Mexico Tax Reform on Big Firms Clears House

Mexico’s Chamber of Deputies gave final lower-house approval to parts of the 2027 income tax reform. The bill changes the ISR income-tax law and limits deductions, interest payments, and the use of past losses for many large companies. The government says it wants to stop tax evasion involving fake invoices and shell companies.

The vote was 322 to 115. Morena and its allies, the Labour Party and Green Party, supported the bill. PAN, PRI, and Citizens’ Movement opposed it. Deputies rejected more than 200 opposition amendments during the article-by-article vote.

The bill now goes to Mexico’s Senate, where Morena and its allies hold a majority. The Senate must vote before the reform becomes law. If approved, the changes are scheduled to begin on 1 January 2027. The measure would affect many companies, including US-owned subsidiaries operating in Mexico.

A tax deduction cap limits how much a company can subtract from income before tax is calculated. Mexico’s proposal targets companies with yearly income above 50 million pesos and a taxable profit. It would prevent exceptionally large deductions from reducing taxable income too sharply.

For example, if a covered company earns 100 pesos and has deductions above 96.67 pesos, it could deduct only 96.67 pesos under the proposed rule. If its deductions are below that line, the company would still lose 1% of them. Amounts blocked by the cap could be carried forward and used during the next 20 years.

The government links the measure to suspected fake-invoice deductions. The cap is not a universal 96.67% allowance for every company. It is a threshold for covered firms, alongside separate limits on interest and old losses.

The proposed rules apply to companies with yearly income above 50 million pesos, roughly US$2.7 million, when they also report a taxable profit. This means the reform focuses on larger profitable businesses rather than every company operating in Mexico.

The bill does not give every qualifying company permission to deduct 96.67% of income. Instead, if a company’s deductions exceed 96.67% of its income, its deduction would be capped at that level. A company below the threshold would still lose 1% of its deductions. For example, on 100 pesos of income, deductions above 96.67 pesos would be restricted.

The rules also exclude firms less than five years old, farm businesses, and bankrupt companies. Maquiladoras receive special treatment, except for sales inside Mexico. The Senate must still approve the bill before the rules start in 2027.

A company could owe more tax if the reform leaves fewer costs available to subtract from income. Large deductions above the proposed threshold would be restricted. Heavy borrowers would also face a lower net-interest deduction limit, and companies with past losses could use those losses against only half of one year’s taxable profit.

For example, a covered company with adjusted taxable profit and substantial borrowing could deduct net interest equal to only 20% of that profit, down from 30%. A company carrying old losses could offset half of its yearly taxable profit, with the remainder available over the next 20 years. These rules could increase taxable income and the eventual bill.

Cash flow could tighten before the final tax bill arrives. For 2027, firms that exceeded the deduction threshold in their last return must sharply raise monthly advance payments. The bill multiplies their profit ratio by about 2.6, compared with about 1.07 for other large firms.

The government says fake invoices allow companies to claim costs that do not reflect genuine business spending. Those deductions reduce taxable profit and therefore can reduce the tax paid. Stricter limits would make that strategy less valuable and could increase revenue.

Its analysis found that suppliers identified as shell companies accounted for about 10% of spending at firms above the proposed deduction line. At most firms below that line, the comparable share was about 1%. The government uses this gap to argue that unusually high deductions deserve closer control.

The reform would cap deductions for covered companies and make some firms pay higher monthly advances in 2027. It would also limit interest and the use of past losses. The bill has cleared the lower house, but the Senate must still vote. The stated goal is stronger revenue collection, although the article reports opposition concerns about the wider burden.

The reform does not treat every business in the same way. Export-assembly plants known as maquiladoras are spared from the new chapter except for their sales inside Mexico. Firms less than five years old, farm businesses, and bankrupt companies are also left out. Corporate groups using an optional tax-deferral regime must leave it in 2027.

This is especially important for US manufacturers because maquiladoras mostly build goods for the US market. A qualifying export plant could keep its special treatment for those export activities, while Mexican sales would not receive the same exemption. The article also notes that many subsidiaries of US companies operate across Mexico.

The exemption reduces the reform’s direct reach into export manufacturing, but it does not remove every possible effect. Covered parent companies or other Mexican operations may still face the deduction, interest, or loss limits. The Senate’s decision will determine whether these distinctions become law on 1 January 2027.

Corporate income is the money a company receives during a year, while taxable profit is the amount left for tax purposes after permitted deductions. Deductions are business costs that tax law allows a company to subtract. Losses are amounts by which deductible costs exceed income, either in a year or from earlier periods.

For example, a company earning 100 pesos might subtract qualifying operating costs before tax is calculated. If those costs total 80 pesos, its taxable profit could be 20 pesos, subject to the law’s rules. If costs exceed income, the company may record a loss and, where allowed, use it against later profits.

Tax systems generally allow this treatment so tax reflects business profit rather than gross sales. Mexico’s proposal would narrow those deductions for covered firms, restrict old losses to half of yearly taxable profit, and cap deductible net interest at 20% of adjusted taxable profit. These are standard concepts; the article explains Mexico’s proposed limits rather than defining each term formally.