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Mexico amends VAT obligations for businesses

Authored by Eliel Amaya, Graciela Rivera, and Angel Ramirez

On June 1, 2020, Mexico amended its legal framework in order to tax foreign companies that deliver their services within the country through digital platforms and whose services are monetized in the Mexican market.

Foreign companies without a permanent establishment in the country that render digital services, must pay the value-added tax (VAT) for any consideration received, if the recipient of the service is located in Mexico and the delivery of the service is done through software or apps in a digital format, on the internet or through any other network in Mexico, regardless of whether the service is automated or requires minimal human intervention.

To this end, the following services will be taxed:

  • The download or access to images, movies, text, information, videos, audio, music, games (including gambling), ringtones, visualization of online news, traffic information, weather forecasts and statistics
  • Intermediation between third parties that offer goods and services and consumers of those goods and services
  • Online clubs and dating websites
  • Remote learning

As stated in Mexico’s VAT law, services that fall into the category of downloads or temporary use or benefits (such as books, newspapers, e-magazines and other intermediation used in the sale of movable assets) are exempt from VAT.

It will be considered that the recipient of the service is in Mexico, when:

  1. The tax domicile is in Mexico.
  2. The recipient pays through an intermediary located in Mexico.
  3. The IP address used in the recipients’ electronic devices is located within Mexican territory (mobile phone, tablet, computer, etc.).
  4. The recipient has provided a phone number with Mexico’s country code.

When the digital services are delivered through an intermediary, the service provider is obligated to withhold an amount equal to 50% of collected VAT on behalf of the entity that sold the goods, delivered the services or granted the temporary use or benefit of an asset.

However, if the entity does not provide a VAT tax ID, the intermediary of the digital platform services must withhold 100% of the collected tax on behalf of the individuals or entities that delivered such service.

Other tax obligations related to VAT

Corporate entities that provide digital services to recipients located in Mexico (both tax residents and non-tax residents) must do the following:

  • Enroll in the Federal Taxpayers’ Registry no later than June 30, 2020, or when the commercial activities begin.
  • Obtain an electronic signature.
  • Include and collect VAT in the offered price, expressly and separately.
  • Provide a tax receipt to individuals whose tax was withheld.
  • File quarterly reports before the tax authority, providing information on the number of services and transactions carried out with beneficiaries (recipients) located in Mexico.
  • Keep a record of the recipients and payments received each month and calculate and pay the VAT at a 16% rate on all sales of goods and services during the month.
  • Name a legal representative that will act before the tax authority and provide a tax domicile in Mexico for correspondence and compliance watch.
  • Provide the tax authority with a monthly list of clients, sellers of goods, service providers or grantors of the temporary use or benefit of assets, in which they have acted as intermediaries, even if payment has not been collected.
  • The report must indicate: name, tax ID, tax domicile and total amount of operations. In case of lodging activities, it must also include the address of the property and property tax ID number.

Considering that the mentioned provisions came into force on June 1, 2020, several penalties might apply if companies are not in compliance. Penalties include the inability to credit VAT or deduct purchases made through technological platforms.

Baker Tilly and our network offices in Mexico are available and can help you register or regularize any commercial activity carried out through a digital platform.

Contact us to learn more about this and all other Mexico tax obligations. Our specialists and resources can identify related risks and provide tailored solutions.

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