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In Mexico, tax expenditures refer to all fiscal measures that reduce public revenue by granting preferential tax treatment relative to the benchmark system. These include deductions, exemptions, tax credits, differentiated rates and tax incentives.
While tax incentives are conceptually equivalent to tax expenditures, in Mexico the former are a component of the latter, as per the structure of the SHCP’s tax expenditures document. As such, tax incentives constitute a specific subset of tax expenditures and are typically created by presidential decree, unlike other benefits which are incorporated directly into tax legislation.
Transparency: in the previous version of the Global Tax Expenditures Transparency Index (GTETI)’s 2024 ranking Mexio was placed 51st, reflecting that improvements are necessary regarding the availability, quality and clarity of information pertaining to tax expenditures. While the country still meets the minimum standards for publication of tax expenditure information (as regards such things as estimates, methodology, legal basis and beneficiary analysis), there is still significant room for improvement, particularly when it comes to defining the benchmark, incorporating assessments and strengthening the role of Mexico’s parliament, the Congress of the Union. With publication of the tax expenditures document (Documento de Renuncias Recaudatorias) having resumed in 2024, there is now an opportunity to make up lost ground in terms of tax transparency and promote more proactive oversight by the legislative branch and civil society.
Complex fiscal landscape: tax expenditures amounted to some MXN 1.42 trillion in 2024, which equates to 4.2% of gross domestic product (GDP) and 19.4% of tax revenue. The primary tax expenditures pertain to the 0% value added tax (VAT) rate and the income tax system. Additionally, tax incentives, most of which are granted by presidential decree, account for approximately 25% of total tax expenditure. These measures have different objectives, legal foundations and timeframes, reflecting a Mexican tax expenditure system that is fragmented and inconsistent in design.
Evaluation challenges: despite advances in incidence analysis and disaggregation by tax type, there is no systematic model in place to evaluate compliance with the objectives of this public policy. In the absence of ex-ante and ex-post evaluations and performance indicators, it is difficult to determine the effectiveness and relevance of the different tax expenditures. At the same time, a time lag between publication of tax decrees and the tax expenditures document limits assessment of the impact of these expenditures.
Fiscal sustainability: tax expenditures account for almost 20% of tax revenue. Their scale poses a challenge to the sustainability of public finances. Against the backdrop of the energy transition, demographic transition and structural pressure on welfare spending and public investment, it is essential to review the permanence and effectiveness of these tax expenditures to prevent them from becoming a structural source of inefficiency and regression.
Areas for improvement:
1. Enhance the design of tax expenditures with time (including sunset clauses), transparency and account-ability criteria.
2. Establish assessment standards, including interim assessments of tax incentives.
3. Integrate performance indicators into budgetary programmes related to tax expenditures.
4. Strengthen the technical capacities of the Congress of the Union, and more specifically the Center for Public Finance Studies (CEFP), to assess the relevance of tax expenditures and their impact on the economy and public revenue.
5. Promote a strategic vision that brings tax expenditures into line with the objectives of the National Development Plan (Plan Nacional de Desarrollo) and ensures their long-term fiscal sustainability.
A tax reform process that incorporates an assessment of tax expenditures will make the tax system more progressive and effective.