TAX BREAKS DECREES FOR THE NORTHERN AND SOUTHERN BORDER REGIONS

Mexico City, February, 2021

Next February 11, 2021 is the deadline for submitting the process to apply the tax breaks for the Northern Border Region and Southern Border Region in terms of VAT, in accordance with the application form “3 / DEC-12 Notice to apply the fiscal stimulus regarding VAT in the northern or southern border region”.

Likewise, on March 31, the deadline for submitting the corresponding procedure to register in the List of beneficiaries of the tax incentive in matters of ISR expires for the aforementioned regions, in accordance with the application form “1 / DEC-12 Notice of registration in the List of beneficiaries of the tax breaks for the northern or southern border region”.

In this regard, on December 30, 2020 the following decrees were published in the Federal Official Gazette:

1. Decree amending the Tax Breaks Decree for the Northern Border Region.
2. Tax Breaks Decree for the Southern Border Region.

Below is a summary of the changes to the first decree and the principal issues of the second decree:

Decree amending the Tax Breaks Decree for the Northern Border Region Decree

Issued to extend the application of the decree published on December 31, 2018 to December 31, 2024 and to make several amendments to facilitate the application of tax breaks.

In this respect, as we can remember, the decree published on December 31, 2018 contemplates the following tax breaks:

Income Tax Break

• Establishes as benefitted persons both individuals and legal entities residents of Mexico as well as foreign residents having a permanent establishment in Mexico that are taxed in terms of Title II “Legal entities”; Title IV “Natural persons”; Chapter II, “Income from business and professional activities”, Section I “Individuals with business and professional activities” and Title VII “Tax breaks”, Chapter VIII “Option for legal entities to accumulate income” of the Income Tax Law, who receive income solely in the Northern Border Region.
  
  The following municipalities are considered to be Northern Border Region
  • Ensenada, Playas de Rosarito, Tijuana, Tecate and Mexicali of the State of Baja California;
  • San Luis Río Colorado, Puerto Peñasco, General Plutarco Elías Calles, Caborca, Altar, Sáric, Nogales, Santa Cruz, Cananea, Naco and Agua Prieta of the State of Sonora;
  • Janos, Ascensión, Juárez, Praxedis G. Guerrero, Guadalupe, Coyame del Sotol, Ojinaga and Manuel Benavides of the State of Chihuahua;
  • Ocampo, Acuña, Zaragoza, Jiménez, Piedras Negras, Nava, Guerrero e Hidalgo of the State of Coahuila de Zaragoza;
  • Anáhuac of the State of Nuevo León, and
  • Nuevo Laredo, Guerrero, Mier, Miguel Alemán, Camargo, Gustavo Díaz Ordaz, Reynosa, Río Bravo, Valle Hermoso and Matamoros of the State of Tamaulipas
• The break consists in applying a tax credit equivalent to one third or the income tax payable in the fiscal year or in the estimated tax payments against income tax payable in the same fiscal year or in the estimated payments of the same fiscal year, as applicable, in the proportion that the income obtained in the southern border region represents in relation to the taxpayer’s total income obtained in the fiscal year or in the period corresponding to the estimated payments.
  
  To apply the break, it is considered that income is obtained exclusively in the Northern Border Region when such income represents at least 90% of the taxpayer’s total income during the immediately preceding fiscal year, in accordance with the general rules that the Tax Administration Service issues for such purpose.
  
  For such purpose, income attributable to the taxpayer’s tax address or to branches, agencies or any other establishment located in the southern border region will be considered.
  
  The application of the break will not give rise to any refund or compensation other than the one available if such benefit was not applied.
• Taxpayers must comply with the following requirements, among others, to be entitled to the tax break’s benefits:
  • They must file a registration notice in the “List of beneficiaries of the tax break for the northern border region” (the List) with the SAT, by March 31 of the fiscal year in question.
  • They must have their address for tax purposes in the Northern Border Region and evidence that they have had such address for at least 18 months prior to the date on which they file the notice of registration in the List.
    
    Taxpayers that have not had their registered tax address for at least 18 months or that subsequently begin activities in the Northern Border Region may opt for submitting the notice of registration in the List to be entitled to the benefits of the Decree, provided they have the necessary financial capacity, assets and facilities to carry out their business operations and activities in such region and use new fixed assets for such purpose.
    
    To this end, taxpayers must evidence that to carry out their activities in the Northern Border Region they use new fixed asset items and estimate that their total income during the year in such region will represent at least 90% of their total income for the year, in accordance with the general rules issued by the Tax Administration Service.
  • Have an advanced electronic signature.
  • Have access to the tax mailbox.
  • Collaborate with SAT on an annual basis, participating in the real-time verification program.
• The following subjects may not apply the tax break: members of the financial system; those who pay taxes in the optional regime for group of companies, coordinates, agricultural, livestock, logging and fishing activities regime, fiscal incorporation regime, professional services, toll manufacturers (maquiladoras), trusts, cooperatives; those who fall in the cases of the lists published by SAT; those that have conducted simulated transactions, income from intangibles, digital trade; taxpayers subject to reviews or audits by the authority during the last five fiscal years and who have been found to have outstanding taxes; personnel suppliers; taxpayers that apply other tax treatments that afford benefits or breaks, excluding certain exceptions; those undergoing liquidation; State productive entities and contractors in accordance with the Hydrocarbons Law.
• SAT may remove taxpayers from the List in the following cases:
  • If they request to be removed from the List.
  • If they fail to file a renewal notice by March 31 of the fiscal year in question.
  • If they fail to comply with the requirements provided under the Decree.

VAT Tax Break

• Establishes as eligible subjects any individuals and legal entities who carry out actions or activities involving asset sales, performance of independent services or the granting of temporary use or enjoyment of assets in establishments or facilities located in the Northern Border Region.
• The break consists of a tax break equivalent to 50% of the VAT rate, that is, paying 8%.
• Taxpayers must meet the following requirements, among others, in order to have access to the benefits of the tax break:
  • Physically deliver goods or provide services in the Northern Border Region.
  • File a notice with SAT within the 30 calendar days after this Decree enters into force.
• The tax break may not be applied in the following cases, among others: the transfer of real estate and intangible assets; digital services; taxpayers that are in any of the cases provided under the next to the last paragraph of article 69 of the Federal Tax Code; taxpayers that fall into the cases of the lists published by SAT; those who have engaged in simulated transactions.
• Tax breaks referred under this Decree will not be considered as cumulative income for income tax purpose.

The decree published last December 30, 2020, contemplates the following amendments and additions: 

The following provisions are amended and added:

• The authorization to apply the breaks is substituted through a registration notice in the “List of beneficiaries of the tax break for the northern border region” (the List).
  
  The Tax Administration Service (Tax Administration Service or SAT) will register taxpayers in the within the first three months of each fiscal year.
  
  The registration notice will be effective during the fiscal year in which it was made. If taxpayers opt for continuing to apply the income tax break in subsequent fiscal years, they must submit a renewal notice by March 31 of the fiscal year in question, provided they continue complying with the established requirements.
• Taxpayers that begin activities in the northern border region may submit the notice of registration in the List to be able to apply income tax breaks under the Decree, provided they have the necessary financial capacity, assets and facilities to carry out their business operations and activities in the region.
  
  Taxpayers must prove that to carry out their activities in the northern border region, they use new fixed asset items and estimate their total income for the year in such region to be at least 90% of their total income during the year, in accordance with the general rules issued by the Tax Administration Service.
  
  The following taxpayers may not apply the income tax break (application of tax credit equivalent to one third of the income tax payable in the year or in estimated tax payments, against income tax payable in the same fiscal year or in estimated payments of the same year):
  • Taxpayers falling into any of the cases provided in the next to the last paragraph of article 69 of the Federal Tax Code (who are liable for unappealable tax credits; with unpaid or unsecured credits; that are considered not found; who have been sentenced by final judgment for committing a fiscal felony; to whom tax credits have been cancelled because collection was unfeasible or debtor is insolvent; to whom a tax credit has been cancelled; that have failed to submit periodic federal tax or withholding tax returns; corporations that place stock in securities markets and fail to comply with the obligation of obtaining a certificate of compliance with tax obligations; taxpayers known as EDOS) and whose names or corporate names and federal taxpayer identification numbers are published in the Tax Administration Service’s webpage, except when the publication is due to a cancellation of fines, which circumstance must be pointed out when submitting the notice of registration in the List.
  • Taxpayers subject to audits or other reviews by the authority for any of the five fiscal years prior to that in which the break is applied and who have been found to have outstanding taxes and have not paid them.
  • Taxpayers that are in the process of liquidation.
  • Legal entities whose shareholders or partners, individually, have been removed from the List.
• Taxpayers that intend to make use of income tax benefits must file a notice with SAT by March 31 of the fiscal year in question to be registered in the List.
• To obtain the income tax benefits under Decree, taxpayers must have registered their tax address, branch, agency or establishment, within the northern border region at least 18 months prior to the date of application for registration in the List.
  
  Taxpayers that have not had their registered tax address for at least 18 months must comply with the requirements established in the Decree, have the necessary financial capacity, assets and facilities to carry out their business operations and activities in such region, use new fixed assets for such purpose and their total yearly income in such region must represent at least 90% of their total income for the year.
  
  To apply the tax breaks, taxpayers that register in the Federal Taxpayers Registry and establish their tax address or open a branch, agency or establishment in the northern border region after the Decree enters into force, must comply with the requirements provided in the Decree, have the necessary financial capacity, assets and facilities to carry out their business transactions and activities in such region and use new fixed assets for such purpose. In addition, their estimated total income for the year in such region must represent at least 90% of their total income for the year.
  
  Goods used for the first time in Mexico will be considered new assets. Taxpayers may also acquire fixed asset items that have been used in Mexico, provided the transferor of such goods is not a related party of the taxpayer.
• Other requirements that must be met to obtain the income tax benefits are: collaborate with SAT on an annual basis in the real time verification program; not be subject to temporary restriction of the use of digital stamps to issue online digital tax invoices; not have the certificates provided by SAT to issue online digital tax invoices cancelled.
• Taxpayers registered in the List may request SAT to remove them from such List at any time.
  
  When SAT removes any taxpayer from the List, such taxpayer will no longer be able to apply the benefits under the Decree and will lose the benefits for the entire year in which this happens. Taxpayers must file, within the month following that in which they requested their removal, supplementary returns of estimated payments for prior months in the same fiscal year and make the corresponding income tax payment with update and surcharges.
• SAT may remove taxpayers from the List in the following cases:
  • If they fail to submit a renewal notice by March 31 of the fiscal year in question.
  • If they no longer comply with the requirements established in the Decree and the general rules issued by SAT.
  • If they request to be removed from the List.
  • If they fall into any of the cases that make them ineligible to enjoy the tax break.
  Taxpayers who stop applying the income tax benefits under the Decree may not apply them again.
• With regard to the VAT tax break (consisting of a credit equivalent to 50% of the 16% VAT rate, that is 8%), the Decree adds that it will not be applicable in the following cases:
  • When grating the temporary use and enjoyment of intangible assets.
  • When providing transportation services of goods or persons, by land, sea or air, except if such services begin and end in the region, without any stopovers outside of it.

Tax Breaks Decree for the Southern Border Region

Income tax break

• Establishes as eligible persons both individuals and legal entities residents of Mexico as well as foreign residents having a permanent establishment in Mexico that are taxed in terms of Title II “Legal entities”; Title IV “Natural persons”; Chapter II, “Income from business and professional activities”, Section I “Individuals with business and professional activities” and Title VII “Tax breaks”, Chapter VIII “Option for legal entities to accumulate income” of the Income Tax Law, who receive income solely in the southern border region.
• The following municipalities will be considered part of the Southern border region:
  • Othón P. Blanco state of Quintana Roo;
  • Palenque, Ocosingo, Benemérito de las Américas, Marqués de Comillas, Maravilla Tenejapa, Las Margaritas, La Trinitaria, Frontera Comalapa, Amatenango de la Frontera, Mazapa de Madero, Motozintla, Tapachula, Cacahoatán, Unión Juárez, Tuxtla Chico, Metapa, Frontera Hidalgo and Suchiate, of the state of Chiapas;
  • Calakmul and Candelaria, of the state of Campeche, and
  • Balancán and Tenosique, of the state of Tabasco.
• The break consists in applying a tax credit equivalent to one third or the income tax payable in the fiscal year or in the estimated tax payments against income tax payable in the same fiscal year or in the estimated payments of the same fiscal year, as applicable, in the proportion that the income obtained in the southern border region represents in relation to the taxpayer’s total income obtained in the fiscal year or in the period corresponding to the estimated payments.
• To apply the break, it is considered that income is obtained exclusively in the southern border region when such income, excluding income obtained from intangible assets and digital trade, represents at least 90% of the taxpayer’s total income during the immediately preceding fiscal year, in accordance with the general rules that SAT issues for such purpose.
  
  Taxpayers who begin activities in the southern border region after the Decree enters into force must estimate whether their income during the year in the southern border region will represent at least 90% of all income obtained during the fiscal year in question; otherwise, they may not apply the tax break.
  
  For such purpose, income attributable to the taxpayer’s tax address or to branches, agencies or any other establishment located in the southern border region will be considered.
• The application of the tax break will not give rise to any refund or compensation other than the one available if such benefit would not apply.
• Taxpayers must comply with the following requirements, among others, to be entitled to the tax break’s benefits:
  • Deberán presentar un aviso de inscripción al “Padrón de They must file a registration notice in the “List of beneficiaries of the tax break for the southern border region” (the List) with the SAT, by March 31 of the fiscal year in question.
  • They must have their address for tax purposes in the southern border region and evidence that they have had such address for at least 18 months prior to the date on which they file the notice of registration in the List.
    
    Taxpayers that have not had their registered tax address for at least 18 months or that subsequently begin activities in the southern border region may opt for submitting the notice of registration in the List to be entitled to the benefits of the Decree, provided they have the necessary financial capacity, assets and facilities to carry out their business operations and activities in such region and use new fixed assets for such purpose.
    
    To this end, taxpayers must evidence that to carry out their activities in the southern border region they use new fixed asset items and estimate that their total income during the year in such region will represent at least 90% of their total income for the year, in accordance with the general rules issued by the Tax Administration Service.
  • Have a favorable opinion of compliance with tax obligations.
  • Have an advanced electronic signature.
  • Have access to the tax mailbox.
  • Not be subject to temporary restriction of the use of digital stamps to issue online digital tax invoices.
  • Not have cancelled the certificates issued by SAT to issue online digital tax invoices.
  • Collaborate with SAT on an annual basis, participating in the real-time verification program.
• The following subjects may not apply the tax break: members of the financial system; those who pay taxes in the optional regime for group of companies, coordinates, agricultural, livestock, logging and fishing activities regime, fiscal incorporation regime, professional services, toll manufacturers (maquiladoras), trusts, cooperatives; those who fall in the cases of the lists published by SAT; those that have conducted simulated transactions, income from intangibles, digital trade; taxpayers subject to reviews or audits by the authority during the last five fiscal years and who have been found to have outstanding taxes; personnel suppliers; taxpayers that apply other tax treatments that afford benefits or breaks, excluding certain exceptions; those undergoing liquidation; State productive entities and contractors in accordance with the Hydrocarbons Law.
• SAT will register taxpayers in the List within the first three months of each fiscal year.
  
  The notice of registration will be in effect during the fiscal year in which it was submitted. If taxpayers opt for continuing to apply the income tax break in subsequent fiscal years, they must submit a renewal notice by March 31 of the fiscal year in question, provided they continue complying with the established requirements.
• SAT may remove taxpayers from the List in the following cases:
  • If they request to be removed from the List.
  • If they fail to file a renewal notice by March 31 of the fiscal year in question.
  • If they fail to comply with the requirements provided under the Decree.
  • If they fall into any of the cases that exclude them from enjoying the break.
  • If they do not apply the tax break referred in this Chapter, when having been able to apply it, they did not do so.
  When SAT removes a taxpayer from the List, such taxpayer will stop applying the benefits contained in the Decree, in which case benefits will be lost for the entire fiscal year in which this happens and taxpayers must file, within the month following that in which they requested their removal, supplementary returns of the estimated payments of prior months of the same fiscal year and make the corresponding payment of income tax with update and surcharges.

VAT Break

• Establishes as eligible subjects any individuals and legal entities who carry out actions or activities involving asset sales, performance of independent services or the granting of temporary use or enjoyment of assets in establishments or facilities located in the southern border region.
• The break consists of a tax break equivalent to 50% of the VAT rate, that is, paying 8%.
• Taxpayers must meet the following requirements, among others, in order to have access to the benefits of the tax break:
  • Physically deliver goods or provide services in the Southern border region.
  • File a notice with SAT within the 30 calendar days after this Decree enters into force.
• The tax break may not be applied in the following cases, among others: the transfer of real estate or the transfer and granting of temporary use and enjoyment of intangible assets; digital services; taxpayers that are in any of the cases provided under the next to the last paragraph of article 69 of the Federal Tax Code; taxpayers that provide transportation services of goods or persons by land, sea or air, except when such services begin and end in such region, without any stopovers outside of it.
• Tax breaks referred under this Decree will not be considered as cumulative income for income tax purposes.
• This Decree will enter into force on January 1, 2021 and will remain in effect until December 31, 2024.

For further information on the application of these provisions, please contact the professionals at Jáuregui y Del Valle, S.C., to analyze in detail the effects they may have on your business. 

*This article is authored by Dulce Hirota and it may reflect their personal opinions independently from the law firm they work for. Shall you intend to apply any of the debated interpretations within the article, we highly recommend to formally consult Jáuregui y Del Valle, S.C. or any other qualified advisor.

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