The Mexican government enacted the 2019 federal budget (the 2019 Budget) and 2019 tax law (the 2019 Tax Law) with a January 1, 2019 effective date. Although the 2019 Tax Law does not include significant new taxes or rate increases, it includes an important limitation to a taxpayer´s ability to offset or ‘compensate’ favorable balances and balances due from all federal taxes. Additionally, on December 31, 2018, a Presidential Decree created new Income Tax and Value Added Tax (VAT) incentives for taxpayers operating along the northern border of Mexico.
The elimination of universal offsetting – together with the inability to compensate VAT, excise, and income tax balances going forward – in practice will significantly impact Mexican businesses. Given the strong reaction of the business community, taxpayers should expect additional clarification of these rules in the coming weeks.
Taxpayers should analyze the requirements and scope of the income tax and VAT incentives under the Decree given the tight deadlines to apply for such benefits. Although there are significant limitations on these incentives, the potential tax reduction is material. Therefore, taxpayers should quantify the benefits from existing or potential future operations in the Border Region.