The 2020 Mexico Tax Reform modifies the Income Tax Law (MITL) and the Value Added Tax Law (VATL), impacting companies and users engaged in the Mexican digital market. While the new tax reform requirements become effective June 1, 2020, preparations for timely compliance need to begin immediately.
Digital income taxation
Mexican residents are subject to tax on their worldwide income. Regardless of the nature of the commercial activity that gives rise to the income, the MITL subjects to tax all income in the hands of Mexican residents. Income arising from digital commerce presents challenges for sourcing and enforcement, given the often-minimal physical presence in the consumer country and the subjectivity of the allocation of value to the related intangibles.
Currently, the MITL, VATL and the Federal Fiscal Code (FFC) do not provide specific rules for taxing electronic commerce. The 2020 Mexico Tax Reform addresses this issue through modifications to the MITL and VATL related to Mexican consumers receiving digital services or using digital platforms to perform business activities.
Effective June 1, 2020, the MITL imposes a new income tax withholding obligation on payments made to Mexican resident individuals selling certain goods or rendering certain services through the internet, pursuant to technology platforms or applications.
Observation: By shifting the reporting and payment requirements to the intermediate payor entity, the Mexican government shifts the enforcement burden to Mexican and non-resident entities providing digital platforms to Mexican individual residents for specific business activity.
The income tax withholding obligation refers to Article 18-B, paragraph II of the VATL in defining covered services as the mediation or connection between third parties for the offering and demand of goods or services.
Income generated by Mexican resident individuals for all other business activity over the internet will continue to be subject to the ordinary taxation rules for business income in the hands of individuals.
Income tax withholding mechanics
The tax withheld on gross payments under Article 113-A will be deemed to be an estimated tax paid by the Mexican resident individual, which can be applied against its annual income tax obligation. The MITL provides a range of progressive rates depending on the relevant type of business activity:
|Transportation of people or goods and delivery by land||2% – 8%|
|Providing lodging services||2% – 10%|
|All other sales of goods or rendering of services||0.4% – 5.4%|
If the Mexican resident individual does not provide its federal taxpayer registration number (RFC), the payor must withhold 20% rather than the above-listed progressive rates.
Articles 113-A and 113-B allow Mexican resident individuals to elect a simplified regime where the withholding tax is considered a definitive tax payment if a number of requirements are met. The simplified regime is available to individuals only if their total gross income from offering goods or services through internet platforms or applications does not exceed
New income tax obligations for providers of platforms and apps
One of the most significant aspects of the new income tax withholding is the increased compliance, reporting, and systems burden for non-resident entities providing platforms or similar internet applications to Mexican resident individuals engaged in business activity. As of June 1, 2020, entities must comply with the following obligations:
- Register with the Mexican tax authority (SAT) and obtain an RFC. Registration must occur within 30 calendar days of the first day on which digital services are provided to a recipient located in Mexico. Entities already providing platform services to Mexican individuals must comply with this obligation within the first 30 calendar days of June.
- Register a Mexican legal representative and Mexican tax domicile with the SAT.
- Obtain an electronic tax signature (‘FIEL’) from the SAT.
When the non-resident collects the payment, including VAT, on behalf of the Mexican resident individual, the nonresident entity should also comply with the following:
- Withhold 50% of the VAT. If the Mexican resident individual does not provide their RFC, the non-resident entity should withhold 100% of the applicable VAT. VAT payment is a monthly obligation.
- Provide electronic tax withholding receipts to the recipients for which withholding is applied. These receipts must be issued within the first five calendar days of the month following the withholding. The SAT will issue rules outlining accompanying information that withholding agents must include in the invoices.
- Provide the SAT with an extensive information list of their Mexican client individuals that sell goods, render services, or provide the temporary use of goods for which the withholding agent provided internet mediation services. The withholding agent must provide customer information on a monthly basis, including the following:
- a. full legal name,
- Federal identification number (CURP),
- tax domicile.
- financial institution and standardized interbank code for the account where the customer receives its payments;
- total transaction amounts carried out for the applicable period for each individual customer; and
- with respect to lodging services, the address of the immovable property.
- Withhold and file payments monthly.
- Maintain books and records showing withholding applied and corresponding payments.
Modification to the VAT rules applicable to digital services
Under the current VATL, a person that renders services in Mexico, regardless of residency, is subject to 16% VAT on the gross income received for those services. The person rendering services must expressly charge the VAT to the recipient. Article 16 of the VATL provides that services will be considered rendered in Mexico if they are partially or wholly carried out in Mexico by a Mexican resident and there are no specific rules for the sourcing of digital services.
Observation: Given the lack of a need for physical presence in the rendering of digital services, these services are often provided by non-Mexican entities with no permanent establishment in Mexico. Generally, the current VATL would not treat remotely rendered digital services as services rendered in Mexico for VAT purposes, and the non-resident entity would not be subject to VAT obligations.
Article 24 of the VATL imposes obligations on services rendered abroad by a non-resident when the benefit of the service is realized in Mexico. These services are considered imported services under the VATL. The Mexican resident service recipient is considered to ‘import’ the services at the time of effective payment. The services recipient bears the reporting and payment obligation as the ‘importer.’ In practice, Mexican resident individuals who do not otherwise file VAT returns, generally, do not self-assess, file, and pay VAT on digital services paid to non-residents. The SAT has not routinely enforced the self-assessment for the millions of Mexican resident individuals without a registered business activity. As a result, foreign entities providing digital services directly to Mexican individual customers have not invoiced these services with VAT.
In practice, existing VAT legislation addresses reporting and collection in the context of business to business transactions in which the business recipient self-assesses the VAT as part of its ordinary monthly VAT compliance. The 2020 Mexico Tax Reform adds tax reporting and compliance obligations for persons that engage in e-commerce with Mexican individuals.
Observation: The 2020 Mexico Tax Reform shifts the burden of VAT assessment, filing, and payment to the non-resident service provider even if there is no physical presence in Mexico.
Article 16 of the VATL creates an obligation for the non-resident digital service provider by adding a specific rule for sourcing digital services. Effective June 1, 2020, a digital service is considered provided in Mexico when the service recipient is located in Mexico, regardless of the residency or Mexican physical presence of the service provider.
The new sourcing rule applies to specific digital services when provided over the internet and when fundamentally automated. The services listed in the VATL subject to the new sourcing rules are broader than those services subject to income tax withholding:
- The downloading or accessing of images, film, text, information, video, audio, music, games, including games of chance, as well as multimedia content, multi-player environments, obtaining mobile ring tones, the visualization of news, traffic and weather information.
- Similar to the MITL, the mediation or connection between third parties for the offering of goods or services over the internet.
- On-line clubs and dating sites.
- Virtual learning and tests.
Article 18-C defines when a service recipient will be deemed to be located in Mexico, and makes this determination independent of tax residency determination. The modified VAT rules require the service provider to determine when a customer falls within one of the following categories:
- The recipient provides a Mexican address;
- The recipient pays for the service through a Mexican intermediary;
- The IP address of the customer corresponds to the range of addresses assigned to Mexico; or
- The recipient provided a telephone number with a Mexican prefix.
If non-Mexican digital companies determine a customer is located in Mexico pursuant to the above rules, VAT obligations similar to the income tax withholding responsibilities will apply. The non-Mexican resident digital service provider must register with the SAT, charge VAT, and provide tax invoices complying with Mexican federal tax requirements. In addition, the non-resident digital service provider must file with the SAT a wide range of information about its Mexican customers, such as:
- the number of transactions carried out on a periodic basis, classified by the type of service, the price, and the number of customers
- calculating and paying the 16% VAT on effectively paid services monthly
- issuing and electronically delivering a formal tax invoice at the recipient’s request
- designating a legal representative in Mexico and a tax domicile and
- obtaining a FIEL from the SAT.
Observation: Many of the obligations listed above overlap with Article 113-A MITL obligations, and the digital services rules under the transition rules for the 2020 VAT Law become effective starting on June 1, 2020. Therefore, the VAT accrual should not begin before this date.
The 2020 Mexico Tax Reform imposes incremental information gathering, reporting, and payment obligations on nonresident entities that provide digital services to Mexican customers. Although the new requirements are not effective until June 1, 2020, the systems, business considerations, and tax function preparations necessary for timely compliance should begin immediately in order to lessen business and economic impacts.
For a deeper discussion of how this issue might affect your business, please contact:
International Tax Services, Mexico
+52 555 263 5756
|Mario Alberto Gutierrez (MX)|
+52 555 263 5827
|Carlos Orel Martinez|
+52 555 263 5798