This is a thought leadership article which looks at the new taxation and obligations of the digital economy in Mexico.
As of 2020, both the Income Tax Law (“IT”) and Value Added Law (“VAT” or IVA in Spanish.), were reformed, and new requirements were enacted. Thus, foreign digital service providers should be aware of the new requirement to collect VAT on the sale of certain goods and services in Mexico. The tax reform also would require income tax withholding on certain transactions with Mexican individuals.
As a brief background, a VAT rate of 16% is applicable in México to the final price of sale or disposal of goods and merchandise, the leasing of goods and services, the rendering of services and Imports of goods and services. Exports are considered to be subject to a 0% tax rate.
It should be noted that the VAT is applied to operations but not to income earned, regardless of the person’s address or the manner in which the operation was performed. Furthermore, this tax is calculated for monthly periods rather than for annual periods, as for the IT.
As mentioned, the VAT Law, was modified and has established that the following activities are considered as services, to those that provide:
- Perform, downloading or accessing images, movies, text, information, video, audio, music, games, including, gambling, as well as other multimedia content, multiplayer
- Intermediation services between third parties offering goods or services and the persons demanding such goods or services.
environments, obtaining mobile ringtones, viewing online news, traffic information, weather forecasts and statistics.
As an exception, downloading or access to electronic books, newspapers and journals shall not be taxed.
As an exception, intermediation services for the disposal of used movable property shall not be taxed.
c) Online club services and dating pages.
d) Distance learning or "test", or exercises.
Additionally, the VAT Law considers that as resident in Mexico would be when:
- The recipient manifests a domicile within Mexico.
- The payment is made through a service or a financial service provider, in Mexico.
- The IP address is in Mexico.
- The recipient manifests a telephone number within Mexico.
Thus, for companies that do downloads, or online learning, into Mexico will have the following obligations as of June 1st 2020, as follows:
- To register the company before the tax authorities for VAT purposes only. This process does not create a Permanent Establishment for Income tax purposes.
- Provide the tax authorities with monthly information (on a trimester or quarterly basis), on every operation performed in Mexico.
- Compute, and pay the 16% VAT on a Monthly, Cash Flow Basis.
- Designate in Mexico:
- Legal Representative, and
- A Tax and Legal Domicile.
- Collect the VAT from the clients in Mexico as established by the Law.
- Issue the corresponding Digital Invoice, with the VAT indicated.
- Obtain the electronic signature before the tax authorities.
Please note, that the tax/legal representative would have to disclose information related to the provider’s transactions with Mexican users/recipients of the digital services, including information related to the number of transactions and transaction amounts by type of service.
Failure to comply with these obligations, would prove to cease and block their business into Mexico.
Businesses should evaluate their systems to identify taxable transactions and reporting obligations. Registration with the authorities will begin June 1st 2020, and should be completed by June 30th 2020, for businesses with operations subject to the rules on June 1st 2020.
The Mexican members of PrimeGlobal are ready to assist any clients that your firm might have to comply with these new obligations.
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