Taxes in Mexico: VAT, income taxes and other obligations

Setting up a business can be a challenge because some cultural and legal differences, also the language can play a huge barrier. However, in this article I will explain the main terms and mechanic to understand Mexican the Tax System.

The main taxes in Mexico are the following:

  • Impuesto Sobre la Renta (Income tax or I.S.R.)
  • Impuesto al Valor Agregado (V.A.T or I.V.A.)

Who is subject to Income tax?

The Mexican Federal Tax Code establishes that companies are considerate Mexican residents if their principal center of administration or the effective place of management is located in Mexico.

Foreign corporations established in Mexico are ruled by the same tax system than national enterprises, the income tax rate as of 2019 is the 30%.

How is calculated the Income tax?

First, we need to understand that Income Tax is an annual based contribution, that is paid no later than March 30th of the following year.

Every month estimated payments are presented by multiplying the sales times a profit percentage determined in base of last year tax profits of the company. For the first year the profit percentage is 0, but this doesn’t mean that the company is except of the annual year income tax payment. In the annual tax statement, all the estimated payments can be deducted from the annual tax.

Who is subject to VAT?

According to the Mexican Value Add Tax Lax (Ley del IVA), the following activities performed in Mexican territory are subject:

  • transfer of goods property
  • rendering of independent services
  • temporary use or enjoyment of goods
  • importation of goods or services.

The rates for VAT purposes are the following:

  • general rate of 16%
  • border rate of 8% (tax incentive)
  • especial 0% rate for some goods and services, for example:
    • not processed food
    • medicines
    • books and magazines (with exemptions)
    • exportation of goods and services (with exemptions)

There are activities that are exempt of VAT, some examples are:

  • construction of houses
  • land sale
  • education services
  • gold sale with a minimum content of 99% of the mention material
  • independent medical services

How is calculated the VAT?

Vat is a cashflow tax, divided in 2 concepts:

  • Input VAT: is the one calculated when goods or services are bought, this VAT is the company purchases.
  • Output VAT: is the one that is calculated when goods or services are sold, this VAT is in the company sales.

So, the difference in both amounts is the payable VAT or favor VAT. When the companies Output VAT is higher than Input VAT it will be required to make the payment to tax authorities for the difference. In case an opposite situation occurs, a refund can be requested or applied to payable VAT in the future.

This tax is presented in monthly bases with a complementary report named DIOT that a detail of the VAT of the vendors.

Do you need help?

Any question or advisory please not hesitate to contact me, it will be a pleasure advising you and your business.

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