Taxation in Agriculture

Chapter 27. Mexico

Abstract

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.

27.1. Overview

Mexico operates under a federal fiscal system where the federal government collects national income and consumption taxes and sets special levies on specific products.

Agriculture plays a modest role in the Mexican economy and in 2018, crop cultivation was responsible for 2% of total GDP, livestock husbandry amounted to 1%, and forestry and fisheries accounted for 0.2%. Notwithstanding this, primary activities comprise 13% of total national employment and continue to be the most important source of income in rural areas.

Corn, avocados, sugarcane, and tomatoes comprise 35% of crop value, whereas beef, poultry, milk, and pork consist of 85% of the value of production in the livestock sector. Agrifood exports have steadily grown since NAFTA implementation, reaching a record high of USD 34.2 billion in 2018.

The most dynamic agricultural areas are located in the northern and western parts of the country. Central and southern Mexico are mainly characterised by small land plots producing basic subsistence crops. In general, low productivity is still the norm. This is best reflected in poverty rates: in 2016, 58.2% of rural households were poor (including 17.4% of extremely poor); in contrast, 39.2% of urban households were classified as poor, including only 4.7% of extremely poor.

Agriculture is treated differently for income tax purposes with tax exemptions and reduced tax rates. Farmers are reimbursed the excise tax they pay on diesel and gasoline used for agricultural machinery.

27.2. Income taxation

The national income tax (ISR by its Spanish acronym) is a direct tax collected on individuals and corporations. The personal income tax (ISR a personas físicas) operates on a cash flow basis under a territorial principle. National and foreign individuals must pay the ISR on earnings originated in Mexican territory. In the case of foreigners, income is attributed to be of Mexican origin if they have a “permanent establishment” in Mexico.

There are two main categories of taxpayers under the personal income tax: those that derive their income primarily from wages and salaries (ISR a asalariados) and those that derive income from entrepreneurial activities (ISR a personas físicas con actividades empresariales). Tax for salary earners is directly withheld by their employer.

In the case of individuals with entrepreneurial activities, the tax base is the difference between income and the cost of acquisition of inputs, services, and marketed goods, plus other expenses deemed as absolutely necessary for the generation of taxable income. Depreciation of assets is allowed at a yearly rate dependent on their useful life.

The tax is calculated according to the following formula: ISR = {[Tax base – Lower limit] * [Marginal rate (%)]} + Fixed rate.

A fiscal year is the same as a calendar year. Preliminary payments are made on a monthly basis (proportional tax bracket tables are available for each month of the year), and a final declaration for the entire fiscal year is presented during April of the following year.

In the case of corporations, the corporate income tax (ISR a personas morales) operates on an accrual basis under a territorial principle. The tax base is defined as the difference between income (either in cash, goods, or services) and the cost of such sales and other expenses deemed as necessary for the generation of taxable income. The corporate income tax rate is 30%. Depreciation of assets is deducted from the tax base using a linear schedule based on the useful life of buildings, machinery, vehicles, and equipment.

The 2014 reforms to the Mexican Tax Law established a specific tax regime for those taxpayers engaged in agricultural (including animal husbandry), forestry, and fisheries activities.1 Previously, they were included in the so-called Simplified Tax Regime for small taxpayers.

According to Article 74 of the Mexican Tax Law, to be eligible for the “Agricultural, Forestry, and Fisheries Regime” (AGAPE, by its Spanish acronym), at least 90% of total income must come from agricultural activities. Individuals, corporations, and/or other forms of organisations like ejidos and production cooperatives can be included under the AGAPE. Income from the sale of land or other fixed assets is excluded from the AGAPE. Very small farming units with annual income below 8 Units of Measures (UMA) (worth MXN 246 576 in 2019) per year need to derive at least 25% of their income from agricultural activities in order to qualify for the AGAPE regime.

Fiscal treatment depends upon total income obtained from agricultural, forestry, and fisheries activities, according to the schedule described in Table 27.1.

Table 27.1. Special tax treatment of agricultural activities under the AGAPE

	Small-scale producers	Medium-scale producers	Large-scale producers
Corporations and other societies	Annual income of up to 200 UMAs (or MXN 6 164 400 in 2019)	Annual income between 200 UMAs and 423 UMAs (or MXN 13 037 706 in 2019)	Annual income above 423 UMAs
Tax treatment	Total exemption	ISR paid on income in excess of 200 UMAs is reduced by 30%	ISR paid on income in excess of 200 UMAs is reduced by 30% with no further reduction on income above 423 UMAs
Corporations (personas morales) whose constituting members are exclusively private individuals (personas físicas)			Annual income above 4 230 UMAs (or MXN 130 377 060 in 2019)
Tax treatment	Total ISR exemption up to 20 UMAs per stockholder pa (or MXN 616 440 in 2019) with a total limit of 200 UMAs per corporation	Total ISR exemption up to 20 UMAs per stockholder pa with a total limit of 200 UMAs per corporation & 30% reduction on ISR on income above 200 UMAs and up to 4 230 UMAs pa	Total ISR exemption up to 20 UMAs per stockholder pa with a total limit of 200 UMAs per corporation & 30% reduction on ISR on income above 200 UMAs and up to 4 230 UMAs pa with no further reduction on income above 4 230 UMAs
Private individuals (personas físicas)	Annual income of up to 40 UMAs (or MXN 1 232 880 in 2019)	Annual income between 40 UMAs and 423 UMAs	Annual income above 423 UMAs
Tax treatment	Total exemption	Exemption on the first 40 UMAs, the ISR on income above 40 UMAs is reduced by 40%	Exemption on the first 40 UMAs, the ISR on income above 40 UMAs up to 423 UMAs is reduced by 40% with no further reduction on income above 423 UMA

Note: UMAs = Units of Measures are reference units used to index payments of loans, taxes and other federal and state contributions to inflation. Their value is updated on a yearly basis by the National Institute of Statistics.

pa = per annum.

In 2019 1 UMA = MXN 30 822.

In the case of agri-food companies (or individuals) operating in the food and beverages industry (processing of raw materials), the regular ISR tax regime applies and no special treatment is granted.

Under the ISR regime, specific provisions apply for income derived from real estate properties, interests, dividends, transportation activities, and lotteries. Nevertheless, those provisions do not apply to income earned in agricultural activities.

27.3. Property taxation

In Mexico, municipal governments have the authority to levy the property tax on land. Tax is levied on the basis of cadastral value and neither farmland nor other farm household’s assets are subject to tax provisions different to those applied to other branches of the economy.

27.4. Tax on goods and services

The consumption tax takes the form of a federal Value Added Tax (IVA, by its Spanish acronym) with rates of 16%, 0%, and exempted goods. Most of the inputs used in primary production, investment goods, and services used by primary production are taxed at a 0% rate.

Since most of agricultural producers sell goods taxed at the 0% rate, it is highly probable for them to have a net positive balance which can be used to pay for future VAT taxes or can be reimbursed by the fiscal authority.

Excise taxes are collected in the production and sale of different goods and services. The so-called “Impuesto Especial sobre Producción y Servicios” (IEPS) is levied on: gasoline, diesel, alcoholic beverages, tobacco products, soda and flavoured beverages and energy drinks (introduced in 2014) and processed foods (introduced in 2014).

All individuals and corporations, including agricultural producers, using diesel and gasoline as inputs in their production processes, receive a tax incentive. It is worth noting that the incentive applies only for fuels used for the operation of tractors and machinery, but not other vehicles, like cars or pickups. The IEPS paid in the acquisition of the fossil fuels can then be deducted from their corresponding ISR payable.

While tax credits for diesel and gasoline used as inputs apply to all individuals and corporations engaged in entrepreneurial activities. In the case of agricultural producers in the AGAPE regime instead of using the IEPS fuel rebate as a credit against their ISR, they can ask for a cash reimbursement. For individual producers with an annual income of less than MXN 551 000 the maximum reimbursement is MXN 1 496 per month and for corporations under the AGAPE regime with an income below MXN 5.5 million, the maximum monthly reimbursement is MXN 14 948.

27.5. Environmental taxes

There is no information on the existence of environmental taxes in Mexico. The IEPS on fossil fuels could be considered to be the only tax measure under this category.

27.6. Tax incentives for R&D and innovation

The ISR Law contains a general tax incentive to promote investment in Research and Technological Development (R&D). It is available to all companies and is not specifically directed towards agricultural activities. Features of the incentive are as follows:

• It consists of a fiscal credit equivalent to 30% of spending on and investments in R&D, which can be credited against the payable ISR in the same fiscal year.

• It applies only to incremental spending and investment in R&D with respect to the previous three years average. Thus, if a firm spent MXN 300 million in R&D from 2015 to 2017, its three-year average would be MXN 100 million. Suppose that in 2018 the firm spends MXN 120 million on R&D. Then, the incentive will amount to MXN 6 million (= 30% of MXN 20 million = 120 million minus the 100 million 3-year average).

• The total available incentive is MXN 1 500 million per year. Once the limit is reached, no new incentives are granted. To avoid concentration of the incentive in a low number of firms, an upper limit of MXN 50 million per taxpayer applies.

• There is a mechanism to distribute the tax grants for investment in R&D which are subject to a limit. Instead of a first come, first served basis, all applications are submitted to an Inter-Institutional Committee that evaluates the applications and decides which will receive the tax incentive.

There is no information that indicates if the R&D incentive is widely used (or not) by farms and agri-food companies.

27.7. Other taxes

There are no further tax provisions or exemptions applying only to agriculture in the case of social contributions, pensions, labour or other taxes.

Note

← 1.  Agricultural activities include planting, cultivation, and harvesting crops, animal husbandry (rearing and fattening of cattle, dairy cows, pigs, poultry); rearing, feeding, breeding of all kinds of marine and river species; forestry activities; and marketing (first sale only) of all primary products that have not been subject to any industrial transformation.