

On 01 December 2018, Andrés Manuel López Obrador (or AMLO as he is commonly known) became president of Mexico after two consecutive unsuccessful presidential campaigns. AMLO has always had a leftist and populist agenda, and many feared he would make radical changes in several areas, including taxes, but what has really changed in the first months of his presidency? From a taxation perspective, not much has changed, at least not as a direct consequence of the new government. The main impact on foreign investment has been a consequence of the re-negotiation of NAFTA, and on the possibility of having new tariffs imposed by the US on Mexican products.
The biggest change enacted by the Mexican government is the elimination of the “universal tax compensation”, a provision that allowed Mexican companies and individuals to offset liabilities of a certain tax with a balance in favour of a different tax.
The main reason for this change, and the main driver of fiscal regulatory changes, has been a crackdown on tax evasion and fraud. The previously mentioned provision was widely used as a tax-evasion tool by taking advantage of a loophole allowed by the provision: someone buys a bankrupt company with large losses (and therefore a large balance in favor of income tax), charges for services that were never provided (collecting value added tax), pays no taxes whatsoever (both income tax and VAT are offset against the income tax balance), and returns the money charged to its “client”.
The result is that, while some legitimate companies have had financial difficulties as a result
of this change, many illegitimate ones have also seen difficulties by having this loophole closed.
In addition to the elimination of this provision, the new government is proposing changes to the legislation that will consider tax evasion as a serious crime, classifying it as organized crime and therefore carrying a mandatory prison sentence. For legitimate companies, the result is an added layer of paperwork, given that they need to ensure their suppliersare complying with all applicable tax regulations in order not to be signalled as co-conspirators of tax evasion.