By Arturo Treviño Villarreal, Tax Partner, Fratelli Consultores, Monterrey, Mexico
On January 1st, new Mexican regulations came into force, dealing with income tax and VAT treatment of digital services and transactions on technology platforms.
The changes in Mexico will no doubt create compliance challenges for both resident and non-resident digital service providers. There are a number of points that need to be analyzed on a case-by-case basis, including new penalties that block the services of digital service providers who fail to comply with the new tax rules.
The Mexican tax authorities published these new regulations in the Official Journal on December 8, 2020 as a series of changes and additions.
Income tax law
In general, Mexico residents doing business and individual non-residents with permanent establishment in Mexico are taxed on income from the transfer of goods or the provision of services over the Internet using technological platforms, computer applications, and brokerage services.
To collect this income tax, a withholding tax mechanism applies to a Mexican resident legal entity, a non-Mexican resident legal entity with or without a permanent establishment in Mexico, foreign corporation or legal arrangement (all of which are acting as withholding tax advisors).
In light of the new rules, withholding tax should be levied on the total amount of non-VAT income that individuals receive or redeem.
Withholding tax is set as the payment of the estimated tax. The applicable tax rates are 2.1 percent for passenger / land transportation services and the delivery of goods, 4 percent for lodging / accommodation services; and 1 percent for the transfer of goods and the provision of services.
In addition, the monthly income that was included in previous provisions for determining tax rates (and thus for calculating withholding tax) is now excluded.
Block digital services
According to the changes, non-resident legal entities with no permanent establishment in Mexico, foreign legal entities or legal agreements will be subject to new non-compliance sanctions, namely the temporary suspension of their digital service in Mexico. The new rules of the Income Tax Act stipulate that the relevant VAT provisions for the locking and unlocking mechanisms must be observed.
The new penalties will be triggered if no withholding tax payments to Mexico are calculated, withheld, and remitted for three consecutive months.
Such blocking is carried out by relevant local telecommunications operators in Mexico (public networks).
VAT & brokerage
Under the VAT rules that came into effect on June 1, 2020, Mexico residents and legal entities providing digital intermediation services to recipients / recipients in Mexico are subject to a number of compliance obligations.
Similarly, foreigners without a residence in Mexico who offer digital services are subject to certain tax compliance obligations.
In general, digital services covered by the VAT Act are those that are automated and relate to downloading or accessing images, films, text, information, video, audio, music, games, etc. Mediation by and between third parties; Online clubs and dating websites; E-learning or tests or exercises are also included. It is not possible to download or access books, newspapers or e-magazines.
Mexico's sales tax law was recently amended to expand the scope of sales tax and now covers these intermediary services in the transfer of used personal property.
Exemption from tax obligations
Non-residents of Mexico who are not based in Mexico who provide digital services for download or access, online clubs and dating websites, and e-learning or testing or practice, are no longer required to meet or meet certain Mexico tax compliance obligations when their services are performed are through intermediaries who withhold the corresponding VAT.
These vendors are no longer required to register with local tax authorities, collect VAT, provide monthly sales information to the tax authority, pay collected VAT to the state budget, issue and send electronic invoices, appoint and appoint a legal representative local to mandate residence and receive an electronic signature etc.
Temporary blocking for access to the digital service
Under the new additions to the VAT Act, non-residents without a branch in Mexico who provide digital services to recipients in Mexico will now face sanctions if certain compliance obligations are not met.
These new sanctions mainly consist of temporarily blocking access to the digital service. The actual blocking is carried out by the local telecommunications operator. Access will be reactivated as soon as the compliance obligations are met.
Temporary blocking sanctions apply, among other things, to failure to register with the local tax authorities in due time, the appointment of a legal representative as well as information about a local residence and obtaining an electronic signature.
In addition, there will be a temporary lockdown if non-residents fail to pay VAT to the state budget and tax returns (e.g. for payments, information returns, etc.) are not filed in a timely manner for three or two consecutive months.
In these cases, the relevant local tax ID of the non-resident in Mexico will also be canceled.
The changes to the Mexican VAT law contain a number of new and detailed rules regulating the temporary blocking of access to the digital service and the blocking (e.g. new Articles 18-H BIS, 18-H TER, 18-H QUÁTER, 18-H QUINTUS)).
Depending on the actual circumstances under which the temporary blocking occurs, it may take 45 to 50 business days to unlock.
Digital switching services
Non-residents with no establishment in Mexico who provide intermediation services to and between third parties can now publish the prices of the goods or services offered with the heading / inscription “VAT Included” (i.e. excluding) on their website, app, platform, etc. Separation from actual price and VAT).
Currently, non-residents acting as intermediaries can collect the price and VAT on behalf of the seller or supplier of goods or services.
In these circumstances, non-residents must also act as withholding agents if the seller or supplier is an individual.
Under the new rules, in cases where non-residents of Mexico (either individuals or legal entities) who provide digital services for downloads and access, online clubs, dating websites and e-learning or tests or exercises may be subject to the full Withholding tax (ie a withholding tax of 100 percent of the value added tax paid).
In addition, electronic invoices should be issued and properly sent, taking into account the requirements of the new regulations.
Under certain conditions, non-residents acting as intermediaries are no longer required to report certain information about their clients to the local tax authorities on a monthly basis.
For example, reporting is not required if non-residents without a branch in Mexico offer digital services related to downloads and access, online clubs and dating websites and e-learning or tests or exercises and the corresponding withholding tax under the new VAT rules.
The changes and additions to tax laws in Mexico are sure to create compliance challenges for both resident and non-resident digital service providers.
There are a number of points that need to be further analyzed on a case-by-case basis: from a defense file for a temporary blocking order to the crediting of VAT from incurred expenses to the distinction between regulated and unregulated digital services.
Taxpayers should be aware of the current difficulties associated with applying for and obtaining tax registration (i.e. tax ID) in order to comply with local laws.
Local telecom operators are now facing potential fines for non-compliance or delays in blocking and unblocking.
Such fines can range from $ 25,000 to $ 51,000 and can be imposed individually for each calendar month that government orders are not carried out.
Arturo is a tax partner at Fratelli Consultores and is based in Monterrey, Mexico.
He has more than 15 years of professional experience in Mexico and abroad in the areas of national tax law, international tax law, EU tax law, transfer pricing, corporate law, general accounting and tax compliance. Arturo has worked for Big 4 law firms as well as in industry (internal role).
He is involved in a range of domestic and cross-border projects for individuals and corporate groups including tax planning, restructuring, mergers and acquisitions, due diligence, compliance, etc.
Arturo received his law degree from the Universidad Autonoma de Nuevo Leon and holds an LLM from Queen Mary from the University of London and an LLM from Universidad Antonio de Nebrija.