Vistra Insights

Mexico’s new value-added tax on digital services

Mexico has officially joined the growing list of countries imposing some sort of digital tax. Mexico’s Congress of the Union passed an amendment to the Value-Added Tax Law that will allow for the taxation of online sales made to customers based in Mexico, regardless of whether the supplier has a physical presence in-country. The new rules will take effect on 1 June 2020.

VATL amendment overview

Mexico’s Value-Added Tax Law (VATL) amendment calls for the collection of value-added tax (VAT) at a standard rate of 16 percent on certain digital services rendered by foreign suppliers to customers located in Mexico. In order for suppliers to fall under the digital services tax, no taxable presence in Mexico is needed.

The VATL provision does not differentiate between business-to-business (B2B) and business-to-consumer (B2C) transactions. As a result, all suppliers are subject to the new legislation, assuming their services are taxable and fit the VATL’s definition of digital services.

Statutory examples of digital services include downloading and/or accessing images, movies, music, text, information, video, gaming (including gambling), ring tones, visualization of online news (but not eBooks or electronic versions of periodicals), traffic, weather, online clubs, dating sites and other multimedia content, distance learning, tests and exercises. Some real-life example of such services include Netflix, Tinder and the online learning platform Coursera. Financial services, payment services, data storage, and software sales and use are not subject to Mexico’s new VATL provision.

Taxable digital services are typically automated (though some human intervention may be involved), provided online and subject to a fee paid by a local customer. Whether a customer is based in Mexico is determined at checkout by the following triggers:

  • A Mexico-based intermediary is used to make a payment;
  • The customer’s phone number or address is in Mexico;
  • A Mexican IP address is used.

It is not uncommon for taxable and non-taxable digital services to be provided together. In such cases, the 16 percent VAT is levied on the taxable portion only, provided that invoices clearly differentiate the services rendered.

To avoid inappropriate taxation, digital services suppliers should make a clear distinction on their invoices between taxable and non-taxable charges. If these charges are not separated, Mexico authorities will deem 70 percent of the total consideration taxable digital services.

Steps digital services suppliers should take now

In-scope online platforms will be required to collect, report and remit VAT on taxable digital services sold in Mexico. Non-resident digital services suppliers should take the following steps to comply with the new requirements:

  • Register with Mexico’s Federal Taxpayer Registry;
  • Levy 16 percent VAT on taxable digital services and remit it to the Tax Administration Service (SAT);
  • Issue electronic invoices with taxable and non-taxable digital services — and VAT charged — clearly labelled;
  • Appoint a local legal representative;
  • Register a local tax domicile to receive notices;
  • Obtain an electronic signature;
  • Lodge VAT returns on a monthly basis and certain other informational filings on a quarterly basis;
  • Comply with other related local requirements, such as record-keeping obligations.

It is important to note that the above steps do not trigger permanent establishment in Mexico.

Summary

Mexico’s new VAT rules related to digital services go into effect on 1 June 2020. Foreign digital services suppliers should carefully review their situations to determine if they fall under the new VATL provision. If so, they should appoint a local legal representative and tax domicile no later than 30 June 2020. Non-compliant entities will be at risk for penalties and even platform blockage.

Hanna Mialik, Senior Associate, Corporate and International Tax Advisory, contributed to this article. 

 

 

 

 

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