of the BEPS initiative. Overall, the high public profile of international tax in Mexico is likely to drive continued efforts to implement BEPS recommendations effectively.

Balancing competitive tax policy objectives with the pressures of BEPS is a major challenge for any jurisdiction, including Mexico. Mexico, as a member of the OECD, is a major driver of BEPS action. The main challenge for Mexico is to remain competitive in the global market to attract investment and promote economic growth, which must go hand in hand with the implementation of BEPS measures, as such measures ensure tax equity/equality, protect the tax base and prevent tax evasion by multinational companies, which obviously has a positive impact on tax collection in Mexico.

The IMMEX or maquila regime can be considered a key feature of the Mexican competitive tax system, which might be more vulnerable than other areas of the Mexican tax regime.

Several amendments were included in the Mexican 2020 Tax reform, in line with BEPS Action 2 by introducing new anti-hybrid rules for entities or legal arrangements treated as fiscally transparent under foreign tax regulations.

Mexico has a worldwide system. Interest deductibility restrictions could discourage investment and increase financing costs/affect loans.

Mexico has a worldwide taxation system and has been using CFC rules for more than 25 years.        

The limitations on benefits and anti-avoidance rules outlined by the authorities, particularly regarding presumptions of transactions lacking a business rationale and generating direct or indirect tax benefits, are likely to impact both inbound and outbound investors by adding an extra layer of compliance – ie, the need to have documents/information to prove that the economic benefit of a transaction surpasses its possible tax benefit.

In Mexico, changes suggested by BEPS in the transfer pricing area have not yet been adopted, such as those proposed in Action 13 – ie, the local file, master file and country-by-country reports. These changes were challenged, and the Mexican Supreme Court ruled in favour of the tax authorities.

Provisions for transparency and country-by-country reporting are welcome, but it is important that the rules governing them are minimally invasive and do not impose excessive burdens on taxpayers.

The Income Tax Law has established a new regime applicable to individuals engaged in business activities such as selling goods or providing services through digital platforms, computer applications, and similar technologies. It should be noted that the new regime is extended to cover hosting services, the sale of goods and any other service beyond transportation.

Under this new regime, intermediary entities, both resident and non-resident, facilitating transactions through these digital platforms are obligated to withhold income tax from service providers.Non-resident intermediaries must register with the Federal Taxpayer Registry as withholding agents and issue the required electronic invoices.

Mexico has implemented a new regime to tax digital services at a VAT rate of 16% when consideration is charged. The taxed services include downloading or accessing digital content, online clubs and dating pages, digital intermediation services, and distance learning or exercises.

As explained in 9.12 Taxation of Digital Economy Businesses, Mexico has imposed VAT rules related to digital taxation and a regulation for certain activities performed using digital platforms. There are currently no proposals to implement new reforms.

As explained in 6.4 Use of Intangibles by Non-local Subsidiaries,in Mexico the use by non-local subsidiaries of intangibles developed by local corporations is subject to transfer pricing regulations and the arm’s length principle.