An outline of Mexico's legal system for corporations and individuals

Throughout the 20th century Mexico made steady progress in its efforts to establish and develop a robust fiscal regime. In 1925 Mario Pani, then-minister of finance, introduced a preliminary series of reforms to the system, and subsequently implemented a second set in 1932. The next major change came in the 1970s and 1980s, when a new tax system was pushed through by ministers of finance and attorneys general. This new system abandoned the existing schedular system and introduced a value-added tax of 10%, leaving behind the mercantile income tax system and establishing the National System of Fiscal Coordination.

Process of Reform

The government of President Enrique Peña Nieto, of the Institutional Revolutionary Party, embarked upon a tax reform programme in 2013, which serves as a forerunner to the fiscal reforms that are still required to this day. As part of this programme, the nation’s tax collection income has been increased from 8% of GDP in 2012 to approximately 13% of GDP in 2017.

The awaited reforms will need to create a clear public policy that involves all three levels of government. This would involve a thorough review of the municipal, state and federal contributions currently contemplated by the laws, together with the required public expenditure. Importantly, it should also consider uniform rates of contributions as well as the rates that would best suit their capacity to pay tax. In summary, the aim of any reforms should ultimately be to clarify and ease the procedures and legal regulations for both taxpayers and the authorities. Furthermore, these changes should be accompanied by a modernisation of the National System of Fiscal Coordination.

As is well known, Mexico still faces the challenges associated with having a large informal sector. Some estimates suggest that this affects as much as 60% of the economically active population. Therefore, tackling informality should also be one of the main priorities of any new tax reforms.

Changes Needed

Reducing the rate of income tax for both individuals and corporations could generate investment and create more employment opportunities. Currently, Mexico has a corporate tax rate of 30%. Some stakeholders have called for this to be lowered in order to invite more foreign direct investment. The authorities will need to take into account the economic capacity of taxpayers, while also calculating the tax income required to meet public expenditure needs.

According to global trends, tax revenues should be based more on indirect taxes that are easier to control. With this in mind, Mexico’s indirect tax rates should be reviewed to ensure that Mexico is competitive on an international scale.

In addition, a thorough review of fiscal judicial administration is required so that the Federal Court of Administrative Justice can establish an integrated training programme for magistrates, secretaries and personnel in general. This would ensure that all members of staff are properly informed and trained, which in turn would lead to improved sentences being made in fiscal cases.

Given that tax regimes around the globe are undergoing a period of change, Mexico could benefit from conducting comparative studies on laws and taxes in neighbouring countries. In this way, the authorities could analyse the potential benefits of various tax-collection systems, as well as tax provisions both for the taxpayers and the authorities. Mexico needs to overhaul its approach to fiscal matters and public spending if it is to achieve sustainable and inclusive economic development.

OBG would like to thank Eduardo Viesca and Maillard, contribution to THE REPORT Mexico 2018.