Mexico continues issuing rules to entice nearshoring investments. On October 11, 2023, the Federal Government published the Decree Granting Tax Benefits to key Export Sectors Consisting of the Accelerated Depreciation of the Investment in New Fixed Assets (including Machinery and Equipment) and the Additional Deduction in Training Expenses (the “Decree”).
- The Decree incentivizes 10 export sectors.
- The Mexican export companies may reduce the monthly advance income tax payments.
- Eligible Mexican export companies may increase cash flows.
- The Decree grants the tax benefits from October 12, 2023, until the end of 2024 for the accelerated tax depreciation for New Fixed Assets, and for additional tax deductions on training until 2025.
Following the release of measures to develop the Istmo de Tehuantepec Free Trade Zone, published in June 2023, the Mexican Government published the Decree to keep promoting and developing the nearshoring phenomenon to Mexico where eligible Mexican companies will be entitled to apply deductions described in the Decree for corporate income tax purposes. The rationale of the Decree is to direct incentives to key export sectors of the Mexican economy to boost competitiveness, innovation and investment in technology aimed at generating jobs and increasing direct foreign investment.
- deductions in Training expenses: 25% of the excess training expenses paid in 2023 to 2025 over the average expense paid in 2020 to 2022;
- depreciation deduction to new assets: 56% up to 89% of the expenditure, depending on specific assets listed; and
- depreciation deduction to new machinery and equipment: 56% up to 88% of the expenditure on certain assets in specific activities.
The accelerated depreciation at the rates described in items II and III applies instead of the straight -line mechanism currently set forth in the Income Tax Law.
Products subject to the Tax Benefits:
The Tax Benefits are granted to Mexican companies engaged in production, elaboration, and manufacturing of products to be exported considering these four criteria: (i) high productivity in the growth of Mexico’s GDP; (ii) export-orientation; (iii) impact of certain sector on the Mexican economy through multiplier effects, and (iv) increase in demand, given the US reduction in the trade flow from other regions. The list of products is as follows:
- Products intended for human and animal food;
- fertilizers and agrochemicals;
- raw materials for the pharmaceutical industry and pharmaceutical preparations;
- electronic components, such as single or charged boards, circuits, capacitors, capacitors, resistors, connectors and semiconductors, coils, transformers, harnesses and modems for computers and telephones;
- machinery for watches, measuring, control and navigation instruments, and electronic medical equipment, for medical use;
- batteries, accumulators, electrical cables, plugs, contacts, fuses, and accessories for electrical installations;.
- gasoline, hybrid and alternative fuel engines for cars, trucks, and trucks;
- electrical and electronic equipment, steering systems, suspension, brakes, transmission systems, seats, interior accessories, and die-cut metal parts, for cars, trucks, trains, ships, and aircraft;
- internal combustion engines, turbines, and transmissions for aircraft; and
- non-electronic equipment and apparatus for medical, dental and laboratory use, medical disposable materials and optical products for ophthalmic use.
In addition, to foster the cinematographic industry, the Tax Benefits are available under the same basis to taxpayers engaged in the production of cinematographic or audiovisual content (including digital productions), provided that the content is protected by copyright and exported.
The Tax Benefits are as follows:
a) Depreciation of Capital Assets: Eligible taxpayers may deduct from the income earned in years 2023 and 2024, the expenditures in the new fixed assets listed in the Decree in lieu of deducting the expenditure over the years of use of those assets as provided in the Income Tax Law. The depreciation deduction should be applied in the amount of the cost adjusted for inflation purposes to reduce the taxable income and reflected in the annual tax return. In addition, the depreciation may be applied evenly on a cumulative basis to reduce the tax profit for purposes of the monthly estimated tax payments.
b) Additional tax deduction: Eligible taxpayers may apply in the 2023, 2024 and 2025 annual tax returns, an additional deduction equivalent to 25% of the excess of the expense paid for training employees in technical or scientific knowledge related to the taxpayers’ activity over the average expense paid by the taxpayer for the same concept in the fiscal years 2020, 2021 and 2022.
The additional deduction will only apply for the active workers registered with the Mexican Social Security Institute.
In general, to apply the Tax Benefits, taxpayers must comply, amongst others, with the following:
- taxpayers must comply with the deductibility requirements set forth in the Income Tax Law;
- taxpayers must be registered in the Federal Taxpayer Registry and have active the tax mailbox;
- obtain and maintain a positive tax compliance opinion issued by the Mexican Tax Service (“SAT”);
- file a notice electing to apply the Tax Benefits; and
- record separately in the accounting records the application of the Tax Benefits.
Failure to comply with the requirements will require taxpayers to pay the applicable tax.
Interaction with Other Foreign Trade Measures:
This Decree is considered an effort to foster immediate results on the nearshoring opportunities for Mexico, and will coexist temporarily with Mexico’s longstanding export promotion programmes through which it offers tariff and tax concessions, particularly to the manufacturing sector, such as the programme for manufacturing, maquila and export services industry (IMMEX);1 the import duty drawback programme for exporters;2 various export subsidy programmes; the sectoral promotion (PROSEC) programmes,3 a programme for the fertilizer sector.
Concerns related to the compatibility of the Decree with any of Mexico’s international obligations under the World Trade Organization commitments, the USMCA or other Free Trade Agreements, should take into consideration the length of any dispute settlement proceeding and the temporality of the tax benefits of the Decree.
1 As stated in Mexico’s last WTO Trade Promotion Review (2022): “Under the IMMEX program, producers of goods for export or companies providing services for export may import, on a temporary basis, various goods free of general import tax and, where applicable, of anti-dumping or countervailing duties, so that these goods may be used in the production of export products. They may also obtain a 100% tax credit for VAT and/or the special tax on production and services (IEPS)”.
2 Id. “The drawback system allows beneficiaries to recoup the duty paid on the import of raw materials, parts, components and other inputs used to produce goods for export; on the import of goods returned in the same condition; or on the import of goods for repair or alteration and subsequent export” (Decree establishing the drawback of import duty for exporters (Official Journal of 11 May 1995 and its amendments)).
3 Id. “under which inputs and machinery needed to produce specific goods can be imported under a preferential tariff, irrespective of whether the final good is consumed on the domestic market or exported.” “As of May 2021, a total of 2,487 tariff lines were covered by PROSEC programmes.”
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