In order to establish mechanisms that strengthen the economy of taxpayers in the northern border of the Country, to stimulate and increase investment, as well as to promote productivity and contribute with the creation of employment sources, on Monday December 31st 2018 and on Monday, January 7th 2019, the decree on tax incentives in the northern border region (the “Executive Order”) and the anticipated revenue rules for applying the Executive Order (the “Rules”) were published. The Executive Order and the Rules establish benefits pertaining to income (Impuesto Sobre la Renta “ISR”) and to value added taxes (Impuesto Sobre el Valor Agregado “IVA”):
The incentive to ISR applies to individuals or legal entities residing in Mexico and to foreign residents with a permanent establishment in Mexico that obtain income exclusively from the northern border and are taxed as: i) legal entities subject to the general regime; ii) legal entities that opted to exercise the optional tax regime of accumulated income; or iii) individuals with entrepreneurial and professional activities. This incentive consists in the application of a tax credit equivalent to one third party of the ISR caused in the tax year or in the provisional payments, against the ISR caused in the same tax year or in the same provisional payments, as the case may be.
For taxpayers to enjoy these benefits, they must prove that: i) their tax address is in the northern border; or ii) they have a branch, agency or any other establishment within such border. Either, with at least eighteen months prior to filing the corresponding request. It is important to analyze the Executive Orderand the Rules in a case by case basis as they contain several exceptions to the applicability of the benefits stated.
Taxpayers who begin activities or whose seniority is less than eighteen months in the northern border, may request this tax incentive if they have the: i) economic capacity, ii) their assets and facilities in the northern border, iii) prove that they carry out their operations and activities using new fixed assets and iv) their total income for their tax year in the northern border represent at least 90% of their total income for the year.
This incentive is granted to taxpayers who carry out the following activities in the northern border: i) sale of goods; ii) provision of services; or iii) granting the use or temporary enjoyment of goods. The foregoing, provided that they carry out their activities and provide services in facilities or establishments located within the northern border. This incentive consists of a credit equivalent to 50% of the VAT rate, which will be applied directly to the value of the aforementioned acts or activities. Regarding the VAT benefits, it is also important to review the Executive Order and the Rules in a case by case basis, as such order includes several exceptions.
To enjoy the aforementioned incentives, taxpayers must additionally meet other requirements, which among them are the following:
I) In the case of ISR:
a) Submit their application to be registered under the list of beneficiaries of the incentive for the northern border before March 31st of the corresponding tax year;
b) Have an advanced electronic signature and tax good-standing certificate;
c) Have an active tax mailbox; and
d) Collaborate with the tax authorities in a semiannual basis by participating in the up-to-the-minute verification program. The invitation to participate will be notified by the tax mailbox and the verification will take place in the tax authorities’ offices or in the taxpayers’ offices. The up-to-the-minute verification will last 1month at the most.
The tax authorities will issue a resolution to the request for authorization no later than the following month to the date of the submission of the same, approving or denying such benefits by registering or not the taxpayer in the list of beneficiaries.
II) In the case of VAT:
a) Perform the actual delivery of goods or the provision of services in the northern border;
b) Submit a notice of application of the fiscal incentive within 30 calendar days following the entry into force of the Executive Order; and
c) In case of taxpayers who begin activities after the Executive Order’s entry into force, they must submit the notice mentioned in item c) above, at the time of their registration before the Federal Taxpayers Registry.
The Executive Order will be in force during 2019 and 2020, with effects only in the northern border region of the Mexican Republic, i.e., the forty-three municipalities adjacent to the United States of America within the States of Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas.