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What are the proposed additions to the Value Added Tax (VAT) Law?


What VAT rate applies for Border Regions?


On June 10, 2020, a reform proposal was introduced to the Mexican Congress to temporarily reduce the VAT rate from 16% to 10% for the remaining of fiscal year 2020, except for the North and South Border Region where a rate of 8% will apply.

Scope of the new rules

Derived from the COVID-19 pandemic, the proposal refers the need to adopt measures to reactivate the internal market, avoid the breakdown of productive and supply chains, through the establishment of reactivation measures that encourage demand, strengthen consumer expectations and offer liquidity to companies.

It also recognizes that tax incentives, in addition to cooperating in favor of the increase in demand, generates other benefits such as investment promotion, employment and business generation. In this sense, acting on the reduction of taxes would allow, indicates the proposal, for individuals to have a better spending capacity in a more quickly, accurately and in a timely manner.

That said, the proposal aims for a temporary reduction of the VAT rate from 16% to 10%, starting from the publication of the reform until December 31, 2020.

In addition to the rate reduction, it proposes to add to the VAT Law, and not only by decree as it is currently in force, the 8% rate applicable in border areas, in order to maintain competitiveness and provide security to taxpayers.

It is worth mentioning that currently the 8% rate referred in said decree, applies only to certain municipalities in the Northern Border Region and in addition the decree establishes certain control and compliance mechanisms. However, the reform also proposes to include the Mexican Southern Border Region and defines the geographic scope of both regions. In the case of the Northern Border Region said geographic definition defers from the current decree.

According to the reform proposal, the Border Region includes, in addition to the 20-kilometer border strip parallel to the international dividing lines in the north and south of the country, the entire territory of the states of Baja California, Baja California Sur and Quintana Roo, the municipalities of Caborca and Cananea, Sonora, as well as the partial region of the State of Sonora included in the following limits: to the north, the international dividing line from the Colorado River to the point located on that line 10 kilometers away west of the Plutarco Elias Calles Municipality; from that point, a straight line until reaching the coast, to a point located 10 kilometers east of Puerto Penasco; thence, following the course of that river, north until the international dividing line is found.

The Southern Border Region includes, in addition to the 20-kilometer border strip parallel to the international division found south of the country, the municipalities of Calakmul and Candelaria, Campeche; Amatenango de la Frontera, Benemerito de las Americas, Bejucal de Ocampo, Cacahoatan, Comitan de Dominguez, Frontera Comalapa, Frontera Hidalgo, La Independencia, La Trinitaria, Las Margaritas, Maravilla, Marques de Comillas, Mazapa de Madero, Motozintla, Ocosingo, Palenque , Suchiate, Tapachula, Tenejapa, Tuxtla Chico and Union Juarez, Chiapas; Balancan and Tenosique, Tabasco.

During the next weeks, this proposal will have to go through certain processes, discussions and modifications at the Mexican Congress. It is still early to know the result and the specifics rules, but we will continue evaluating and commenting on its development. For more information, contact us.