At the end of 2018, Mexico published the New Law of Income of the Federation for 2019, which significantly affects enterprises. Specifically, the law dramatically changes the tax regime rules that formerly allowed for offsetting between federal taxes, so called “universal compensation.”
Before digging into the details, it is important to first build a working definition of compensation. As it is most often used in the Spanish-speaking business world, compensation refers to satisfying a financial obligation with an offsetting surplus from another source. (This is outlined in Article 2185, Federal Civil Code of Mexico).
Until December 2018, taxpayers obligated to file and pay taxes could choose to offset their tax liabilities with qualifying amounts of federal tax benefits, such as tax credits. (Details are explained in Article 23, Federation Tax code-CFF). Compensation could be done based on updated amounts, according to Article 17-A of the CFF, providing for flexibility throughout the billing and payment process.
Universal tax compensation was a mechanism greatly beneficial to taxpayers. Because it enabled companies to avoid tying up additional cash flow to pay taxes, their corporate financial planning was more practical.
The end of the Universal Compensation of balances
On December 28th, 2018, the Mexican Income Law for 2019 was published in the Official Journal of the Federation. The law stipulated that, in accordance with Article 23 (the first paragraph of the Federation tax code) and Article 6 (the first and second paragraphs of the value added tax law), the compensation of universal balances would be put to an end. The consequence of this change is that now any balances or credits in favor of the taxpayer will only be eligible to be credited against a tax levied in the same category.
In 2019, regulation 2.3.19, the sixth modification to the RMISC 2018, was published. It establishes that, “taxpayers obligated to pay by means of declaration that have quantities in their favor generated as of 31 December 2018 and declared in accordance with the fiscal dispositions, which would not have been compensated or requested to be returned, may choose to offset (“compensate”) those amounts against those debts which they are obliged to pay.
“Taxpayers who apply the provision in the present rule shall submit the notice referred to in Article 23, first paragraph of the CFF, in the terms provided in rule 2.3.10, without being subject to the facility contained in rule 2.3.13.”
Based on the above illustrated changes, it is important that the Mexican companies, especially those with balances or credits in their favor up to 31 December 2018, take into consideration this change in the fiscal rules of the Universal Compensation of Taxes for the planning of their budgets and cash flow statements. Since the 2019 exercise, the accreditation of balances is only allowed to be credited toward the same tax category, or they may opt to initiate tax return requests before the tax authority.
With the new regulation in place, it is important that multinational companies verify how their Mexican branches or subsidiaries are offsetting their taxes, and evaluate the impact that this change may have on their financial results in the country.