Decree of Tax Incentives in the Northern Border Region

Alert 1. 2019

On December 31st, 2018, the Decree of Tax Incentives in the Northern Border Region (the Decree) was published in the Federal Official Gazette (DOF by its acronym in Spanish), which entered into force on January 1st, 2019 and will be in force during the tax years 2019 and 2020. 

The main objective of the Decree is to establish mechanisms that would strength the economy of the taxpayers of the northern border of our country, in order to incentive and increase investment, promote productivity and contribute to the creation of new sources of employment. 

The most important aspects of this Decree are the following: 

Generalities 

Definition of Northern Border Region 

For purposes of the Decree, it is considered as northern border region the municipalities of Ensenada, Playas de Rosarito, Tijuana, Tecate and Mexicali of the state of Baja California; San Luis Rio Colorado, Puerto Peñasco, General Plutarco Elias Calles, Caborca, Altar, Saric, Nogales, Santa Cruz, Cananea, Naco and Agua Prieta of the state of Sonora; Janos, Ascension, Juarez, Praxedis G. Guerrero, Guadalupe, Coyame del Sotol, Ojinaga and Manuel Benavides of the state of Chihuahua; Ocampo, Acuña, Zaragoza, Jimenez, Piedras Negras, Nava, Guerrero and Hidalgo of the state of Coahuila de Zaragoza; Anahuac of the state of Nuevo Leon, and Nuevo Laredo; Guerrero, Mier, Miguel Aleman, Camargo, Gustavo Diaz Ordaz, Reynosa, Rio Bravo, Valle Hermoso and Matamoros of the state of Tamaulipas.

 Income tax 

Subjects of the Decree 

The following individuals and entities resident in Mexico for tax purposes, as well as residents abroad with a permanent establishment in Mexico, who receive income exclusively in the northern border region, are subject to the benefits of the Decree: 

i) Those that are taxed in the terms of Title II "Legal entities"; 

ii) Those individuals with entrepreneurial and professional activities; 

iii) Legal entities that would have opted to accrue the income when those were effectively collected in accordance with Title VII, Chapter VIII "Option of legal entities to accrue revenue " of the Income Tax Law. 

It is important to mention that the Decree states that "income is exclusively received in the aforementioned northern border region", when the income obtained in that region represents at least 90% of the total income obtained by the taxpayer in the previous tax year. 

Tax Incentives 

The aforementioned persons may apply a tax credit equivalent to one third of the income tax (IT) of the year or in the monthly estimated payments of such tax, against the IT generated in the same tax year or in the monthly estimated payments of the IT of such year, respectively.

It is important to mention that the tax credit will be in the proportion represented by the total income of the aforementioned northern border region, from the total of the taxpayer's income obtained in the tax year or in the period corresponding to the monthly estimated payments. 

Requirements 

To obtain the benefits of the Decree, taxpayers must meet the following requirements: 

I. They must prove that they have their tax domicile in the northern border region for at least the last 18 months as of the date of their registration in the "Registry of beneficiaries of the incentives for the northern border region"; otherwise, they must prove before the Tax Administration Service (SAT) that they have the economic capacity, assets and facilities to carry out their operations and business activities in said region. 

It is important to note that taxpayers whose tax domicile in said region is not greater than 18 months or those who register in the Federal Taxpayers Registry (RFC) after the Decree has entered into force, must prove that for the realization of its activities within the northern border region, use new fixed assets (fixed assets that are used for the first time in Mexico or that are not acquired from a related party of the taxpayer). 

II. Have an advanced electronic signature, as well as a positive tax compliance opinion of its tax obligations. 

III. Access to the tax mailbox through the SAT webpage. 

IV. Collaborate every six months with the SAT by participating in the verification program in real time of said decentralized administrative body. 

Additionally, taxpayers must submit an application for authorization no later than March 31st, 2019, in order to be registered in the "Registry of beneficiaries of the incentives for the northern border region." 

For such purposes, the SAT will issue a resolution no later than the month following the date on which the application was filed, taking in any case, five business days following the filing of said application to request from the taxpayers the documentation and additional information that it deems convenient. 

Exceptions 

Among other taxpayers, the following taxpayers may not apply the benefits of the Decree: 

  • The credit, insurance and bonding institutions, the general deposit warehouses, financial leasing and credit unions. 
  • Those that pay under the optional regime for Groups of Companies. 
  • Those that pay taxes in the Regime of agricultural, livestock, forestry and fishing activities. 
  • Those who pay taxes under the Tax Incorporation Regime. 
  • Taxpayers whose income derives from the provision of professional services. 
  • Taxpayers who carry out activities through trusts[1] that are dedicated to the acquisition and construction of real estate. 
  • Taxpayers who carry out business activities through trusts[2]. 
  • Residents abroad who carry out maquila operations. 
  • Taxpayers who supply personnel through labor subcontracting[3] or are considered intermediaries under the terms of the Federal Labor Law. 

Value Added Tax 

Subjects of the Decree 

Individuals and legal entities that perform the acts or activities of alienation of goods, rendering of independent services or who grant the temporary use or enjoyment of goods, in the premises or establishments located within the northern border region, are subject to the benefits of the Decree. 

Tax Incentives 

The tax incentives consist in a credit equivalent to 50% of the Value Added Tax (VAT) rate as established in Article 1 of the Value Added Tax Law (VATL). 

This tax credit will be applied directly to the general VAT rate of 16% mentioned in the previous paragraph; therefore, the reduced rate of 8% will be applied to the value of the acts or activities foreseen in this article, in accordance with the provisions of the VATL. 

Requirements 

To obtain the benefits of the Decree, taxpayers must meet the following requirements: 

I. Carry out the material delivery of goods or the provision of services in the northern border region, according to the aforementioned definition.

II. Submit an application notice of the tax incentives within 30 calendar days following the entry into force of the Decree. 

In the case of taxpayers who initiate activities after the entry into force of the Decree, they must present the aforementioned notice together with the application for the enrollment in the RFC. 

Other considerations 

  • The SAT may issue general rules necessary for the correct application of the Decree. 
  • The tax incentives referred to in the Decree will not be considered as taxable income for purposes of the IT. 
  • Those who apply the benefits of the decree, will be relieved from submitting the notice, referred to in Article 25 of the Federal Tax Code. 

Grant Thornton Mexico through its Tax Division is at your disposal for any questions or additional information required. 

 

[1] Known as “Fideicomisos” in accordance to the Mexican legislation.

[2] IDEM

[3] Outsourcing services


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