Nearshoring: U.S., Mexico Announce New Tax Incentives
The advent of the United States-Mexico-Canada Agreement (USMCA), along with recent disruptions to global supply chains, has generated opportunities once again to relocate business and manufacturing operations closer to the U.S., also known as nearshoring.
The Mexican government, through its Department of Treasury, published an executive order to promote investments in Mexico due to the nearshoring phenomenon through tax incentives for export-oriented industries.
The United States Trade Representative (USTR) has recognized that U.S.-Mexico total trade in goods and services surpassed US$864 billion in 2022, an all-time high. Into 2023 (year-to-date through July), Mexico has become the largest partner of the U.S. for total trade in goods.
The executive order grants benefits to companies that seek to optimize their operations through nearshoring strategies and to those companies currently located in Mexico that belong to sectors identified as crucial in the export industry.
A tax incentive consisting of an accelerated depreciation of certain assets is granted to companies under the general legal regime or taxpayers under the simplified trust regime and to individuals with business activities (hereinafter Benefited Taxpayers), when they are engaged in the exportation and production, processing or industrial production of the following goods:
- products intended for human food and animal consumption
- fertilizers and agrochemicals
- raw materials for the pharmaceutical industry
- electronic components such as simple or loaded cards, circuits, capacitors, condensers, resistors, connectors and semiconductors, coils, transformers, harnesses and modems for computers and telephones
- machinery for clocks, measuring instruments, control and navigation and electronic medical equipment for medical use
- batteries, accumulators, electric conduction cables, contacts, fuses and accessories for electrical installations
- gasoline, hybrid and alternative fuel engines
- electrical and electronic equipment, steering systems, suspension, brakes, transmission systems, seats, interior accessories and stamped metal parts for certain transports
- internal combustion engines, turbines and transmissions for aircrafts
- non-electronic equipment and devices for medical, dental and laboratory use, disposable material for medical use and optical articles for ophthalmic use
The incentive consists on being able to make a greater immediate deduction of investment in "new" fixed assets, acquired as of the effective date of the decree and until Dec. 31, 2024. For purposes of the decree, new assets are considered as those used for the first time in Mexico.
Some of the maximum allowable depreciation percentages by type of asset are the following:
- 86 percent for certain transportation propelled through rechargeable electric batteries, electric engine or with hydrogen-powered engine
- 86 percent for airplanes used for agricultural aerial spraying
- 88 percent for desktop and laptop personal computers, servers, printers, bar code scanners, digitizers, external storage units and computer network hubs
- 89 percent for dice, dies, molds and tooling
- 89 percent for machinery and equipment directly destined to the research of new products or development of technology in the country
- 56 percent for machinery and equipment used in the manufacture of pharmaceutical drugs, antiseptic products for pharmaceutical use, and other substances, tablets and injectable actives
- 56 percent for machinery and equipment used in the manufacture of electron microscopes, electronic medical equipment, laboratory instruments and equipment, laboratory analysis, trial and testing equipment, and diagnostic and radiotherapy equipment
- 72 percent for machinery and equipment used in the manufacture of chemical products or in the manufacture of materials used in the manufacture and testing and packaging of electronic and semiconductor components
- 76 percent for machinery and equipment used in the production of machinery and equipment used in the design, fabrication and manufacture of electronic and semiconductor components in categories such as deposition, thermal processing, oxidation and diffusion, lithography, photoresist processing, cleaning and removal of materials, among others, for the manufacturing process of the electronic and semiconductor components industry
- 76 percent for machinery and equipment used in the design, manufacture and fabrication of electronic components such as simple or loaded cards, circuits, capacitors, condensers, resistors, connectors and semiconductors, coils, transformers, modems for computers, and telephones and harnesses
- 80 percent for machinery and equipment used in the construction and assembly of sets in forums and locations for recording and photography
- 80 percent for machinery and equipment used in the investment for audio and video post-production and visual effects equipment and facilities, and equipment for the production of costumes for props and special equipment for setting the scene
- 83 percent for machinery and equipment used in the manufacture, assembly and transformation of magnetic components for hard disks and electronic cards, power supplies/adapters, batteries and liquid crystal displays for the computer industry
- 83 percent for machinery and equipment used in the investment for recording equipment in any form, and professional lighting equipment for recording and photography
- 86 percent for machinery and equipment used in the manufacture, assembly and transformation of batteries for certain transportation, as long as they are electric
- 86 percent for machinery and equipment used in the manufacture of certain transportation propelled by electric rechargeable batteries, or electric engines that also have an electric combustion engine or a hydrogen powered engine
- 86 percent for machinery and equipment used in the manufacture of gasoline, hybrid and alternative fuel engines for certain vehicles
- 86 percent for machinery and equipment used in the manufacture of electrical and electronic equipment, steering, suspension and braking systems, transmission systems, seats and interior accessories and stamped metal parts for certain transportation
- 88 percent for machinery and equipment used in the production of certain products intended for human and animal consumption, boilers and water tanks
By virtue of this accelerated deduction, the profit rate to be used in 2024 and 2025 and the provisional payments will be modified. The aforementioned amount of the immediate deduction must be reduced in equal parts in the provisional payments of the corresponding fiscal year, which will begin in the month the investment is made.
When the assets are transferred, lost or cease to be useful, a deduction may be made for the amount resulting from applying to the original amount of the investment minus the period between the month in which the asset was acquired and the last month of the first half of the period in which the deduction was made. The resulting percentages according to the number of years elapsed since the deduction was made and the percentage of immediate deduction is applied to the asset in question, according to certain schedules established in the decree that depend on the percentage of depreciation.
Likewise, Benefited Taxpayers may apply in the annual tax return for the fiscal years 2023, 2024 and 2025, a tax incentive consisting of an additional deduction equivalent to 25 percent of the increase in the expense incurred for training received by each of their employees in the corresponding fiscal year. For these purposes, the increase will be the positive difference between the expense incurred for training in the corresponding fiscal year and the average expense incurred by the taxpayer for the same concept in the fiscal years 2020, 2021 and 2022.
The training shall provide technical or scientific knowledge related to the taxpayer's activity.
Access to the Benefit
Certain taxpayers such as those listed in the "black list" of the tax authority, who have concluded tax credits or who have restricted digital seals, among others, may not be Benefited Taxpayers.
The Benefited Taxpayers that decide to apply this benefit must give notice to the Tax Administration Service (Servicio de Administración Tributaria or SAT) in which they state that they opt for its application during the 30 calendar days immediately following the month in which they apply for the first time the aforementioned incentives.
Likewise, taxpayers must maintain specific records of investments for which they choose to apply the immediate deduction. These records should include supporting documentation, describe the type of asset, its relevance to their primary business or activity, the specific use of the asset, the applicable deduction percentage, the year in which the deduction was applied, and the date of sale, loss due to unforeseen circumstances or when the asset ceases to be useful.
The concrete circumstances of each taxpayer must be analyzed in order to define each taxpayer's possibility to qualify as a Benefited Taxpayer or whether it would be possible to consider different legal actions to apply for such benefits. Please contact the authors for more information.
Holland & Knight Partners Francisco Andrés Gámez-Garza, Mario Barrera, Jose Ricardo Ibarra Córdova, Luis Rubio Barnetche, Associates Cinthia Yohaina Hernández, Andrea Iturbide, Catalina Mandujano, Miguel Angel Rosas Ortiz and Mariana Salinas, as well as Senior Policy Advisors Maite Laris and Jorge Aguilar, also contributed to this alert.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.