October 13, 2023
Mexico offers tax incentives to taxpayers in key sectors of the export industry
On 11 October 2023, a Presidential Decree (the Decree) was published in Mexico's Federal Official Gazette, granting tax benefits to taxpayers engaged in economic activities in key sectors of the export industry, as defined. The incentives include accelerated tax depreciation for investments in new fixed assets and an additional tax deduction for increases in workforce training expenses. These tax incentives are aligned with the government's recent policies to promote foreign investment and increase Mexico's competitiveness for businesses looking to optimize supply chain and nearshoring structures. The Decree entered into force on 12 October 2023.
The Decree provides tax benefits for legal entities and individuals earning income from business activities and professional services that is taxable under the Mexican Income Tax Law.
The incentives would be granted to taxpayers engaged in the production, manufacture and export of goods in the following categories:
Additionally, the incentives are applicable for taxpayers engaged in the production of cinematographic and audiovisual content that is protected by copyright and to the extent that the content is exported.
These benefits would be applicable when taxpayers estimate that income arising from the export of these goods will represent at least 50% of their total income for fiscal years 2023 and 2024, respectively.
Under the Decree, accelerated tax depreciation for investments in new fixed assets acquired from 12 October 2023 through 31 December 2024 would be allowed. For this purpose, new fixed assets are those used for the first time in Mexico. The accelerated depreciation is in the form of a single-year deduction of a percentage of the asset's acquisition cost, in the year of acquisition, by applying the deduction percentages established in the Decree. These percentages range from 56% to 89% depending on the type of assets and the main business activity of the taxpayer. The remaining amount of the cost is generally not deductible unless the asset is sold or written off within a certain period, in which case additional cost recovery is permitted based on a schedule in the Decree. This incentive will apply only to investments that are used for a minimum of two years after the fiscal year in which the accelerated depreciation is applied. Furthermore, the immediate deduction would not be available for investments in office furniture and equipment, automobiles (including armor), other non-individually identifiable assets and aircraft other than those used for agricultural fumigation.
The Decree provides rules to apply this benefit to estimated income tax payments as well as the annual return and requires the taxpayer to maintain books and records to support the acquisition of the assets, the depreciation, as well as their use.
Applicable taxpayers will also be entitled to an additional tax deduction for fiscal years 2023, 2024 and 2025 equivalent to 25% of the incremental amount of expenses for training received by each of its workers in the corresponding year. The increase will be determined by the positive difference between the training expenses of the corresponding year and the average expense incurred during fiscal years 2020, 2021 and 2022. This additional deduction must be taken in the year in which the expenses are incurred and will be subject to certain rules; for example, the training must provide technical or scientific knowledge related to the business and the employees receiving the training must be registered with the Social Security Institute. This additional tax deduction would not be considered taxable income for the taxpayers.
The benefits under the Decree will not apply for certain taxpayers, including those that (i) are under a liquidation process, (ii) are "blacklisted" or "suspended" in terms of the applicable tax rules or (iii) have enforceable tax assessments that are not properly guaranteed.
In addition to meeting the general tax deductibility requirements in terms of the Mexican Income Tax Law, taxpayers that opt to apply the tax incentives of the Decree must (i) be properly registered before the Federal Taxpayers Registry with an enabled electronic tax mailbox ("buzón tributario"), (ii) have a positive tax compliance opinion status with the Mexican tax authorities, and (iii) file a notice informing the tax authorities that the tax benefits have been applied. The notice should be filed no later than 30 days following the month in which the tax benefits are applied.
Companies and individuals should evaluate and quantify the potential benefits of these tax incentives. Companies that operate in Mexico as "Maquiladoras" in terms of Articles 181 and 182 of the Mexican Income Tax Law, should carefully evaluate the potential benefits and tax implications derived from applying these incentives, as the accelerated depreciation benefit will only apply to assets purchased directly by the maquiladora and the amount of such accelerated depreciation, as well as the additional deduction on training expenses, could be neutralized or offset via the application of the safe harbor rules or the methodology approved under a maquila advanced pricing agreement.1 It will be important to monitor if additional guidance is issued in the following months.
For additional information with respect to this Alert, please contact the following:
Mancera, S.C., Mexico City
Ernst & Young, LLP, Latin America Business Center, New York
Ernst & Young LLP, Latin America Business Center, Chicago
Ernst & Young LLP, Latin America Business Center, Miami
Ernst & Young, LLP, Latin America Business Center, San Diego
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin America Tax Desk, Japan & Asia Pacific
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 The safe harbor methodology requires taxable income in Mexico to be the greater of (i) 6.5% of total costs incurred by the maquiladora or (ii) 6.9% of the total value of the assets used in the maquiladora operation.