Uncollectible Accounts
Collections in Mexico
The collection process in Mexico may be quite difficult due to missing standards and complicated legal processes in this area. There is no framework on standard payment terms or on late payment fees. These must be agreed on in private contracts between the parties. Pre-legal actions such as direct negotiations with customers are usually faster, cheaper, and more successful than court proceeding which can take years to conclude. Due to Covid, this period is even prolonged. Essential for any legal proceeding is a full documentation as evidence to support any Plaintiff claims.
To be prepared for a possible judicial process the following documents should exist to substantiate any comercial transactions before any Civil/Commercial Court in Mexico:
- Purchase Order/ LOI
- Accepted Terms and Conditions, Privacy Policy
- Signed Contract and/ or accepted purchase order
- Signed Delivery Notes, Signed Service Reports,
- Bill of Lading for shipped goods
- Official Mexican Invoice
To be accepted in a judicial procedure all documents need to be signed originals in Spanish language.
How to check the credit risk of a new client?
Unfortunately, Mexico does not provide standardized tools to determine the credit risk of companies, as other countries do (eg. Schufa in Germany) but nevertheless every company should do their due diligence before starting to work with a new client.
- General Company Information: Tax number, Acta constitutiva, Bank account information
- Ask for references: This is a very common practice in Mexico
- Review the enrolling acts before the Public Registry of the Entity to confirm any posible seizure existent within your clients.
Treatment of uncollectible debts
NIF´s
The Mexican General Accounting Standards (NIF) require companies to accrue for possible bad debts affecting the profit or loss of the period. (NIF C 3, Paragraph 45.1). As there are no standard rules regarding payment terms and conditions in Mexico, every company can determine when an account should be considered as uncollectible and when an accrual is necessary based on its experiences, the actual situation and reasonable, justifiable prognostics (NIF C-3, 45.3)
For the calculation of the accrual the following criteria should be considered (NIF C 16, Paragraph 42):
- Probability that the overdue account becomes uncollectible, based on history of the customer regarding late payments, claims and so on
- Impact of the uncollectible account on the cash flow
If a standard group accounting policy exists for the accruals of uncollectible accounts, those can be applied. Please be aware that the accrual can be reversed or adjusted at any time should the circumstances change.
Example for a general bad debt allowance:
Total overdue invoices: 10,000,000 MXN
Group Accounting Policy Factor: 2%
Accrual for bad debt: 200,000 MXN
Presentation in Balance Sheet
Accounts Receivable: 10,000,000 MXN
Accrual for Bad Debt –200,000 MXN
Total Accounts Receivables: 9,800,000 MXN
In addition, specific accounts with a high probability of becoming uncollectible should be adjusted with an induvial bad debt accrual. The accruals for uncollectible debts are nondeductible for tax purposes (LISR Art. 28).
Prescription Periods in Mexico
Prescription periods are recorded in the Mexican Code of Commerce (Codigo de Comercio). The standard prescription period is 10 years (Codigo de Comercio, Art 1047). A shorter period might apply for certain transactions.
Investment Units
Investment Units (UDI´s) are a measurement unit used in the Mexican credit system, which are not subject to Inflation. UDI´s are determined by the Mexican central bank and updated daily. The Mexican government publishes the valid UDI daily on its communication channels (DOF).
Tax Law
Bad debts can be deducted for tax purposes once they have been prescribed or earlier if it is practically impossible to claim the outstanding payment (LISR, Art 25, 27). The Mexican tax law distinguishes between three scenarios:
- A debt is considered practically impossible to claim and therefore fully deductible for tax purposes if it can be shown that the customer has declared bankruptcy (LISR, Art. 27 XV c)).
- Uncollectible debts under approx. 195,000 MXN (30,000 UDI´s) can be deducted for tax purposes if it hasn´t been possible to claim the outstanding invoice within 1 year after its due date if the following requirements are met:
- Written notification to customer informing them, that the uncollectible account will be deducted and of their obligation to accumulate the invoices as revenue.
- Inform SAT at latest on the 15th of February about deducted uncollectible accounts in the previous tax year.
- Uncollectible debts over 195,000 MXN can be deducted if the following requirements are met:
- Present a lawsuit claiming the payment of the open amount or start an arbitration agreement
- Written Notification to customer informing them, that the uncollectible account will be deducted and of their obligation to consider the invoices as revenue.
- Inform SAT at latest on the 15th of February about deducted uncollectible accounts in the previous tax year.
In case of two or more overdue debts of the same client, the amounts must be added up.
If you have any further questions concerning Collections in Mexico, don’t hesitate to contact our WMP Tax & Accounting department. We are happy to support you! Have a look at our services.
