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Mexico Introduces Tax Incentives for Northern Border Region

On 31 December 2018, Mexico published in the official gazette a decree on tax incentives for northern border regions. The incentives include:

  • An income tax credit equal to 1/3 of the tax due for a period, which effectively reduces the corporate income tax rate from 30% to 20%; and
  • A 50% VAT credit that can be applied directly at the time of a transaction and effectively reduces the VAT rate from 16% to 8%.

The incentives apply for income exclusively sourced in the qualifying regions (see below) and for goods and services supplied in the qualifying regions. In this respect, at least 90% of the income of a taxpayer must be sourced from a qualifying region for the incentives to apply.

To qualify, taxpayers must prove that they have been resident in a qualifying northern border region for at least 18 months and register in a newly established registry for the incentives. However, taxpayers may still be able to benefit subject to certain conditions, including that they have the economic capacity, assets, and facilities to carry out their operations and business activities in a qualifying region. Taxpayers outside qualifying regions with a branch in a qualifying region, and vice versa, may also be eligible, subject to certain conditions.

Certain taxpayers are specifically excluded from the income tax incentive, including, among others:

  • Financial institutions;
  • Special deposit warehouses;
  • Taxpayers under the optional regime for groups;
  • Qualified real estate trusts;
  • Taxpayers under the regime for agricultural and related industries;
  • Taxpayers reporting income under benefits from the maquiladora regime;
  • Taxpayers carrying out business activities through trusts;
  • Cooperative production societies;
  • Taxpayers applying other incentives;
  • Taxpayers identified as issuing invoices without substance;
  • Taxpayers under audit or subject to certain action by the tax authorities;
  • Taxpayers that operate under an outsourcing arrangement; and
  • Taxpayers under liquidation proceedings.

In addition, certain income is ineligible, including income from intangible assets and digital commerce. The VAT incentive is also limited in certain cases, including in respect of immovable property, intangible assets, and digital content.

Northern border regions covered by the incentives include the following municipalities by state:

  • Ensenada, Playas de Rosarito, Tijuana, Tecate, and Mexicali in the state of Baja California;
  • San Luis Río Colorado, Puerto Peñasco, General Plutarco Elías Calles, Caborca, Altar, Sáric, Nogales, Santa Cruz, Cananea, Naco, and Agua Prieta in the state of Sonora;
  • Janos, Ascensión, Juárez, Praxedis G. Guerrero, Guadalupe, Coyame del Sotol, Ojinaga and Manuel Benavides in the state of Chihuahua;
  • Ocampo, Acuña, Zaragoza, Jiménez, Piedras Negras, Nava, Guerrero, and Hidalgo in the state of Coahuila de Zaragoza;
  • Anáhuac in the state of Nuevo León; and
  • Nuevo Laredo, Guerrero, Mier, Miguel Alemán, Camargo, Gustavo Díaz Ordaz, Reynosa, Rio Bravo, Valle Hermoso, and Matamoros in the state of Tamaulipas.

The decree entered into force on 1 January 2019 and is effective for 2019 and 2020. Authorization for the incentives should be applied for by 31 March of the year a taxpayer intends to apply the incentives.

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