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Will newly approved Mexican tax reform affect your operations?

December 30, 2019 Article 1 min read
Julio Valdez Alejandro A. Rodriguez
On Dec. 9, 2019, the Mexican authorities published a 2020 tax reform package that includes changes affecting income, value-added, and other tax regulations. If you’re operating in Mexico, here’s what you need to know.
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Mexico’s 2020 tax reform package includes several changes that will affect foreign companies operating in Mexico. Many of these changes are intended to bring Mexico’s tax rules in compliance with recommendations from the Organization for Economic Co-operation and Development (OECD) and its Base Erosion and Profit Shifting (BEPS) action plan. Most of these changes will be applicable beginning Jan. 1, 2020. While not an all-inclusive list, some of the major changes include:

Income tax

  • Permanent establishment (PE): The definition of what creates a PE in Mexico is expanded. These changes are focused on the use of independent agents and commission arrangements in Mexico.
  • Interest deductibility restriction: Interest expense that exceeds 30% of adjusted EBITDA will be nondeductible. This restriction only applies to interest exceeding MXN $20 million (approximately $1.1M USD) per year.
  • Shelter structure: The four-year restriction previously applicable to shelter providers is eliminated.

Value-added tax (VAT)

  • Receivable balance offset: Taxpayers are only able to offset tax-receivable balances against the same type of tax (i.e., income taxes and value-added-tax, or VAT). This change has been in place since January 2019 via a temporary regulation, and is now part of the law.
  • VAT withholding on outsourcing/insourcing structures: Companies receiving outsourcing/insourcing services are required to withhold 6% of the VAT paid to such service providers.

Other tax items

  • Reportable transactions: As of Jan. 1, 2021, taxpayers and the tax advisors will be required to disclose certain reportable transactions to the Mexican tax authorities. Additional details regarding the transactions and structures that must be reported will be provided in the coming months.

Additional guidelines and regulations are expected to be published via miscellaneous rules over the next few months. For more information and to discuss how this may affect your organization, please contact our international team.

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