The most significant taxes in Mexico for corporations and individuals, measured in the amount of pesos collected, are the business flat tax (IETU), income tax (ISR), value added tax (IVA) and tax on cash deposits (IDE). The following is a brief description of each major type of Mexican tax:
Business Flat Tax (Impuesto Empresarial de Tarifa Única – IETU)
This tax is paid by resident Mexican business entities, such as corporations and partnerships, as well as individuals on their worldwide income received as compensation for the sale of goods, for independent services rendered and for leased goods.
The tax is calculated and paid monthly on a cash-flow basis at a rate of 17% for 2009 and 17.5% for 2010. For example, if August is the current month, taxpayers apply the tax rate to the difference between sales (from January to July) minus expenses (from January to July). From this result, payments from prior months can be deducted.
Income Tax (Impuesto Sobre la Renta – ISR)
All revenues for entities and individuals, including those obtained abroad, are taxed according to the income tax law. The rate for corporations is 28%. Individuals pay this tax using a progressive table from 0% to 28%. The tax is calculated on an annual basis, with monthly payments in advance. Expenses are not counted as deductions on the monthly payments. Deductions are applied only when the annual tax calculation is prepared.
IMPORTANT NOTE: Taxpayers do not pay the total of both IETU and ISR. The amount of ISR and IETU tax due is calculated each month and the taxes due are compared. Taxpayers only pay the highest amount in the following way: If the highest amount is ISR then the taxpayer only pays the ISR tax, but if the highest amount is IETU, then the taxpayer pays the ISR amount plus any IETU over that amount.
According to the income tax law in Mexico, a corporation also has taxable income when they issue an invoice to collect money from a client. In other words, if a corporation issues an invoice in May but does not collect until July, the corporation is compelled to pay taxes in May.
An interesting note is that any increase in the value of liabilities due to inflation is added to taxable income. On the other hand, any increase in current assets due to inflation becomes an additional tax deduction. After calculating the net of these amounts, the corporation may have an extra tax deduction or extra taxable income. Stockholders of companies in Mexico should be aware that if their corporation repays debt, it may result in extra taxable income because the original amount will be repaid but will likely be less than the inflated debt on the books.
The calculations for individuals are the same as for corporations, with the difference being that the taxation rate is variable depending on the taxable basis. The higher the income, the higher the rate.
For individuals whose only source of income is from a salary, the government pays a subsidy called the “employment subsidy” which is a deduction from the payable income tax. This deduction is an amount that also changes depending on the level of income. Again, the more income, the lower the employment subsidy and the less income, the higher the employment subsidy. The employment subsidy is paid by the government through the employer and the employer can deduct the employment subsidy payments from their tax payments.
It is important to know that for corporations, the calculations for deductions are the same as for income. In other words, the corporation can deduct an expense in the year that the invoice is issued by the supplier, whether or not that invoice actually gets paid in the current OR subsequent year. This is not true for individuals, who only deduct expenses when they pay (when the check is cashed) and accumulate income when they are paid (when they cash the check paid to them).
Value Added Tax (Impuesto al Valor Agregado – IVA)
IVA is a sales tax applied to the value added to products and services through the chain of production, taxing the final price paid by the consumer.
All individuals and entities engaging in the activities listed below are required to pay value added tax:
• Sale of assets
• Rendering of independent services
• Grant of temporary use or sale of assets
• Import of goods or services
Taxpayers have the right to deduct the VAT paid by them when purchasing goods or services that are bought in conducting the main activities of their business. Here is an example of how that formula works:
Value added tax collected from clients
-Value added tax paid to suppliers
= Payable IVA or IVA a favor
As with the case of income tax for individuals, both corporations and individuals accumulate this tax a pagar (payable to the government) when they receive the money from sales that include IVA. From that amount, they can deduct the amount of IVA paid when they pay their suppliers.
Tax on Cash Deposits (Impuesto sobre Depositos en Efectivo – IDE)
The tax on cash deposits is a fairly new tax that was put into effect in July 2008. This tax is calculated at a 3% rate on the deposits made in cash to an account maintained with any Mexican financial institution. It is also applicable when the aggregate deposits in any month exceed MXN $15,000. The tax is collected by the institutions receiving the deposits, who issue the corresponding certificates of withholding to the taxpayers so they can deduct this tax from other taxes paid in Mexico.
For example (in pesos):
$20,000 total amount deposited in cash by taxpayer into his bank account
$ 5,000 taxable amount
$ 150 tax due (3%)
NOTE: Only cash deposits are taxed. Wire transfers, check deposits, and deposits in currencies other than Mexican pesos are not taxed.
We hope that this introduction will give you some idea of the tax laws in Mexico. Obviously, there are more details and other taxes related to individuals or business, and a myriad of deductions and ways to calculate taxes. There are also treaties between Mexico and other countries to prevent double taxation, but specific analysis is required for each particular case.
For further information, we welcome comments or questions below. For more complicated issues, we invite you to contact the YES offices.