Mexico:  Proposal to Eliminate ‘Universal Compensation’

Mexico’s 2019 Budget Bill, submitted by the Executive office to Congress for approval on December 15, 2018, includes a provision to eliminate universal compensation which allows taxpayers to offset any federal tax due with positive balance in other federal taxes (i.e., VAT tax credit applied to settle income tax due).  Since the President’s political party controls the Senate and House of the Representatives, this bill is expected to be enacted effective January 1, 2019.

The elimination of universal compensation may significantly impact Mexican taxpayers managing cash flow since taxpayers can no longer offset balances between various federal taxes (including VAT, excise, payroll and income taxes).  Additionally, taxpayers can expect a prolonged period of time to recover overpaid taxes and VAT. Taxpayers with Mexican subsidiaries should consider severe cash flow impact this provision may have.

Special interest groups, including Western Maquiladora Trade Association and Mexico’s Maquiladora Industry Advocacy Association (INDEX), are actively working to influence Mexican taxation officials to adopt a special exclusion from this provision for many Maquiladora companies, but it is unclear whether or not a special consideration would be granted.