Lower Corporate Income Tax Revenue Puts Collections Under Pressure: Slowdown, Lighter Enforcement, and More Refunds Raise Red Flags
Income tax collections fell in the first quarter despite more corporate filings, reflecting weaker activity, less enforcement, and rising refunds.
The start of the year sent a clear signal for public finances: even though the number of companies that filed their annual return with a payment increased, collections from the Income Tax (ISR)—the federal government’s main tax revenue source—softened in the first quarter, amid limited economic growth and changes in the enforcement and refund dynamics of Mexico’s Tax Administration Service (SAT).
According to estimates from the Center for Economic and Budgetary Research (CIEP) based on official data, total tax revenue fell 0.6% in real terms year over year from January to March and came in below what was projected in the Revenue Law. The outcome is mainly explained by weaker momentum in the most important components: ISR and VAT (IVA). While VAT came in close to target, it also declined compared with the previous year, consistent with softer consumption and the effect of refunds in certain exporting sectors.
For ISR, the drop was more pronounced. Collections decreased 4.1% in real terms year over year in the first quarter and fell short of the scheduled target, implying tens of billions of pesos that did not enter the treasury during the period. This matters because corporate ISR often serves as a gauge of profits, margins, and productive activity, especially in industries tied into export supply chains and in highly formal service sectors.
Figures from the Ministry of Finance and Public Credit (SHCP) show that, even with more legal entities filing a return with payment, the average amount paid per return declined. In practical terms, that suggests more companies complied, but with smaller taxable bases—whether due to lower earnings, accounting adjustments and credits, or a sector mix increasingly weighted toward relatively smaller taxpayers.
This performance comes in a context of moderate growth. Economic activity has shown signs of slowing, with a weak year-over-year expansion in the first quarter. Tax revenue is highly sensitive to this: SHCP itself has noted that an additional percentage point of real GDP growth can translate into a meaningful increase in non-oil tax revenue; conversely, growing below target makes it harder to meet the budget without spending cuts, reallocations, or higher financing needs.
Less Enforcement and More Refunds: The Other Driver Behind the Adjustment
Beyond the business cycle, two administrative components shaped the balance: revenue from enforcement actions and the behavior of refunds and offsets. Collections tied to audits, reviews, and collection actions posted a year-over-year decline—an important shift after years in which the revenue strategy leaned on greater SAT efficiency, compliance monitoring, and tax litigation involving large taxpayers. Less momentum in that “secondary revenue” reduces a buffer that, at other times, has helped offset cyclical weakness in ISR and VAT.
At the same time, refunds and offsets rose during the quarter. This line item can increase for several reasons: from processing accumulated credit balances to VAT refunds linked to exporters and production chains with strong international integration. From a fiscal standpoint, the increase functions as an outflow that pressures net revenue flows, although it can also be read as a sign of normalization in response times and in upholding taxpayer rights—especially amid scrutiny over longstanding backlogs.
The combination of lower net enforcement and higher refunds is particularly sensitive in a year when public spending faces rigidities: debt service costs, social commitments, and public investment needs. In this context, the room to absorb lower revenue without budget adjustments narrows, and the debate typically shifts to spending efficiency, program prioritization, and the pace of infrastructure investment.
Looking ahead, ISR performance will depend on two vectors: the trajectory of the economy—industrial output, formal employment, and consumption—and tax administration strategy. With interest rates still high in real terms and private investment facing cautious decisions due to global demand and financing costs, the recovery in corporate profits could be uneven. At the same time, continued efforts to combat evasion, streamline procedures, and provide legal certainty in tax disputes will be key to sustaining collections without raising rates.
The external environment will also matter: weaker international demand or bouts of financial volatility tend to affect manufactured exports, remittances, and the exchange rate, with indirect effects on consumption and ISR. By contrast, a strengthening of supply-chain relocation (nearshoring) could broaden taxable bases in industrial regions, although its benefits typically materialize with lags and depend on infrastructure, energy, water, security, and regulatory certainty.
In sum, the first-quarter decline in ISR, despite a higher number of corporate filings, reflects an economy with less momentum and a revenue outlook increasingly dependent on administrative factors such as enforcement and refunds. The challenge for fiscal policy will be to balance budget discipline with the need to sustain investment and growth, without undermining taxpayer confidence or slowing formalization.
