The insecurity and widespread violence that have characterized the northern border of Mexico (the “Border”),have become one of the most urgent and important matters to be addressed by the Mexican government, as such problems have unleashed an economic slowdown along the 180 kilometers of the Border shared with the United States of America.
Murdering, kidnaping, thefts, corruption, lawlessness, drug trafficking, organized crime, among others, are some of the reasons why the International Institute for Strategic Studies placed Mexico second in terms of total estimated armed-conflict fatalities in 2016 only after Syria.
Thus, to address these matters the current Mexican administration is giving the first step to bring a solution. Last January 1st, 2019 the executive order of tax incentives in the Border (the “Executive Order”) entered into force seeking to establish mechanisms that strengthen the economy of taxpayers in the Border by stimulating and increasing investments, as well as by promoting productivity and contributing with the creation of new employment sources.
The Executive Order, which will be in force during 2019 and 2020, establishes benefits pertaining to reduce the triggered income tax (Impuesto Sobre la Renta “ISR”) by one third and the value added tax (Impuesto Sobre el Valor Agregado “VAT”) rate from 16% to 8% within the Border, as explained bellow:
As a rule, 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 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.
For taxpayers to enjoy these benefits, they must prove that: i) their tax address is in the Border; or ii) that they have a branch, agency or any other establishment within the Border. Either, with at least eighteen months prior to filing the corresponding request.
Taxpayers who begin activities or whose seniority is less than eighteen months in the Border, may request this tax incentive if they have: i) the economic capacity to begin activities; ii)their assets and facilities in the 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 Border represent at least 90% of their total income for the year.
Requirements in the case of ISR
i) Submit their application to be registered under the list of beneficiaries of the tax incentive for the Border before March 31st of the corresponding tax year;
ii) Have an advanced electronic signature and tax good-standing certificate;
iii) Have an active tax mailbox; and
iv) 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 1 month 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.
Subject to limited exceptions included in the Executive Order, this incentive is granted to taxpayers who carry out the following activities in the Border: i) sale of goods; ii) provision of services; or iii) granting the use or temporary enjoyment of goods. The foregoing, if they carry out their activities and provide services in facilities or establishments located within the 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.
Requirements in the case of VAT
i) Perform the actual delivery of goods or the provision of services in the Border;
ii) Submit a notice of application of the tax incentive within 30 calendar days following the entry into force of the Executive Order; and
iii) 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.
Short in force period of the Executive Order. A self-imposed barrier to achieve its objectives.
As already stated, the Executive Order at the moment will only be enforceable during 2019 and 2020. Considering that new businesses in general take at least one or two years to start recovering their investments, if the objective of boosting the economy at the border by the stimulation of new investments is to be met, the validity period of the Executive Order should be extended considerably.
Even for tax measures, which tend to vary a lot, a two-year period is a very brief one that could bring a certain amount of skepticism to taxpayers. An extension to a six-year term of the Executive Order, that lasts as long as the current administration, could bring certainty to future investors in their business decisions alongside the Border.
Challenges in the implementation of the Executive Order. Exasperating compliant taxpayers vs avoiding tax erosion.
If the paperwork needed to prove the eligibility for being subject to the tax benefits included in the Executive Order results burdensome to the taxpayers, as some tax measures tend to be, its effectiveness could diminish substantially. Nevertheless, if the authorities fail to prevent taxpayers from taking advantage to unduly benefit from the Executive Order by eluding or even evading their tax obligations, the measure could be counterproductive to its goals and to the public finances in general.
The signing of the Executive Order is indeed a good first step but the success of it depends from its implementation.
The forty-three municipalities adjacent to the United States of America within the States of Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas.
It is important to review the Executive Order in a case by case basis, as there are several particularities that may apply depending on the situation.
Under the Executive Order, a taxpayer that receives at least 90% of its income from the Border, will be considered as a taxpayer that obtains its income exclusively from the Border.