In general terms, the taxable period in Mexico is the calendar year.
Corporate taxpayers are required to file annual CIT returns for the preceding calendar year by 31 March of the following year.
Thereafter, taxpayers meeting certain size criteria or belonging to a group that, as a whole, meets these criteria must submit a tax-compliance informative return along with the preceding calendar year annual CIT return (i.e. 31 March of the following year).
In lieu of submitting the tax-compliance informative return, business taxpayers meeting certain size criteria may either elect or be obliged to file a tax-compliance audit report on an annual basis with the Mexican Audit Administration. This audit report covers all federal taxes other than customs duties and consists of audited financial statements and detailed schedules, together with a report by the auditor stating that no irregularities were observed in respect of the taxpayer's compliance with its federal tax liabilities. This report must be filled electronically, and the auditor must be an independent certified public accountant (CPA) registered with the Mexican Audit Administration. The amount of detailed information required to be filed, and the auditor's responsibility in connection therewith, is significant.
Employees’ profit sharing payments are generally due by 31 May of the year following that in which the corresponding profit was obtained.
Information returns must also be filed not later than 15 February each year, reporting on, amongst others, the following activities performed in the immediately preceding year:
- Loans received from or guaranteed by non-residents.
- Transactions conducted through a business trust.
- Parties to which the taxpayer makes payments and withholds income tax.
- Parties to which the taxpayer has made donations.
- Parties to which the taxpayer has paid dividends, and the value of such payments.
- Transactions carried out with suppliers and clients, either local or overseas.
Taxpayers making salary payments are also required to file information returns reporting salaries paid and salary credit paid in the immediately preceding calendar year.
An annual information return must be filed on investments made or held in a tax haven. This must be filed in February of the immediately following year.
An information return on transactions carried out with non-resident-related parties must be filed together with the annual CIT return (no later than March of the following year).
Taxpayers allowed to elect to file the tax report will not be obligated to file the information return stating their tax status.
Payment of tax
Corporate taxpayers are required to make estimated payments of CIT by the 17th day of each month based on their estimated taxable income at the end of the previous month and calculated principally by applying the profit factor to the cumulative monthly gross income. The profit factor is determined by dividing the taxable profit by gross income shown in the annual return for the preceding year, or, if no profit factor is to be found in that annual return, the factor appearing in the year preceding that and so on, up to five years, with certain adjustments. For this purpose, gross income includes nominal income, excluding inflationary adjustments. The balance of CIT for the year is due at the same time as the annual return.
Special procedures are provided for computing advance CIT payments and for obtaining authorisation to reduce the amounts of monthly advances after the sixth month of the year. No advance payments or adjustments thereto are required in the first year of operations.
Elimination of universal netting of favourable tax balances with other federal taxes or against WHTs
Until 2018, the Mexican Federal Fiscal Code provided a mechanism that allowed taxpayers to compensate favourable balances and balances due from all Federal taxes in both monthly and annual returns (‘universal compensation’). A common and important cash-flow management tool in Mexico was to compensate, for example, VAT-favourable balances against income tax or other Federal taxes due rather than constantly requesting tax refunds.
‘Universal compensation’ allowed Mexican entities to manage operating cash flow (i.e. VAT or favourable excise tax balances) through netting with income tax liabilities. The uncertain timing and formalistic nature of the Mexican tax refund process made universal compensation an important tool for Mexican businesses.
The 2019 Federal Income Budget eliminated universal compensation in a manner that would only permit taxpayers to compensate balances of the same tax nature and would exclude the possibility of compensating against WHT liabilities due by third parties that should be remitted by the Mexican resident to the tax authorities (i.e. non-Mexican residents for Mexican-sourced tax). For example, if a taxpayer has a VAT-favourable balance for the month, but also has estimated income tax payments due or a withholding income tax payment due, the taxpayer would now need to pay the income taxes and request a VAT refund on a monthly basis or credit such VAT against future VAT liabilities.
Through Administrative Rules published by the Mexican tax authorities, they enable the possibility for those taxpayers who have amounts in their favour as of 31 December 2018 to offset such amounts against those who are obligated to pay for their own debt, provided that they derive it from federal taxes different from those caused by importation, administer the same authority, and have no specific destination.
Tax audit process
For taxpayers that file a tax-compliance audit report, the tax audit (tax inspection) may start with a review of the audit report prepared by the independent CPA. Tax authorities may request several documents from the taxpayer and third parties that carried out transactions with the audited taxpayer.
Tax audits should be concluded within the following 12 months after the audit was initiated. The period to conclude tax audits for taxpayers that are either part of the financial system or consolidated for tax purposes is 18 months. In cases where the Mexican tax authorities request information to tax authorities from foreign jurisdictions, the period to conclude the audit is two years. The above periods might be suspended under certain circumstances (e.g. a judicial recourse or appeal initiated by the taxpayer against the tax authorities). Upon conclusion of the audit, the tax authorities should issue either a notification explaining tax underpayments observed during the audit process or a notification of conclusion if no issues remain open at the end of the inspection.
Finally, tax authorities should issue a notification of assessment within the six months after the conclusion of the tax audit. At this point, all underpayments claimed by the tax authorities become due.
Tax benefit vs. economic benefit
Per the 2020 Tax Reform, a new provision was introduced to the Mexican Federal Tax Code providing that legal acts lacking a business purpose and that result in a direct or indirect tax benefit can be recharacterised.
The new rule will allow the tax authority to presume that there is not a valid business purpose when the expected, quantifiable economic benefit is less than the tax benefit. The tax authority can presume that a series of legal acts lack business purpose when the same economic benefit could have been obtained through a simpler set of transactions, but the tax cost would have been higher.
The reasonably expected economic benefit includes generation of revenue, cost reduction, increase in the value of assets, and better market positioning. The tax authority, as part of an open audit, can presume that the legal acts lack business purposes based on facts and circumstances known as a result of the tax controversy process. A tax benefit includes any reduction, elimination, or deferral of a tax.
The Prodecon is a decentralised Mexican government organisation that acts as the Ombudsman of Mexican taxpayers, providing advice and issuing recommendations to the tax authorities. In recent years, Prodecon’s Concluding Agreements have become more common and have had a positive impact for taxpayers when it comes to reconciling differences with the tax authority in regards to an audit and controversial assessments.
The agreement applies when a taxpayer is dissatisfied with the authority’s tax assessment as a result of an audit. The taxpayer then should file a petition to the Prodecon, noting the facts, omissions, and support elements to expose its defending arguments. The Prodecon then notifies the authority and proposes an agreement to settle the difference and conclude the audit without further procedures. The authority has 20 days to indicate whether or not it accepts the terms that arise in the Conclusive Agreement.
Statute of limitations
In general, the right of the tax authorities to collect taxes, review tax returns, or claim additional tax expires five years after the date the respective return is filed. However, in cases where the taxpayer has not secured a federal tax registration number, has no accounting records, has failed to keep accounting records for the required five-year period, or has not filed a tax return, the statute of limitations expires in ten years. Similarly, the period for claiming a refund of overpaid tax expires after five years.
Topics of focus for tax authorities
Although there are no formal written communications from the tax authorities dealing with their topics of focus, in recent years the tax authorities have focused audits on transactions with non-residents, inter-company transactions, transfer pricing, social security contributions, and customs duties, among other areas.
Effective tax rates
During 2021, the Mexican tax authorities published five batches of effective tax rates references applicable to hundreds economic activities pertaining 21 economic sectors during the fiscal years 2016, 2017, 2018 and 2019 bases on the available information contained in the federal tax registry and several databases maintained by the Mexican tax authorities.
Such references were published by the Mexican tax authorities, in order to incentivize and facilitate taxpayer's tax obligations by comparing their [taxpayer's] effective tax rate against those put forward by the Mexican tax authorities, assigning a level of risk that varies from low to risk depending on the differences.
Depending on the level of risk, the Mexican tax authorities may initiate a new “deep review process” (not an audit) to assess the origin of the differences.
As of January 1, 2022, pertaining the transportation of goods and merchandize, taxpayers must generate a specific electronic tax invoice to display the transit of the merchandize, the origin, intermadite and destination points, as well as the means of transacportaiton; either through land, air, sea or river; as well as the pertinent information in connection with the transportation of hydrocarbons and oil products.