Demystifying Mexico Tax Compliance Complexity

In the past two years, the Mexican government enacted far-reaching changes to the Mexican income tax, value-added tax, and Federal Tax Code. While previous Mexican government tax reform efforts were aimed at highly digitalized businesses, the most recent round of tax reform went beyond prior efforts and changed the entire international Mexican tax system.

Today, Mexico’s tax system is one of the most complex in the world. That’s why accounting expert Juan Alberto Morales recommends startups develop an in-depth understanding of Mexico’s tax system before doing business in the country. 

“If you’re not related to the tax system, it’s difficult to understand a new one because it has a lot of regulations and rules that make it challenging,” Morales says.

Morales is a Bilingual International Public Accountant who specializes in tax consulting, corporate tax compliance, automation of tax calculation, and risk assessment of fiscal function processes. He is a tax director at JA Del Río, an accounting firm focused on helping companies do business in Latin America. On March 24, Morales hosted a webinar for Founders Network members where he provided the demystifying of Mexico tax compliance.

To learn more about the demystifying of Mexico tax compliance, see if you qualify for membership and check out the webinar from March 24.

A digital system

Morales says Mexico tax compliance is unique because it operates via a largely digital system. According to one report, Mexico has one of the most advanced digital tax administration systems among the world’s emerging economies. While this digitalization has improved the effectiveness of tax collection in Mexico, it presents a few hurdles for startup founders doing business in the country.

“We are a very complex country,” Morales says. “It’s one of the most complex systems in the world and mostly because our taxation system is based in a digital environment. Everything you need to do is through the Mexican internal revenue service system. All of your invoices, all of your expenses, all of your bank accounts must pass through this system.”

Starting on the right foot

According to Morales, there are 14 steps startups must take prior to starting operations to ensure they are in line with Mexico tax compliance.  These include securing a tax ID, a fiscal address certified by the tax authorities, legal representation in Mexico, and more.  Only in this way can startups avoid running afoul of Mexico’s tax authorities.

“In Mexico, you have to put a lot of effort into understanding the system. You have to plan and set all of your tax obligations before you start operations,” Morales says. “A lot of startups that try to come and do business in Mexico, they just start. They forget about the tax formalities. When they turn back and see what they have missed, it can be difficult to remediate.”

Avoiding penalties

Through reform efforts over the last five years, the Mexican tax authorities have made it clear that noncompliance will have consequences. As a result, taxpayers take Mexico tax compliance very seriously. According to a recent report, 83 percent of surveyed Mexican taxpayers thought it was likely they would be sanctioned if they failed to comply with their tax obligations.

“When you start a business and you don’t comply with the formalities, the tax authorities in Mexico will fine you and put penalties on you,” Morales says. “Startup founders often think they can do it all themselves. When startups come to us, they have a lot of issues that could have been avoided if they had got the proper advice.” 

At his webinar, Morales covered:

• How taxes are structured in Mexico
• Tax digitization
• Tax risks
• Day to day compliance 

To learn more about the demystifying of Mexico tax compliance, see if you qualify for membership and check out the webinar from March 24.