The national tax authority in Mexico is called the “Hacienda”. This is similar in function to the Internal Revenue Service in the US.
The tax system in Mexico is complicated, with strict controls on transfer pricing for transnational companies, and limited tax advantages for companies seeking to avoid taxes by re-investing in their existing businesses.
Claudia Avila Connelly of AMPIP provided the following information about taxation in Mexico:
The taxation system in Mexico is primarily concentrated in the federal system. The three primary taxes are the I.S.R. (Impuesto Sobre la Renta) which is a proportion of salary, IMPAC (Impuesto al Activo) tax on assets, and I.V.A. (Impuesto a Valor Aggregado) a value added sales tax of 15%.
At the state level the only tax is the I.S.N. (Impuesto sobre Nomina), tax based upon payroll, this rate varies between states. For example in Queretaro there is no I.S.N, while in other Mexican states might vary between 0% – 2%. This may be waived depending upon the social impact and generation of employment by the investment project Other costs at the state level that may be negotiated would be the public property registration, which represents a percentage of 2% to 5% of the value of the building.
At the municipal level the only tax that exists is the Predial (property tax). There are other costs related to the construction license and title change. All of these can be negotiated as incentives but any concession granted to the investor, must be previously approved by the local town administration, with evidence of the session minutes where it is clearly stated that the concession has been granted by the administration, and signed by all members.
It is the employer’s responsibility to retain, pay, and report the taxes and income for workers (unless they are private contractors). The average Mexican worker will not ever have to fill out an income tax form.
The difference in tax law between the US and Mexico is enormous. One of the most frightening aspects for US trained accounts is that there are modifications to the Mexican tax code every month. This means that your accountants must update their knowledge of the tax code and the changes on a monthly basis.
As with all tax laws, there are “grey areas” that will be interpreted differently by the tax authority and the entrepreneurs and corporations.
Mexico has a huge underground economy, with estimates that up to 60% of the commerce and services are not registered with “Hacienda”, and do not pay taxes. This puts pressure on the legally registered businesses, and Hacienda seeks to audit and verify that those registered business are conforming.
This has caused a great deal of controversy, and the term “fiscal or tax terrorism” has been used by angry businessmen who want “Hacienda” to focus their efforts incorporating those businesses outside of the system, instead of re-auditing those who are captive in the system
Tax reform is a big issue currently in Mexico, and I believe that in the near future steps and legislation will be introduced and approved to simplify the tax code and streamline the system.
I strongly recommend a good accountant, a good internal auditor and a good external auditor for any business dealings in Mexico.
Disclaimer: The ideas presented are personal opinions and generalizations based upon 25+ years interacting, living and working in and with Mexico. None of this may be true, it may be completely false, use the information at your own risk