The main taxes affecting companies doing business in Mexico are Income Tax (ISR), Value Added Tax (IVA), Excise Tax (IEPS) and the Social Security fees that must be paid on employees’ behalf. Furthermore, companies with employees must distribute and pay an amount equal to 10% of tax profits to their employees.
A company is resident for tax purposes in Mexico if its main business headquarters are located in there. A company also acquires tax residence in Mexico through the figure of a permanent establishment, an assumption that arises when a foreign resident has a place of business in Mexico where it performs business activities (e.g. FBA). In this case, only the revenues attributable to the permanent establishment are taxable.
The obligation of digital platforms to withhold tax has been in effect since June 1, 2020. However, prior to that date, vendors and services providers operating through these platforms, whether companies or individual’s resident in Mexico or abroad, had to fulfill tax payment obligations on their own. The amendment of legal provisions as of June 1, 2020 has centered on digital platforms becoming the withholders of taxes that were always payable by vendors or services providers.
Companies resident in Mexico pay tax based on their total tax income under worldwide source. However, nonresident companies only pay tax on income derived from a source of wealth located in Mexico. In general terms, the source of wealth of revenues is deemed to be located in Mexico when the activities and/or assets related to a company’s operations are located in Mexico or when payments are made by Mexican entities to foreign residents.
The corporate ISR rate is 30%. The same rate is applicable to the Mexican branches of foreign entities operating under the permanent establishment figure, in alignment with the principles established by the OECD in this regard.
A company’s net income is a result of subtracting costs, deductible expenses, investments and the tax losses obtained during the 10 preceding fiscal years from its annual gross revenue. Revenues and expenses are recognized on an accrual basis.
IVA is applicable to the sale of goods, provision of services, the import and export of goods or services and lease transactions.
The standard IVA rate is 16%, while the 8% rate is applicable in certain municipalities located in Mexico’s northern and southern border regions. The IVA on imports is calculated according to the customs value of the imported goods.
Companies may credit their IVA payments against their payable tax; if the excess amount cannot be fully credited, the taxpayer may request its refund.
IEPS is applicable to certain specific products and services. For example, it is applicable to the import and sale of tobacco, alcoholic beverages, mobile telephony services, automotive fuel and other hydrocarbons, flavored beverages, fossil fuels, pesticides, etc. Tax rates vary depending on the product type. A special 8% tax is also applicable to foodstuffs with a high caloric value, including fried foods and ice cream, among others.