Tax Incentives for the Northern Border Region of Mexico and the United States
By Javier Lopez de Obeso, Associate Attorney
On January 1, 2019, Mexico’s Decree of Fiscal Incentives of the Northern Border Region (the “Decree”) became effective, and on January 30, 2019 the Mexican Tax Administration Service (“SAT”) published the general rules (“the Rules”) for the application of the Decree, establishing tax benefits to the taxpayers of Mexico’s income tax (“ISR”) and its value-added tax (“VAT”). The Northern Border Region (the “Region”) consists of specific municipalities within the Mexican states of Baja California, Sonora, Chihuahua, Coahuila, Nuevo León, and Tamaulipas.
The ISR benefits are going to be granted as a tax credit to taxpayers, consisting of one-third (1/3) of the income tax triggered, and which may be utilized against each monthly estimated payment and the annual income tax return, in the proportion of the revenue from the Region with respect to the total revenue of the taxpayer.
This benefit will be applicable to individuals and companies that are residents in Mexico for tax purposes and non-Mexico residents with permanent establishments in Mexico that comply with the following requirements:
a) Submit an application for registration in the corresponding Registry of Beneficiaries for the Stimulus of the Northern Border Region (the “Registry”) prior to March 31, 2019;
b) At least 90% of the taxpayer’s total income must be obtained through business activities within the Region; and
c) Provide evidence that their tax domicile, branch, agency, or any other kind of establishment has been located within the Region at least 18 months prior to the filing of the application, or if such duration is less, that they are able to prove that they use “new” fixed assets in their operations and activities within the Region, and have sufficient economic, asset, and facilities capacity. The Rule details the documentation to prove the financial capacity, assets and facilities, among which it is important to mention financial statements, accounting records of investments duly registered, supporting documents of sources and financing conditions, formalized minutes of capital contributions and, in general, any information that demonstrates the materiality of the operation that will be carried out in the Region, among others.
Taxpayers starting their business activities in the Region that provide evidence of the fact that they will use “new” fixed assets to carry on their activities within the Region, estimate an annual income in such Region representing at least 90 percent of their total income, and have sufficient economic, asset and facilities capacity.
The VAT benefit is a tax credit equivalent to 50% of the VAT triggered by taxpayers that perform commercial activities within the Region. For administrative simplification, the tax credit will be applied directly on the VAT rate to be changed it from 16% to 8% upon the sale or lease of goods, or the rendering of services in the Region.
Individuals and companies eligible for this benefit must meet the following requirements:
a) Sell property, provide independent services or lease property located within the Region;
b) Conduct the actual delivery of property or provision of services within the Region;
The Decree will remain in force during the years 2019 and 2020.
If you have any questions or need any legal assistance, please call the Mexico Law Team at ScottHulse, P.C. at 210.202.2315