Understanding Mexican Tax Laws and Regulations: A Comprehensive Guide

Posted on Aug 24, 2024 in Law & Jurisprudence

I. Concept of Joint Ventures

A joint venture is a contract where a partner contributes money, goods, or services to another associate (called an entrepreneur) for conducting a mercantile business. In return, the entrepreneur will share the profits or losses of the business.

II. What is an Electronic Signature and How is it Used by the SAT?

The main purpose of electronic signatures is to provide the same functionality in the digital world as handwritten signatures do for printed documents. They identify the author and, in shared documents, determine the content through the intersection of copies signed by all parties.

Unlike traditional physical signatures, electronic signatures allow individuals located far apart to sign documents without needing to be in the same place at the same time.

III. Why Were Contributions and Surcharges Updated?

Individuals and corporations who fail to pay taxes or utilize products within the stipulated period outlined in tax provisions must pay fees and updated charges on the due concepts.

Federal Tax Code

Title 1, Chapter One, Article 17-A:

The value of contributions, uses, and repayments by the federal treasury are updated periodically due to price fluctuations in the country. This update involves applying a discount factor to the amounts requiring adjustment.

This factor is calculated by dividing the INPC (National Consumer Price Index) of the month preceding the most recent period by the INPC of the month preceding the oldest period.

Title II of the Rights and Obligations of Taxpayers, Chapter One, Article 21:

When contributions or utilizations are not covered by the due date or deadline specified in tax provisions, the amount is updated from the month payment was due until it is made. Surcharges are also payable to compensate the federal treasury for the delayed payment.

IV. Example of Updating and Surcharges

Suppose you owe $1000, payable before February 17, 2009. If we are now in September, you are liable for penalties (which for this year are 1.13% per month) for 7 months of arrears. This equates to 7.91% x $1000 = $79.1 in surcharges.

INPC 2009

January: 135.467
February: 135.836
March: 136.161
April: 135.613
May: 135.218
June: 134.071
July: 134.367
August: 135.140

To update the values, we divide the INPC of the month preceding the most recent (August 2009) by the INPC of the month preceding the month the tax was generated (January 2009).

Therefore, 136.161 (August INPC) divided by 134.071 (January 2009 INPC) minus 1 equals 0.015. Multiplying this by 100 gives us 1.5%. Applying this to the original $1000, we get $15.

Adding the $79.1 surcharge and the $15 update, we get a total of $94.1. Adding this to the original tax of $1000, the total payable in September 2009 is $1094.1.

V. Definition of a Return

Article 22: Tax authorities will refund amounts paid in error, as per tax laws. For withheld contributions, a refund will be granted to taxpayers who did not withhold the contributions in question.

For indirect taxes, repayment of undue payment is made to individuals who paid the transferred tax, if not already credited. Therefore, those who transfer the tax, whether expressly stated or included in the price, are not entitled to claim a refund.

VI. Definition of Compensation

Article 23: Taxpayers required to pay by declaration can offset amounts in their favor against those they are obligated to pay by debit or retention, provided both derive from federal taxes (excluding those related to imports), are managed by the same authority, and have no specific destination, including accessories.

Compensation can be carried out from the month payment is made, as per Article 17-A of this Code.

VII. Taxpayer Obligations Regarding the RFC

Article 27: Legal entities and individuals required to submit periodic returns or issue warrants for their activities must apply for federal registration of taxpayers with the SAT and obtain a certificate of advanced electronic signature. They must also provide information regarding their identity, address, and general tax information.

These individuals must also demonstrate their tax domicile to the federal taxpayer registry. In case of a change in tax residence, they must provide appropriate notice within the following month.

VIII. Taxpayer Obligations in Accounting Matters

Obligations to Provide Information to SHCP by Accounting Taxpayers Using Electronic Records

Article 30-A: Taxpayers using electronic records for their accounts must provide the tax authorities with information about their customers and suppliers, as well as information related to their accounts, upon request and in processes that utilize resources.

Operations with the General Public

Taxpayers conducting business solely with the general public are only obligated to provide information about their suppliers and related accounting.

Service Providers

Individuals providing services through general rules established by the Secretary of Finance are required to provide the information mentioned above.

IX. Income Tax Law Article Regarding Declaration Obligations

This section requires further information to provide the specific article and its content.

X. Powers of Tax Authorities over Taxpayers Enrolled in the RFC

Article 33: To better execute their powers, tax authorities are authorized to:

Provide Free Assistance

I. Provide free assistance to taxpayers by:

A) Explaining tax provisions in clear, non-technical language.
B) Maintaining offices nationwide to guide and assist taxpayers in fulfilling their obligations.
C) Developing easily fillable reporting forms and distributing them promptly.
D) Accurately noting requirements.
E) Informing taxpayers of their rights and defenses against tax authority decisions.
F) Conducting informational meetings with taxpayers, especially when tax rules change.
G) Publishing annual decisions of tax authorities in an easily accessible format.
H) Periodically publishing criteria related to tax and customs provisions in the Official Gazette of the Federation.

Troubleshooting for the Taxpayer

II. Establish programs for preventing and resolving taxpayer issues, allowing taxpayers to appoint trustees to represent them before tax authorities.

III. Conduct tours, invitations, and surveys to inform and advise taxpayers about the strict enforcement of their tax obligations.

Establish General Rules

Furthermore, tax authorities will inform taxpayers of internal criteria and interpretations for the proper execution of tax provisions through general rules disseminated via public channels.

Powers Granted to the SHCP Apply to the SAT

When laws and regulations refer to or grant authority to the Ministry of Finance (SHCP) or its administrative units, it should be understood as applying to the Tax Administration Service (SAT) for functions related to tax administration.

XI. Titles within the Income Tax Law

PART I: General Provisions
TITLE II: Legal Persons
TITLE III: Legal Persons – Non-Profit Scheme
TITLE IV: Individuals
PART V: Foreign Residents with Income from Sources of Wealth Located in the National Territory
TITLE VI: Preferential Tax Regimes and Multinational Enterprises
TITLE VII: Tax Incentives

XII. Chapters of the Income Tax Law for Legal Persons

TITLE II: Legal Persons

CHAPTER I: Income
CHAPTER II: Deductions
CHAPTER III: Inflation Adjustment
CHAPTER IV: Credit Institutions, Insurance and Securities, General Deposit Warehouses, Financial Leasing, Credit Unions, and Corporate Capital Investment
CHAPTER V: Losses
CHAPTER VI: Tax Consolidation Regime
CHAPTER VII: Simplified System
CHAPTER VIII: Obligations of Legal Persons
CHAPTER IX: Powers of Authorities

XIII. Definition of a Moral Person (ISR)

Subject: A moral person refers to commercial companies, decentralized agencies engaged predominantly in business, lending institutions, civil societies and associations, and joint ventures when engaged in business activities in Mexico.

Purpose: It encompasses income in cash, kind, or credit, derived from business, agricultural, industrial, farming, or fishing activities carried out by legal entities.

Base: Legal entities distributing dividends or profits must calculate and determine the applicable tax by applying the rate mentioned in Article 10 (28%).

To determine the tax on dividends or profits:

Multiply by the factor of 1.3889
Apply the rate of 28% to the result

Rate: Moral persons should calculate income tax using the tax result obtained in the fiscal year at a rate of 28%.

XIV. Definition of Revenue Comp. (ISR)

Organizations located in the country, including joint ventures, accumulate all income in cash, goods, services, credit, or otherwise, obtained during the fiscal year, including income from their branches abroad.

XV. Definition of Allowable Deductions (ISR)

Taxpayers can deduct the following:

Refunds, Discounts, or Rebates: Returns received or discounts and rebates made during the fiscal year.
Cost of Sales
Expenses: Net expenditure after rebates, discounts, or rebates.
Investments
Repealed Investment
Bad Debts and Losses Due to Accidents: Bad loans and losses resulting from accidents, force majeure, or the disposal of property other than those mentioned in the first paragraph of Section II of this article.
Creation of Reserves for Pension Funds, Pensions, etc.: Contributions allocated to the creation or increase of reserves for pension funds or retirement of personnel, in addition to those established by the Social Security Act, and seniority premiums incorporated under the terms of this law.
Employer Contributions to IMSS: Fees paid by employers to the Mexican Social Security Institute, even if they are charged to workers.
Accrued Interest: Interest earned during the fiscal year, without adjustment. In the case of default interest, only the amount actually paid is deductible from the fourth month onwards.
Annual Adjustment for Inflation: The annual adjustment for inflation deductible under Article 46 of this law.
Advances and Income Paid to Listed Persons: Advances and income paid to production cooperative societies and advances surrendered by societies and associations to their members, when distributed according to Section II, Article 110 of this Act.
Deduction of Advances for Expenses: If taxpayers have paid any advances for the expenses mentioned in Section III of this article, they will be deductible subject to compliance with the requirements of Article 31, Section XIX of this Law.

XVI. Definition of a Tax Loss and its Location in the Act (ISR)

Article 61: A tax loss is the difference between cumulative income for the year and the deductions allowed by this Act, when the latter amount exceeds income.

XVII. How is ISR Calculated for a Moral Person?

This section requires further information to provide the calculation method.

XVIII. Definition of OCT, Percentage, Distribution Month, and Method

Our Basic Law, in Section IX, Paragraph A, Section 123, provides workers with the right to participate in the profits of enterprises, assuming the company generates earnings. For its calculation, regulation, and distribution bases, we must refer to the Federal Labor Law.

The National Commission, composed of representatives of workers, employers, and the government, determines the percentage of profits to be distributed among workers. (Currently 12% based on distributable profits).

XIX. Definition of an Individual with Business Activities and its Location in the Act (Income Tax Law)

Article 120 (ISR): Individuals who receive income from business activities or professional services are obligated to pay tax under this section.

Business Activities:

I. Business revenues include those from conducting commercial, industrial, agricultural, livestock, fishing, or forestry activities.

Professional Services:

II. Revenue from providing professional services, remuneration derived from independent personal services, and income not considered in Chapter I.

When is the Income Tax for Individuals Due?

The tax return must be filed, usually between May 1st and June 20th, with an extended deadline for declarations requiring a refund until June 30th.

XX. Subject, Object, Base, and Rate for Individuals with Business Activities (Income Tax Law)

Subject and Object: Individuals residing in Mexico who earn income in cash, property, credit, services, or otherwise, as specified in this title, are required to pay tax under this title. Individuals residing abroad who conduct business or provide independent personal services in the country through a permanent establishment are also required to pay tax on income attributable to this.

Base: Article 108-A. The ISR should be applied based on taxable income received. There are taxed and exempt incomes; the former are accumulated, while the latter are not. Likewise, expenses may be deductible, leaving a portion of the income taxed.

Rate: Article 108-A. A utility tax will be applied at a rate of 35%. However, a portion of the tax may differ, or a rate of 30% may apply to taxable income reinvested in the financial business, with the remaining 5% payable upon profit distribution.

The rate varies depending on the base limit, ranging from 1.92% to 28% for individuals and a fixed 28% for moral persons.

XXI. Difference Between Individual and Corporate Client Schemes

For tax purposes, it’s crucial to define whether a person will conduct their economic activities as an individual or a moral person. The law provides different treatments for each, affecting registration requirements with the Federal Taxpayer Registry (RFC) and subsequent obligations.

Individual: An individual with the capacity to incur obligations and exercise rights. Article 113 LISR. Several schemes exist for individuals based on their activity and income amount. Individuals account for all their assets. Articles 106, 113 (retention), 117 (obligations), and 118 (patterns) of the Income Tax Law.

Moral Person: A group of people united for a specific purpose, such as a corporation or civil association. Moral persons’ tax and obligations differ based on whether they are for-profit or non-profit. They account for the total capital contributed by each partner. Article 86 of the Income Tax Law.

XXII. Definition of IETU

The Single Rate Business Tax (IETU) is a tax on profits that came into effect on January 1, 2008.

XXIII. Number of Articles in the IETU Law

The IETU Law contains 19 articles.

XXIV. Subjects, Base, and Rate of IETU

Tax Subjects: Individuals and moral persons residing in Mexico, as well as foreign residents with a permanent establishment in the country, regardless of where their income is generated.

Object of the Tax:

Disposal of property
Provision of independent services
Granting temporary use or enjoyment of property

Tax Base: Determined by considering the total revenue earned from taxable activities minus the deductions allowed in the IETU.

Tax Rate: 16.5% for 2008, 17% for 2009, and 17.5% for 2010 and beyond.

XXV. Taxed and Exempt Income for IETU

Taxed Income:

Price or consideration for the sale of property, provision of independent services, or granting temporary use or enjoyment of property, including amounts charged for taxes or duties, interest, penalties, or advances/deposits.
Advances or deposits returned to taxpayers, as well as rebates or discounts received, provided the transactions leading to the deduction were made.
Amounts paid by insurance institutions to individuals performing activities mentioned in Article 1 of the Act when the risk covered by insurance policies or reinsurance contracts involving deducted goods occurs.
Income received by institutions mentioned in Article 8 of the Income Tax Law, financial intermediaries, and those involved in loan portfolio collection activities described in Article 1 of this Act, excluding the provision of services for which interest is charged or paid.

Exempt Income:

Income received by the Federation, Federal States, municipalities, autonomous constitutional bodies, and parastatal government institutions not considered income taxpayers.
Income not subject to ISR payment, including:
- Income obtained by non-profit moral persons or trusts authorized to receive deductible contributions under the Income Tax Law.
- Income received by individuals and corporations from agriculture, livestock, forestry, or fisheries, exempt from income tax only if registered with the RFC.
- Income received by individuals accidentally performing activities mentioned in Article 1 of the IETU Law.

XXVI. Deductions Allowed for IETU

Expenses related to acquiring goods, services, or temporary use or enjoyment of property, or for administration, production, marketing, and distribution of goods and services.
Contributions paid by the taxpayer in Mexico, excluding IETU, income tax, tax on cash deposits, social security contributions, and taxes to be transferred.
Amount of returned goods, discounts or rebates made, and returned deposits or payments, provided the revenues from the operations leading to them were affected by the single rate corporate tax.
Compensation for damages and contract penalties, provided the law mandates their payment.
Creation or increase of reserves related to life insurance or pension insurance from social security laws, issued by authorized insurance institutions.
Amounts paid by insurance institutions to policyholders or beneficiaries upon the occurrence of the covered risk and amounts paid by surety institutions to cover claims.
Cash prizes awarded to individuals organizing lotteries, raffles, or contests authorized under respective laws.
Donations, whether remunerative or not, under the same terms and limits established for the Income Tax Law.
Losses on bad debts.
Value Added Tax (VAT) or excise duty on production and services where the taxpayer is not entitled to credit, provided they correspond to deductible expenses for the single rate corporate tax.

XXVII. How IETU is Determined

Calculate the tax base by subtracting allowed deductions actually paid during the period from total income received during the period (from the first day of the year to the last day of the month for which the tax is calculated).
Multiply the determined tax base by the IETU rate (17%).
Subtract applicable tax credits (e.g., wage and social security contributions, credit for deductions exceeding income) and interim ISR payments made in the same period.
Subtract provisional income tax payments and, if applicable, income tax withheld for the same period on the interim payment and IETU interim payments made in the same year.
The result is the provisional IETU payment for the period.

XXVIII. Definition of LIVA

LIVA (VAT) is an indirect tax, meaning taxpayers don’t pay it directly but transfer it to a third party, with the final consumer ultimately absorbing the cost. Payments made for this tax are definitive, meaning no annual return is required, unlike interim payments.

XXIX. Subjects of VAT

The Mexican state is the subject of VAT, as it receives the revenue generated by this tax.

XXX. Object of VAT

VAT applies nationwide to the following:

Sales of movable goods located within the country, as well as sales made by individuals mentioned in Article 4, fractions a), b), d), e), and f).

XXXI. Base and Rate of VAT

Tax Rates

Rate 0%

Acts or activities subject to this rate have the same legal effect as those for which the tax is payable under this Act.

Section 2-A: The 0% rate applies to the following:

Disposals:

a) Non-industrialized animals and plants, excluding rubber.
b) Patent medicines and food products.

Rate of 10%

Article 2: This rate applies to the values specified by law when the acts are performed by residents in the border region and the physical delivery of goods or services occurs within that region.

XXXII. Time of VAT Accrual

Article 17: For the provision of services, tax payment is required at the time of effective charge-off, except for interest mentioned in Article 18-A of the LIVA, where the tax is payable as it accrues.

Article 18-A: The real value of accrued interest is considered the value for calculating the tax.

XXXIII. Obligations of VAT Payers

This section requires further information to specify the obligations.

XXXIV. Elements of Employment

Provision of Services: Work must be performed directly by the individual and cannot be delegated; it is irreplaceable.
Subordination: The employee or worker must receive orders or follow methods and schedules imposed by the employer, either verbally or in writing.
Compensation for Services: This is the payment or profit received for the work performed, regardless of whether it’s called fees or royalties. This is crucial because attempts are sometimes made to disguise the true nature of the payment to avoid paying fees or royalties, highlighting the importance of substance over form.

XXXV. General Working Conditions

Working Time (Article 58 LFT)

Working time is the period during which the worker is available to the employer to provide work.

Types of Working Hours (Article 60 LFT)

Day Shift: Between 6:00 AM and 8:00 PM.
Night Shift: Between 8:00 PM and 6:00 AM.
Mixed Shift: Includes periods of both day and night work. If the night period is less than 3.5 hours, it’s considered a day shift; if it’s 3.5 hours or more, it’s considered a night shift.

Hours and Duration of Working Hours (Article 61 LFT)

Day Shift: 8 hours
Night Shift: 7 hours
Mixed Shift: 7 hours

Overtime (Articles 66, 67, 68 LFT)

Article 66: The workday can be extended due to extraordinary circumstances, not exceeding 3 hours daily or 3 times a week.

Article 67: Overtime hours will be paid at a rate 100% higher than the regular hourly rate.

Article 68: Workers are not required to work beyond the limits established in this chapter. Overtime exceeding 9 hours per week requires the employer to pay the employee double the regular hourly rate, subject to penalties outlined in this Act.

Days Off (Articles 69, 70, 71, 73 LFT)

Article 69: For every 6 days of work, employees are entitled to at least one day of rest with full pay.

Article 70: In jobs requiring continuous work, workers and employers will agree on the days for weekly rest.

Article 71: Regulations will ensure that the weekly rest day is Sunday. Employees working on Sundays are entitled to a premium of at least 25% of their regular daily wage.

Article 72: Workers providing services every day of the work week or to multiple employers on the same day or week are entitled to be paid for rest days based on the salary earned from each employer.

Article 73: Workers are not required to work on their days off. Violations of this provision require the employer to pay double the regular daily wage, in addition to the regular pay for the rest day.

Holidays (Articles 76, 79, 81 LFT)

Article 76: Workers with more than one year of service are entitled to paid annual leave of at least 6 working days, increasing by 2 working days for each subsequent year of service, up to 12 days. After the fourth year, the leave period increases by 2 days for every 5 years of service.

Article 79: Leave can be compensated with a fee. If the employment relationship ends before one year of service, the employee is entitled to remuneration proportionate to their length of service.

Article 81: Leave must be granted within 6 months of completing the year of service. Employers will provide workers with a document annually, stating their age and the agreed-upon vacation period and dates.

Holiday Bonus (Article 80 LFT)

Article 80: Workers are entitled to a bonus of at least 25% of their wages during the holiday period.

XXXVI. Termination of Employment Relationship

Article 53. LFT

Termination of the employment relationship occurs under the following circumstances:

Mutual consent of the parties.
Death of the worker.
Termination or expiration of the employment contract or capital investment.
Physical or mental incapacity or disability of the worker that prevents them from performing their work.
Cases mentioned in Article 434.

XXXVII. Income Similar to Wages

Remuneration and Benefits: Obtained by officials and employees of the federation, states, and municipalities, including those for unverifiable expenses, as well as those obtained by members of the armed forces.
Yields and Advances: Received by members of production cooperatives and advances received by members of societies and associations.
Fees: For members of boards of directors, supervisory boards, advisory boards, or similar bodies, and fees for managers, commissioners, and general managers.
Fees: Paid to individuals providing services predominantly to a borrower, provided the services are performed at the borrower’s facilities.
Fees: Charged by individuals to legal entities or individuals with business activities for providing independent personal services, when they communicate in writing to the borrower their choice to pay tax under this chapter.
Income: Received by individuals from legal entities or individuals with business activities for conducting business activities, when they inform the payer in writing of their choice to pay tax under this chapter.
Proceeds: Received by individuals exercising the option granted by their employer or a related party to acquire shares or securities representing property, at no cost or a price less than or equal to market value, regardless of whether the shares or securities are issued by the employer or a related party.

XXXVIII. Exempt Wage Income

Exempt income is not included in the tax base for calculating income tax. Article 109 of the ISR Act establishes the following exempt income:

Minimum Wage and Overtime Benefits: Calculated based on such wages, if they do not exceed the minimum wage identified by labor law and the concept of payments for overtime or services performed on rest days, up to the limit set by labor law, for workers who receive them.
Compensation for Occupational Hazards or Diseases: Granted in accordance with laws, collective agreements, or labor contracts.
Retirement, Pensions, and Other Assets: In cases of disability, unemployment, old age, retirement, and death, whose daily amount does not exceed nine times the general minimum wage in the taxpayer’s geographical area. Tax is payable on the excess amount under this title.
Reimbursements for Medical and Funeral Expenses: Collected on reimbursements for medical, dental, hospital, and funeral expenses, generally granted in accordance with laws or employment contracts.
Social Security Benefits: Granted by public institutions.
Benefits: Received in connection with disability benefits, educational grants for employees or their children, childcare, sports, and cultural activities (Article 8, Fifth Paragraph of this law).
Contributions and Returns on Housing Subaccounts: Individual accounts under the Social Security Act and the housing subaccount from the individual account system for retirement savings, under the law of the Institute of Social Security and Services for State Employees.
Banks and Savings Funds: Established by companies for their workers when they meet the deductibility requirements of Title II of this Act or, where applicable, of this title.
Social Security Contributions: The portion of social security for workers paid by employers.
Seniority Premiums, Retirement, Severance, and Other Payments: Received by individuals upon termination of their employment relationship, as well as those obtained under the retirement insurance subaccount or retirement, unemployment at an advanced age, and old age subaccounts under the Social Security Act.
Annual Bonuses and Other Benefits: Equivalent to the general minimum wage in the geographical area, increased to 30 days, when such rewards are granted generally, as well as vacation pay provided by employers during the calendar year and worker participation in corporate profits, etc.

XXXIX. Employment Allowance

This section requires further information to define the employment allowance.

XL. Social Security Contributions

This section requires further information to define social security contributions.

XLI. Branches of IMSS and Their Definitions

The Mexican Social Security Institute (IMSS) has five branches of insurance:

Work Risk Branch: Protects workers against accidents and illnesses arising from their work, providing medical care and a pension during periods of incapacity or to beneficiaries upon the insured’s death. Work-related accidents and illnesses are defined in Articles 41-43 of the LSS (Social Security Law).
Sickness and Maternity Branch: Provides medical, surgical, pharmaceutical, and hospital care to the worker and their family, including benefits in kind and cash, such as nursing assistance and temporary disability benefits.
Disability and Life Branch: Protects against the risks of disability and death of the insured or pensioner when not caused by an occupational hazard, granting a pension to their beneficiaries.
Retirement, Unemployment, and Old Age Branch: Allows contributing workers to save for their retirement, covering the risks of retirement, severance at an advanced age, old age, and death of pensioners. This branch provides a pension, healthcare, family allowances, and welfare support based on the requirements outlined in the law.
Nursery and Benefits Branch: Provides childcare services to the insured and their beneficiaries and offers benefits to the wider community aimed at promoting health, preventing illness and accidents, and contributing to the general improvement of living standards through various programs and services.

XLII. Definition of INFONAVIT

INFONAVIT stands for the Institute of the National Housing Fund for Workers.

XLIII. Employer Obligations Towards INFONAVIT

Employers are obligated to contribute 5% of their workers’ integrated daily wage to INFONAVIT.

XLIV. Classification of Risk Degrees in Social Security and INFONAVIT

This section requires further information to explain the risk degree classification.

XLV. Payroll Tax

This section requires further information to define the payroll tax.