If you are planning to start a business in Mexico, your company will have to pay Mexican corporate tax. Corporate taxes in Mexico may seem complicated at the beginning. But don’t worry, Start-Ops is here to simplify things. We already wrote about payroll taxes in Mexico. So, in this article, we will talk about the taxes that a company needs to pay on its income. So let’s begin.
Mexico’s Corporate Tax Rate
First, let’s get legal; the Mexican Fiscal Code is the supreme document in all tax matters. From it, comes a law called the Federal Income Tax Law (LISR). Article 9 of the LISR states that every company in Mexico, regardless of the type of business entity, needs to pay a corporate income tax of 30%. Companies pay Mexican corporate tax over income or profit, the same as everywhere else in the world. And, same as everywhere, companies calculate profit as:
Revenue – Expenses = Profit
Although there may be some specific accounting rules regarding the recognition of revenue and expenses according to the Mexican Financial Reporting Standards, this is pretty much the equation that rules accounting. So basically, your company obtains revenue, deducts expenses, and pays a 30% tax on what’s left. Obviously, if the company has losses instead of profits, it doesn’t pay corporate tax in Mexico.
Companies pay corporate tax a little differently in Mexico. Rather than presenting an annual return, companies in Mexico pay corporate tax provisionally each month.
Let’s see how this works.
Corporate Tax in Mexico: How it Works
Let’s talk about how the payment of corporate tax in Mexico works in practice. In Mexico, companies need to present monthly tax returns and one annual tax return. Companies must present monthly tax returns before the 17th day of the following month. i.e. you present January’s return before February 17th. They present the annual tax return, on the other hand, before the last day of March of the following year.
Month to month, companies pay provisional Mexican corporate tax. At the end of the year, they can deduct provisional payments from their annual tax payment. Companies pay provisional corporate tax based on a theoretical profit using a profit coefficient. Let’s take a look.
Companies pay provisional monthly income tax by calculating a profit coefficient. This coefficient is based on the last fiscal year’s profit. Dividing annual profit by the annual revenue, you get the profit coefficient.
Once you calculated the profit coefficient, you can calculate theoretical profit as follows.
And, once you have the theoretical monthly profit, you can calculate your monthly provisional payment. All you need to do is to multiply it times the Mexican corporate tax rate of 30%.
In the first year of operations, companies are exempt from paying provisional income tax. The reason is that the profit coefficient of zero since they haven’t had annual profits. But they still have to present their monthly returns in zeroes. The following section shows the monthly and yearly cash flow of a made-up example.
The First Year of Operation
In its first year of operation, companies need to present monthly returns. However, since there is no profit coefficient, its theoretical profit is zero regardless of the monthly revenue. Therefore they don’t need to pay provisional Mexican corporate tax.
When the year ends, the company would present its annual return and pay the taxes that are due according to its profit. By dividing the annual profit between the revenue, it obtains the profit coefficient that will be used to calculate the following year’s provisional tax payments.
The Second Year of Operation
Let’s continue the example. For the second year of operation, the company will present its monthly tax returns and pay provisional corporate tax. It does this by calculating its theoretical profit. To obtain this profit they use the profit coefficient from last year.
When the year ends, the company would present its annual return and pay the taxes that are due according to its profit. Just the tax due. Remember that we already paid monthly provisional taxes on our theoretical profit. At the end of the year, you subtract provisional payments from the total corporate tax to pay. This difference is what you need to pay the government. So, it would look like this.
Remember this is a made-up example. A lot of things may happen. You may do better o you may do worse. Therefore the government can end up owing you because you paid too much provisionally. When this happens, you can ask for a tax refund or a tax credit for your company.
Corporate tax in Mexico is not that hard to understand. However, companies pay for it in a particular way. If you are looking to start operations in Mexico, get in touch with us. We can advise you on the best strategy for your company.