The main sources of tax revenue in Mexico are income tax, value-added tax (VAT), and local levies on real property. The federal government also imposes excise taxes on alcohol and cigarettes, as well as production taxes on mining.
A new income tax law, effective 1 January 1987, retained the 1981 division of taxpayers into four groups: resident corporations; resident individuals; nonresident corporations and individuals taxed only on their Mexican-source income; and nonprofit organizations, which, though paying no taxes, are still required to file annual returns. The tax reforms of 2001 extended the requirements for reporting income to the Hacienda (the term for Mexico's tax agency) as a condition for maintaining various income tax exemptions on income from dividends, capital gains, gifts and inheritances.
The tax reforms of 2001 provide for the corporate tax rate to be reduced by 1% a year until it reaches 32% in 2005, so rates in 2002 and 2003 were 35% and 34%, respectively. A reduced rate—30% in 2002—applies to profits that are reinvested. A1.8% tax on fixed assets is deductible from corporate income tax. Except for gains from sale of stock on the Mexican stock exchange, capital gains are taxed at the same rate as other corporate income. Dividend payments by Mexican companies to nonresidents are not subject to any withholding. Branches of the foreign companies have the same tax obligations as domestic companies. Interest income is taxed at rates of 10% and 15%, and income from royalties at 10%.
By the income tax reforms of 2001, the top marginal rate was reduced from 40% to 35%, effective 2002, and was scheduled to drop to 32% by 2005. In 2002, the Mexican progressive income tax schedule had eight brackets, but the top four, which apply to increments of income over 24,090 pesos (about $2,285), are only 1% apart (32%, 33%, 34% and 35%). The lower bands are 3%, 10%, 17% and 25%, with 3% applying to taxable income up to 1,389 pesos ($132). The highest band (35%) applies to the increment of income above 91,683 pesos a year ($8,700). Several types of deductions are available, including lump-sum standard deductions, for housing expenses, property taxes paid, etc., but the specific mix in determining taxable income differs from region to region. The 3% Substitute Tax on Salary Credits (ISCAS) introduced in 2002 was raised to 4% for 2003. Though the tax reforms of 2001 allow state governments to impose an income tax up to 3%, as of 2003 none had a state income tax. Gifts less than about $1,700 (calculated as the equivalent of three annual minimum wages) are tax-exempt as are gifts between spouse and linear descendents (although such gifts over one million pesos—about $95,000—must be reported to the Hacienda to maintain the tax exemption).
The main indirect tax is Mexico's value-added tax (VAT), in effect since 1980, which has a current standard rate of 15% on most goods and services, except in border zones in which a 10% VAT applies. Medicine and food products are zero-rated. VAT-exempt goods and services include sales of animals, vegetables, and fruit for other than industrial use; sales of tractors, fertilizers, and pesticides; rentals of agricultural machinery; international freight; international air passenger service, pre-paid cellular phone service, radio paging and beeper services, the sale of natural gas for car fuel, and imports and exports in Strategic Bonded Warehouse facilities. A 5% luxury tax on a rather arbitrary collection of goods (luxury cars, jet skis, salmon, golf, horseback riding, but not yachts, lobster, scuba diving or skydiving) was abolished in 2003. Though the tax reforms of 2001 give the states leeway to impose sales taxes up to 3%, none have done so.