Expectations for the Mexican Fiscal Year 2024

For the fiscal year 2024, no changes are expected to the Mexican tax framework. This means that there will be no new taxes created or existing tax rates increased. There will also be no changes to the Income Tax Law (ITL), Value Added Tax Law (VATL), Special Tax on Production and Services Law (STPSL), or Federal Fiscal Code (FFC). Additionally, there will be no changes to the existing tax incentives.

Despite the lack of changes to the Mexican tax framework, there are a few other considerations which should be noted by taxpayers for the 2024 fiscal year.

1. International tax agreements: The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) and the Agreement to Avoid Double Taxation of the Pacific Alliance (AAP) will come into effect in Mexico in 2024. These agreements will impact how taxes are applied to cross-border transactions.
2. Case laws of the judicial bodies: During 2023, the Mexican judicial bodies issued a number of rulings on tax matters. These rulings will be binding in future cases involving similar issues. Some of the most relevant rulings include:
   1. Controlling beneficiary (Ultimate Beneficial Owner (UBO)): The courts upheld the constitutionality of the power of the tax authorities to request information on controlling or UBO’s under the Tax Administration Miscellaneous Resolution.
   2. Technical assistance is not a business profit for Income Tax Treaty between Mexico and the Netherlands purposes: Income earned by a resident of the Netherlands from technical assistance will not be considered business profits. In this regard, it was resolved that, if the concept of technical assistance is not included in the Agreement or within the income regulated separately therein, it does not mean that said income is business profits and, therefore, under the terms of the Agreement itself, the meaning attributed by domestic legislation must be taken into consideration and applied. In this sense, domestic legislation, on the one hand, defines technical assistance as an independent personal service and, on the other, establishes that it is not a business activity; thus, for the purposes of the Agreement, the income derived from said assistance should not be considered business profits, but in addition the income obtained by a tax resident of the Netherlands, due to technical assistance services, must be taxed in Mexico as royalties, subject to 25% withholding.
   3. Proof of the actual conducting or materiality of transactions: The evidence, proofs, or records which demonstrate the materiality of transactions supported by CFDI’s (tax receipts or invoices) must be objective and reasonable in accordance with the nature of the transaction being verified, the specific formal conditions of the act, and the characteristics of the fact to be proven. The tax authorities cannot require evidence that is excessive or disproportionate.
   4. Cancellation of CFDI: The courts ruled the unconstitutionality of the provision that prohibits the cancellation of CFDI in subsequent periods to those in which they were issued. Nonetheless, it is important to note that this unconstitutionality judgement does not have general effects, so it only applies to taxpayers who filed a timely or within the legally established deadlines the appropriate means of judicial protection (constitutional trial).
   5. Civil offset is not a form of payment of VAT: Civil offset is not a form of payment of VAT which grants to taxpayers the right to request a VAT refund of the balance in favor or crediting of the tax. This is because offset only determines when the VAT obligation arises, but does not generate its credit, since for this the VAT must have been effectively paid to the tax authorities. Therefore, it is important to take this criterion or case law into account and, if necessary, avoid compensation operations that credit or transfer VAT, since the tax authorities may reject refunds that have not been subject to verification powers, as well as make observations of the creditable VAT determined in the monthly payments, and even if they were to deny the creditable VAT, they may also pretend to reject IT deductions linked to said VAT.
   6. VAT crediting on the capitalization of liabilities: For the VAT crediting and refund of the balance in favor to be granted, the tax must be paid in cash, bank transfer, or check, which also is met when the tax has been filed or declared and paid to the tax authorities, without authorizing the payment of the tax through the capitalization of the liability or debts, through the equity issuance, since this is not authorized in the VAT Law. In that sense, if it is intended to cover the tax through the issuance of shares, it does not meet the requirements to be considered effectively paid and, therefore, the refund of the balance in favor that may be generated does not proceed nor its crediting.
   7. Deducibility of investments: Investments are deductible when they are paid and according to the maximum amortization percentages established in the ISR Law.
3. Electronic audit: The new forms of auditing by the tax authorities through electronic means will continue, mainly the cross-checks between tax returns submitted and the issuance of electronic tax receipts that are in the possession of the tax authorities. Therefore, it is advisable that taxpayers conduct periodic tests to ensure that there are no errors in the information reported to the tax authorities.
4. Nearshoring: From October 12, 2023, to 2024, tax incentives will be applicable for income tax purposes in nearshoring operations of taxpayers located in Mexico from key sectors of the export industry. These incentives consist of the immediate deduction of investment in new fixed assets and the additional deduction of training expenses. This will allow foreign companies to see Mexico as a favorable destination to establish their operations and take advantage of the tax benefits granted. These incentives will be applicable, under certain requirements, for investments that taxpayers maintain in use for a minimum period of two years immediately following the year in which the immediate deduction is made.

For further information please contact:

Cristina Contreras
Tax Manager
ECOVIS Mexico, Mexico City, Mexico
Email: cristina.contreras@ecovis.mx

Kennya Ramírez
Tax and Legal Consultant
ECOVIS Mexico, Mexico City, Mexico
Email: kennya.ramirez@ecovis.mx