General Comments on Deduction of Expenses by Mexican Companies and the Case of the Deduction of Pro-Rata Expenses

08 August 2017

Mexican companies (that are deemed to be tax residents in Mexico) are subject to income tax in Mexico on their worldwide income. Income tax in Mexico is federal; thus, no state income tax exists. The current corporate rate applicable to companies is 30% (the rate applicable to individuals could reach 35%).

Consistent with the Mexican Constitutional proportionality principle for taxation, companies are able to take the deduction for income tax purposes of certain expenses, provided that they comply with the applicable requirements set forth in the Mexican Income Tax Law. Due to a very formalistic tax system, sometimes complying with the applicable requirements can represent a burdensome task for taxpayers, which requirements must be complied with no later than the last day of the corresponding tax year (with the exemption of the invoice that supports the deduction which can be provided up to the day on which the annual tax return becomes due or is filed).

In general terms, companies are able to deduct from their taxable income (i.e., all income received in cash, goods, services, credit or in any other form) their operating expenses, cost of goods sold, payroll, sales discounts, bad debts, losses due to exchange rate and inflation and any other expenses that are strictly necessary for the business activity of the company.