Mexico City is facing a significant shift in its fiscal landscape as major companies challenge a recent hike in the Payroll Tax (ISN), which increased to 4% starting January 2025, making it the highest rate in the country. This increase was initially supported by the local business group Coparmex and the Mexico City government but is now under scrutiny from prominent corporations.
Firms such as Liverpool, Soriana, Cervezas Cuauhtémoc Moctezuma, and Deloitte have begun legal proceedings challenging the ISN hike. They argue that the increase is inequitable, claiming that micro and small enterprises, which are exempt from this tax, benefit from favorable treatment compared to larger corporations. Furthermore, they assert that the increased tax violates principles of tax proportionality.
Most of these companies have opted not to request a suspension of the new tax, indicating a willingness to engage in long-term litigation, aiming ultimately for a favorable ruling that could exempt them from the reform enacted by the Morena party lawmakers.
Historically, the ISN had been set at 3% since 2014, a modest increase from 2.5%. With the recent adjustment, the ISN is poised to become a major source of revenue for the Mexico City government, surpassing in 2025 the combined revenue projected from property taxes, real estate acquisition taxes, and vehicle ownership taxes.
In December 2024, the government and Coparmex had previously agreed that the revenues generated from this tax would be allocated to essential projects related to water, security, and mobility. The government of Clara Brugada is projected to collect nearly 30% more from this tax in 2025, generating around 45.983 billion pesos compared to 35.507 billion in the previous year. This significant revenue boost is intended to support infrastructure investments.
However, the businesses involved argue that they have been inundated with tax increases and other financial burdens over the past six years, including a staggering 269% rise in minimum wage. Since January 2023, new reforms have mandated increased contributions to worker retirement accounts, and the introduction of additional vacation days has further escalated payroll expenses.
The ISN is calculated based on various compensation components such as salaries, vacation bonuses, commissions, and holiday pay. Nonetheless, it excludes contributions to social security, profit-sharing distributions, and other employee benefits.
Among those challenging the increased tax rate are some of the most recognized names in the industry, including kemper, Kimberly Clark, Manpower, Alsea (which operates Domino's Pizza), and others.
Despite the potential for a lengthy legal battle, historical precedents suggest that the corporations may face an uphill struggle. The courts, including the Supreme Court and the collegiate tribunals in the First Circuit, have frequently upheld previous ISN increases and dismissed similar exemption appeals. Significant cases include a ruling from 2011 where the then-magistrate Alberto Pérez Dayán approved a 2.5% tax rate, and a 2017 ruling against Costco, which confirmed that there is no obligation for the capital Congress to provide detailed justifications for tax hikes like those from 2.5% to 3%.
The upcoming challenges to the ISN hike reflect broader tensions between large corporations and tax policies perceived as favoring smaller businesses at their expense. These dynamics could spark a significant conversation about tax equity, corporate responsibility, and the financial sustainability of both large and small businesses in Mexico City.
As Mexico City prepares for yet another financial adjustment in the landscape of local taxation, all eyes are on the ongoing challenges from these corporations. Will the courts uphold the new ISN, or will the sizable financial pressures lead to a reconsideration of fiscal policy in the capital? The outcome will certainly have far-reaching implications for the business community and the local government's funding strategies going forward.
