Expanding operations to Mexico has become attractive for manufacturing companies seeking competitive advantages. While the country offers numerous benefits, including reduced labor costs and proximity to the U.S. market, understanding taxation in Mexico is essential to ensuring success and compliance. Below, we outline the key aspects of taxation that manufacturing companies must understand when establishing operations in Mexico.
Firstly, it is important to understand which are the main federal and local taxes:
Main federal taxes:
- Corporate Income tax (impuesto sobre la renta “IT”)
- Value added tax (impuesto al valor agregado “VAT”)
- Special Tax on Production and Services (“IEPS”)
- Import duties
- Social security contributions
Main local taxes:
- Payroll Tax
- Property Aquisition Tax
Now let`s take a closer look at the taxes that are most relevant for manufacturing companies:
Corporate Income Tax (CIT)
According to the Mexican Income Tax Law, residents in Mexico and foreigners with a Permanent Establishment (PE), are subject to income tax, and are taxed on their worldwide income at a rate of 30% on a net basis.
For manufacturing companies, understanding the scope of taxable income and deductions is vital, as this 30% rate is applicable to taxable profits. Common deductible expenses include operating costs, depreciation, and certain employee benefits, including employees profit sharing.
Safe Harbour
Under the safe harbor regime, maquiladoras have the option of paying taxes according to the safe harbour method. In which tax profits equals to the greatest amount equivalent to one of the following percentages:
- 9% of the value of the assets
- 5% of the amount of ordinary costs and expenses of their operation.
A maquiladora is a manufacturing operation in Mexico which is run by a foreign company and exports goods to other countries.
Maquiladoras import raw materials, components and machinery to process or assemble them in Mexico and then export back the finished manufactured goods. The processing, transformation, or repair of goods must be carried out with temporarily imported machinery and equipment owned by the foreign principal.
Value Added Tax (VAT)
The Value Added Tax (VAT) in Mexico is 16%, applicable to:
- – Sale and lease of goods.
- – Rendering of services.
- – Persons who grant the temporary use or enjoyment of assets within Mexican territory.
- – Import of goods or services into Mexico.
Manufacturing companies, particularly those operating under Mexico’s IMMEX program and VAT and IEPS Certification, may benefit from exemptions or deferrals on VAT for temporary imports of raw materials and components.
Under these programs, manufacturers can temporarily import materials without paying VAT as long as the finished goods are exported. Neverthelss, it is essential for manufacturers to maintain accurate records and ensure compliance with VAT reporting requirements to avoid fines or penalties.
Payroll Tax
A payroll Tax is applicable on wages and other expenditures derived from an employment relationship. This tax rate varies per State, but such tax normally amounts to 2% and 3% on the wage paid.
Property Acquisition Tax
The buyer of any type of real-estate property (house, land, building, apartment, among others) is responsible for paying taxes on real-state or land. The applicable tax may vary among the different States in Mexico, but the average is a 2% rate. Nevertheless, the Property Acquisition Tax may reach 6.5% on the sale price in some states.
In addition to the main applicable taxes, it is important to take into consideration the following topics related to taxation in Mexico:
Transfer Pricing Regulations
Mexico enforces stringent transfer pricing rules to prevent tax avoidance through under- or over-pricing transactions between related entities. Manufacturing companies with parent companies abroad must ensure that all cross-border transactions are conducted at arm’s length meaning prices must reflect market rates.
Companies should prepare detailed transfer pricing documentation annually to comply with these regulations, demonstrating that their transactions meet arm’s length standards.
Compliance with Mexican Financial Reporting Standards (MFRS)
Financial reporting in Mexico must adhere to Mexican Financial Reporting Standards (MFRS), which may differ from International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). Manufacturing companies must ensure their accounting systems align with MFRS to avoid compliance issues.
Large companies are often required to undergo annual audits, and maintaining accurate financial records is critical for both tax reporting and audit purposes. Records must be preserved for at least five years and include invoices, receipts, and all financial statements. Digitalization of these records is recommended to streamline compliance processes.
Next step for understanding Taxation in Mexico: Partnering with Experts
The complexities of Mexico’s tax and accounting landscape make partnering with experienced service providers or shelter companies an invaluable strategy for manufacturers. These partners can handle administrative burdens such as tax compliance, tax recovery, among other administrative tasks, allowing companies to focus on their core manufacturing operations.
Understanding taxation in Mexico is crucial for manufacturing companies aiming to establish or expand their operations in the country. Manufacturers can optimize their tax strategies by staying informed about corporate income tax, VAT, transfer pricing, and available incentives while ensuring full compliance. Partnering with local experts like Mexcentrix can further enhance the success of manufacturing ventures in Mexico.
With the right knowledge and support, companies can turn challenges into opportunities. Mexcentrix can help you by facilitating the whole process. Contact us!
