Mexico: Further Tax Incentives for Northern Border Region

On December 29th, 2018, a decree has been published in Mexico which is aimed at improving the economic situation of the northern border region (“frontera norte”). The decree offers tax incentives to residing companies in terms of income tax and VAT reductions.

The decree has been effective since January 1st, 2019 and will remain so until December 31st, 2020. It affects 43 municipalities and specifically listed types of investments (e.g. creating jobs).

 

Income Tax Reduction

Companies that qualify for the income tax reduction will profit from a tax credit equaling approximately one third of its yearly tax revenue. If a taxpayer is economically active in both the norther border region and other parts of Mexico, the tax credit will be calculated proportionally to his respective revenues.

Another group of affected taxpayers are those who exclusively do business in the norther border region while residing there. Companies belong to this category if at least 90% of their total revenue of the previous fiscal year has been generated in the “frontera norte”.

In order to profit from the tax incentives, companies need to submit an application form to the tax authority SAT until March 31st of the year in question. In order to be viable for the reductions, the company must demonstrate that is has fulfilled the required criteria for at least 18 months.

 

Restrictions

The granted tax reduction is only applicable for the year of application but can be renewed. If one if the required criteria ceases to exist, the company loses its privileged status and must inform the tax authority immediately, resulting in potential paybacks of taxes with interest.

 

VAT Reduction

Certain companies can profit from a 50% VAT reduction from 16% to effectively 8%. Details regarding requirements and the application process can be found here.

 

These regulatory changes could affect your business with view to customizing or support of your ERP/SAP system. Please contact us to learn about possible necessary reactions to the changes – we are happy to assist you!